5 Things Spotify's Management Wants You to Know Before Its IPO

Spotify gave a chance for investors to learn more about its business and for analysts to ask questions when it hosted an analysts day just as you'd expect a streaming company to do so: via livestream.

Management revealed a lot of insight into the business and where Spotify and its 159 million listeners around the world can go from here.

It also threw out a couple of important dates:

• March 26: The date Spotify will reveal its first-quarter results and provide financial guidance.
• April 3: The date Spotify shares will start trading on the New York Stock Exchange under the ticker SPOT.

But before we get to those dates, here are five key takeaways from Spotify's investor day.

1. Spotify is in the content discovery business

There are dozens of music streaming services around the world all selling access to the same 35 million song recordings. From Apple (NASDAQ: AAPL) to Pandora (NYSE: P) to Tidal in the U.S. and others operating in Europe or Asia, Spotify has a lot of competition.

That's why it's important to Spotify to distinguish its business as selling a discovery platform, not simply access to the same set of songs as everyone else. Indeed, Spotify's algorithmically and hand-curated playlists account for 31% of total listening hours on the platform. Third-party playlists account for even more. That's one of Spotify's biggest competitive advantages, and it will only get stronger as it grows its users and acquires more listener data.

2. There's still lots of room to grow

With 159 million monthly active listeners, including 71 million premium subscribers, Spotify is the largest music streaming service in the world. But that doesn't mean it's done growing.

Spotify says there are 1.2 billion payment-enabled smartphone users in the countries in which it operates. That number will grow to 1.6 billion by 2021. And the company plans to enter markets with another 1.4 billion payment-enabled smartphone users by that time. Just 12% of smartphone users in Spotify's current markets have a premium music streaming subscription. So, the addressable market is massive.

Spotify is also looking to become more embedded in cars. Time spent in cars accounts for 30% of music listening, representing a big opportunity. Spotify will look to partner with auto manufacturers to become part of entertainment systems.

3. The free service is here to stay

Spotify's management says it's going to manage the company for growth instead of profit for the foreseeable future. That's seen by the growing loss in net income, which grew from 230 million euro in 2015 to 1.235 billion euro last year.

Most of Spotify's losses stem from its free service. In fact, management says the average user takes 12 months to pay back the losses stemmed from acquiring it through the free service.

Still, the free service is a key to onboarding paid users; 60% of gross premium subscriber additions in recent years started as free users.

The free music tier also provides Spotify with scale, which is key to its competitive advantages in algorithmic music curation. Spotify's 159 million total listeners are more than twice as many as Pandora and four-times Apple Music's. And they listen more on average, too, according to management -- 25 hours per month.

4. No plans for a price increase

Along the same lines, Spotify has no plans for a price increase in order to improve profitability.

Spotify is somewhat constrained by its competitors' pricing. Apple Music, for example, costs the same $9.99 per month -- that's actually a lower limit set by the music industry. But Apple is willing to take a loss or produce extremely small profits on Apple Music subscriptions if it sells more hardware like iPhones or Beats headphones.

Keeping the price at $9.99 per month (or lower if you split a family plan), allows Spotify to grow its market share and scale its business. That's its path to long-term profitability -- not higher prices.

5. Spotify's building a music meritocracy

Spotify isn't trying to shortchange musicians for their creations -- just the opposite. Spotify wants to connect artists with listeners that might be interested in their music, enabling them to make money directly off their music.

Viewing Spotify as a direct line to listeners could enable artists to cut out the middleman, i.e., record labels. Spotify's listeners could ultimately vote on how much a piece of music is worth through their listening habits instead of labels acting as a gatekeeper.

If Spotify can enable more direct monetization for artists, it could ultimately produce much better profit margins. The bulk of its revenue currently goes toward paying royalties to record labels, which then pass on a percentage to artists. Paying artists directly enables both artists and Spotify to produce more profits.

Stay tuned

Investors interested in learning more about Spotify will have their chance later this month when the company reports its first-quarter results and provides guidance for the rest of the year. It'll give investors one last glimpse at the company's health before it goes public on April 3 via direct listing.

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Adam Levy owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Pandora Media. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.