Happy Wednesday Bites folks,

Sorry for not sending a Sunday email out. We were having login issues (no, seriously).

We’re talking about Spotify, and breaking down a successful company’s thinking in how they intend to stay successful.

Spotify’s Success Problem: 3 Points

Spotify is on a tear, which is a rarity in the American/European music industry. Strong revenues, user growth, and a culture of experimentation make the company a safe streaming bet against Apple and Amazon.

So what’s the problem?

Spotify’s ability to consistently make a profit is…lacking.

Let’s try to scrape further.

An Expensive Business Model

Here’s how Spotify’s business model works:

1. Spotify charges you money to listen to music.

2. It takes that money to pay staff, music labels, tech costs, etc.

3. Whatever extra money is left = profit

Currently, for every $1 Spotify earns, $0.70 is paid to a label or rights holder. Which leaves 30 cents per dollar for anything else. It leaves little room for flexibility, and pretty much forces you to diversify into other spaces.

Differentiation comes at a cost

Spotify knows that anyone can put music into an app if they’re willing to pay labels, so it’s separated itself from its rich competitors with a friendly UI and a best-in-class recommendation engine. This flywheel has rewarded Spotify  a very low churn rate and 30% share in the music streaming market, which is twice as much as the next guy.

But the company has also placed a $1B bet on podcasting to increase non-royalty ad revenue, and it hasn’t been profitable as it originally thought.

Maybe to counteract some of this, Spotify recently added higher margin audiobooks to its platform, as it tries to punch into the space dominated by Audible.

What is Spotify going to do? (Speculation)

Spotify clearly understands that the opportunity lies in finding + investing higher margin content.

Here’s what we can see from them:

1. More user-uploaded podcasts: Some of Spotify’s podcasting deals with high profile celebrities haven’t worked. We’d probably see more user-uploaded podcasts pushed to your recommendations.

2. Music in the physical world: Maybe the company tries to compete with big ticketing firms to sell access to your favorite artists’ concerts.

3. Try another experiment in hardware: Their ‘Car Thing’ idea didn’t work, but we loved it. Car companies are eventually going proprietary to collect their own data rather than going through Android or Apple. This begs a partnership.

None of this is investment advice.

What AI Made This Week

Sick Fits by Ahmed

If you don’t know about Alexa Chung, go look at her instagram.

100% Legend.

Have a great week!

Ahmed and Peter