Investor Dialogue: Spotify, Podcasting & Competition

Disclaimer: This In Practise Investor Dialogue is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

In Practise Investor Dialogues gathers a group of professional investors to explore the value drivers and risk factors of a specific business, moderated by In Practise. Attendees are selected on the basis of the depth of their knowledge of the security that is subject of the dialogue.

I think it would be beneficial to have a brief introduction of everyone before we begin. 

Analyst 1: I work for a small investment firm. Historically, we did own Spotify, but we don't own it at the moment. We may own it again in the future. We've been following it for years. Like many of you, we consider ourselves value investors. However, what we end up owning tends to be considered by the market as more growth companies. My role is primarily research. I work directly with our founder, to help find new ideas and focus on the ones that we do own. 

Analyst 2: I run a small fund and have owned Spotify since it dipped after its IPO. I have followed it long before the IPO. So, we've been in it, I guess you could say, somewhere between late 2018 or early 2019. It's a large position. It has been and continues to be. I'm really excited about the company for a lot of reasons, mostly because it seems to be very misunderstood from a business model perspective.

It's one of these companies that the deeper I delved into it over the years, the more I realized how difficult it was to understand and how poor their communication was around this business model. It would be hard for the average value investor or even growth investor to own it. We're still on this journey, kind of trimming it when it runs or adding to it when it falls. So, it's always in motion and fluid. I'm not married to the company, but if we needed to sell it, if it made sense to sell, we would. 

Analyst 3: I know most of you here share a similar philosophy as this group. I'm a fundamental investor focused on high-quality businesses with a growth bias, and this is what I tell my clients. I manage money for a handful of families. I'm looking for the one percent companies. So, one of the research questions is, is this a one percent company? If it's not, it shouldn't be in the portfolio. Spotify, I believe, qualifies here and is a core position. It's not outsized, but it's a core position and has been for the past two and a half years. 

Analyst 4: I know everyone here to some extent or another, so I'll be really brief. I've owned Spotify since, I think, late summer 2018. I actually sold it this year, not because of any major revelations, but it just became a situation where if I had to own 12 or 15 things, then I would definitely own it, but I don't. So I own nine things and Spotify kind of dropped out. And I think that my thinking about the future of Spotify became a bit more cautious over the five years that I owned it. But I still love it as a business. 

I shared an agenda in advance with everyone. However, I'd also like to pose the open question of what feels best for you all to start the conversation. This could be related to one of the agenda points or perhaps an introduction into one of these. 

Analyst 2: For me, I found them interesting. I posed some additional questions because I believe a lot of the traditional questions, such as those on gross margins, are somewhat mundane for people who are deeply invested in the company and have been studying it for a long time. They're somewhat retail, and frankly, a bit boring. So, I proposed some other, more intriguing questions that I don't think get discussed as often. Perhaps around the business model or the opportunity and comparing the monetization of audio versus video, the technology, and the platform required to bridge that gap, just topics like that. However, I'm open to anything. If people just want to discuss the very basic question of whether it's a good business model, that's fine too. I just wanted to throw out some other, deeper ideas. 

Analyst 1: Yes, I can share what I perhaps struggled with when I studied the business. I know I've discussed this business with a few of you. The area that intrigued me the most was the advertising side. I think at one earnings call, possibly in Q3 2021, Daniel mentioned that the advertising business could represent something like 30% to 40% of overall revenue at some future date, unspecified. And I think for me the question became, is that realistic? And would that ever happen? My confidence in that hasn't necessarily decreased, I just wouldn't say it's improved. So, I'd be curious to get your take on advertising as a percentage of overall revenue and to what extent that matters if this business is going to truly materialize over the next five to 10 years. 

Analyst 2: I recently had a discussion with a gentleman on this subject, so I'm pleased to initiate the conversation if that's what everyone wants. As a percentage of revenue, we're aware of their long-term objective, which we obviously can't guarantee, is 40% of revenue and 40% of 100 billion in revenue. That would be 40 billion. However, the larger question has always been that those who own Google or Amazon understand that Spotify doesn't possess the same level of granularity and detail about its consumers. Consequently, the CPMs can't be as high. Currently, Spotify can't charge what Google can because it can't see what you're doing. It has very limited visibility on you, other than a personality graph that it constructs.