Spotify's Biggest Risks and Opportunities

Music streaming unicorn Spotify is planning to go public later this year -- and compete in one of the most notoriously difficult industries in the market. Listen to this Industry Focus: Tech clip to hear more about the biggest challenges that Spotify is going to have to face up against, how it might be more successful than Pandora (NYSE: P), some of the most promising ways that Spotify could defend against competition, and more.

A full transcript follows the video.

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This video was recorded on March 9, 2017.

Dylan Lewis: What do we see with Spotify's business right now? What are the risks we're worried about? And maybe, what are some of the opportunities? We haven't talked too much about the competitive pressures, but one of the things that has me most worried about this company as it currently exists is, there's not a lot of pricing power in the streaming music space, and there's also not a lot of cost control, either.

Evan Niu: Right. And between the two of those, you get squeezed pretty hard. On one hand, Apple (NASDAQ: AAPL) Music is humongous, and Apple does not need to make any money on this. $10 a month is kind of table stakes right now, but I wouldn't be surprised if going forward, that comes down even further, just through competition. Because like you said, if it's commoditized enough, these companies have to compete on price.

I do think Spotify has other ways that they can differentiate themselves. For example, they're ubiquitous. They have so many third-party integrations, from gaming consoles to phones to cars to high-end audio receiver. Spotify is literally everywhere. It's also cross-platform. While Apple is only targeting iOS and its own userbase, Spotify targets everyone. And that scale really gives them the amount of user data that they need to be able to personalize these things and target these things we were just talking about. So, I do think they have some advantages.

Lewis: Yeah. It's certainly a business that, in five years, could look a little different than it currently does. For the sake of people who currently owns shares, I kind of hope it does, because we've seen a lot of companies struggle to make it work in the music streaming space. I think Pandora is probably the biggest one. We've talked about some of the more music industry relevant things that Spotify could do. Those are things that Pandora tried to do. They acquired Ticketfly and tried to branch more into the event marketing side and ticket fulfillment side of that business, and then they later divested those assets.

Niu: It didn't work out very well.

Lewis: That could be Pandora's execution. That could be that, simply, tying those two worlds together is maybe a little bit more difficult than people give it credit for. But, I certainly think that those options are there for Spotify.

Niu: Right. I think there's some potential to really expand this. The ticket booking thing with Pandora, I think that was kind of a misguided effort to pivot into this other area where they thought they could make more money, when they didn't even have their core music streaming business down very well. [laughs] That was kind of a weirdly timed move on Pandora's part. I do think this idea of Spotify becoming a more direct distribution platform has a lot of potential and is much more directly related to its core competencies.

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.