Spotify 101

Another tech unicorn is going public this year, and anticipation is building. In this clip from Industry Focus, host Dylan Lewis and Motley Fool contributor Evan Niu explain exactly what Spotify does, how its business model works, how well the company has been converting free users to paying users over the last few years, and more.

A full transcript follows the video.

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This video was recorded on March 9, 2017.

Dylan Lewis: This is a company we know well. They're the leader in the music streaming space. We probably have some listeners that are not super familiar with them, though. What does their service look like?

Evan Niu: Spotify was really the first big premium on-demand music streaming service. The big difference between Pandora (NYSE: P) and Spotify historically was that Pandora wasn't on demand. It was, you set a radio station, and you don't pick what you listen to. But Spotify was one of the first companies to really offer on-demand service, where you pick specifically what song you want to listen to and then you get it. They were a first mover in that space. And they inked a lot of direct licenses with the record labels to offer this service. I think that's really helped them grow to the place they are now, which is the No. 1 service in the world.

Lewis: And in some ways, they've benefited from some of the other players in that space moving slowly. You think about Apple, a company that revolutionized the way that people consume songs and being able to buy them individually and create their own playlists, that seemed like a space that was ripe for them, and yet they waited on creating their own streaming option. That's allowed Spotify to get a huge lead in their overall user counts.

Niu: Right. And to bring Pandora back, Pandora now has on demand service, but they only launched that a couple years ago, I think in 2016. They were very late. So, that first-mover advantage was huge, I think, in this context.

Lewis: Looking at their user base, they have that ad-supported model, like you mentioned, and it's exactly what it sounds like: free access, you can choose songs, but you hear ads, too. They have some limited mobile functionality with that ad-supported system. On the Premium side, you get rid of your ads, you have offline listening from mobile devices, and you can get full control of your listening experience there. Their plans run from $9.99 a month for individuals up to $14.99 for family accounts, and they have student plans for $4.99 a month. Those are all dollar-denominated. I think a point of order for the rest of the show is, Spotify's financials are stated in euros. Going forward, unless we say otherwise, we're talking euros, not dollars. For some context, currently, 1 euro is worth $1.23. I thought that might be helpful background, and a good disclaimer to get out there before we get into the financial metrics discussion of the show.

Niu: Yeah, you always have to remember what currency you're talking about.

Lewis: Before we get to currency, why don't we talk a little bit about some of the core business metrics? I think MAUs is probably one of the easiest places to start.

Niu: Sure. Right now, they have 159 million monthly active users, of which 71 million are Premium paid subscribers subscribing to any of the plans you just mentioned above.

Lewis: And that rate is actually higher than it was a couple years ago. You go back to 2015, I think 30% were premium, and now we're seeing about 44%. Some of that, I think, is the popularity of the Premium offering. Some of that is how they calculate that Premium number.

Dylan Lewis owns shares of Apple. Evan Niu, CFA 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.