Musicians have some choice words for Spotify CEO Daniel Ek, who says they should work harder

Musicians have not taken kindly to comments made last week by Spotify Technology SA Chief Executive Daniel Ek that they need to work harder in the streaming age.

The dramatic consumer shift in recent years from buying albums to listening to streaming music has crushed a major revenue stream for many artists, who complain they’re not compensated enough from streaming companies, and that the current business model is not sustainable for many musicians.

In an interview published Thursday with Music Ally, Ek addressed those complaints, and put the blame on the musicians themselves.

“I feel, really, that the ones that aren’t doing well in streaming are predominantly people who want to release music the way it used to be released.”

— Daniel Ek, Spotify CEO

“On our marketplace, there’s literally millions and millions of artists,” Ek told Music Ally. “What tends to be reported are the people that are unhappy, but we very rarely see anyone who’s talking about… In the entire existence [of Spotify] I don’t think I’ve ever seen a single artist saying ‘I’m happy with all the money I’m getting from streaming.’”

But he maintained: “Unequivocally, from the data, there are more and more artists that are able to live off streaming income in itself.

“Some artists that used to do well in the past may not do well in this future landscape, where you can’t record music once every three to four years and think that’s going to be enough. The artists today that are making it realize that it’s about creating a continuous engagement with their fans. It is about putting the work in, about the storytelling around the album, and about keeping a continuous dialogue with your fans,” Ek said.

That implication — that artists need to churn out more content if they want to the same money they used to — set off howls of outrage by many in the music community, who said that’s just not how the creative process works. And artists ranging from Mike Mills of R.E.M. to David Crosby to Twisted Sister’s Dee Snyder weren’t afraid to call Ek every name in the book.

And before fans shout to boycott Spotify, Mills offered a grim dose of realism: “Boycotting Spotify won’t help the musicians on there.”

On Wednesday, Spotify reported a wider-than-expected quarterly loss and revenue that fell short of expectations, though its number of active users grew more than expected. Spotify shares

have risen 72% year to date, compared to the S&P 500’s

1.2% gain.

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The Case for Spotify By

© Reuters.

By Geoffrey Smith and Peter Nurse — Spotify Technology SA (NYSE:) faces a reckoning.

The music streaming service, which debuted on NYSE in 2018, has been adding users at a torrid pace, forecasting growth in average monthly users for the fourth quarter at roughly 25% above the last three months of 2019. With nearly 300 million users already, it is still poised for growth as it enters new global markets such as Eastern Europe and expands its offerings beyond music to podcasts.

But Spotify also faces competitive challenges from Big Tech: Amazon, Apple and Google are all getting in the music streaming business. Profit has been elusive, and as a pure-play company, Spotify has less flexibility to compete against behemoth companies that can offer audio streaming on slim to no margins.’s Geoffrey Smith argues the case in favor of investing in Spotify, while Peter Nurse explains why investors should be cautious. This is .

The Bull Case

Forget the lack of profits. Or at least, reconsider the importance you attach to them in the near term. Spotify is still a company with a compelling growth story.

Monthly average users are still growing at around 30% year-on-year. Last week, the company predicted sequential quarterly user growth of 5% and 7% for the rest of the year. The midpoint of the company’s forecast for Q4 is still 25% above the final quarter of 2019.

At a time when the pandemic is forcing investors to differentiate much more sharply between those companies with a future and those without, Spotify is clearly in the former bracket. Multiple expansion, to borrow Donald Trump’s reference to the Covid-19 virus, “is what it is.”  

In any case, much of the widening of its loss in the second quarter was an accounting issue arising from the sharp rise in its share price in the quarter, rather than any lasting operational issue. Gross margins improved during the quarter.

The underlying business is clearly going to be in demand for a long time yet, even at a higher price point. Its 299 million users are already a lot, but they are still only a fraction of the global addressable market (Spotify is only now, for example, launching in eastern Europe, gaining access to 250 million more potential customers).  

The company’s churn rate is also improving as it mines a rich seam with its Family and Duo plans. For every additional user on the plan, the disincentive so switch suppliers grows and the cost of gaining each new subscriber – a key metric for the company – falls.

Moreover, of that 299 million, only one in five has ever listened to a podcast, according to the company’s latest estimates. In other words, Spotify still has scope to substitute many of the services offered by radio for the last 100 years, be it news, documentaries, or – as with the hotly anticipated Joe Rogan podcast debut in September – comedy.  Its ability to serve ads against all that content may be crimped in the short term by the fall in ad budgets worldwide, but it has an obvious opportunity for advertisers who have vowed to stay off Facebook (NASDAQ:) for the next few months.

And looking at the longer term, it’s easy to see the increasing concern at Big Tech’s stranglehold on the economy as a win-win for the company. If Congress breaks up rivals such as Apple Inc (NASDAQ:), then the playing field is leveled in Spotify’s favor. If it chooses to wave through the creation of digital monopolies, then the attractiveness of such a formidable content aggregator as a potential bid target for one of the major platforms will only increase.

The Bear Case

Spotify has been one of the Wall Street darlings since its flotation on the New York Stock Exchange in early 2018.

The music streaming company has managed to pull in nearly 300 million monthly active users, including 138 million paying subscribers, prompting share price gains of over 70% year-to-date.

However, the music surrounding this company going forward may well be less sweet.

As Guggenheim analyst Michael Morris put it as he downgraded its investment stance on the company to sell earlier this week, “the market is now pricing shares for blue-sky growth, which has made the risk-reward unattractive.”

The main problem is Spotify is not making money. It’s tough for streaming music companies to make a profit because of high royalty rates owed to music publishers.

Rivals like Amazon (NASDAQ:) and Apple can operate their streaming music services at near break-even levels or even as loss leaders. As more of a “pure play” in the space, Spotify doesn’t have that ability to the same extent.

After flirting with the black in the third quarter of 2019, the company has posted operating losses ever since, including a loss of 167 million euros in the second quarter of this year, released earlier this week. 

The outlook isn’t much better. The company’s own figures predict an operating loss of between 70 million and 150 million euros in the third quarter, and a loss of between 45 million and 145 million euros in the year’s final quarter.

It’s true Spotify has been very good at attracting new subscribers to its platform–adding 8 million paid subscribers in the second quarter alone. But the amount those new customers are paying, on average, has fallen considerably over the last few years. Premium subscribers paid just 4.41 euros per month on average in the second quarter. Three years ago, Spotify was reaping in 5.53 euros  during the same period.

Spotify has tried to counter the “pure play” issue by investing in original podcasts, including signing big names such as American comedian Joe Rogan. The hope being that it becomes more like Netflix Inc (NASDAQ:), a subscription service with high-value exclusive content. 

However, Morris expects competition for podcast content and distribution to intensify over the next 12 months, particularly from Amazon and Alphabet (NASDAQ:), which could negatively impact sentiment from the current highly-positive levels implied in the share price.

Spotify has performed well since its listing, but facing competitors like Apple, Google, Amazon and Netflix will be difficult going forward and it is currently priced for perfection.


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Tencent Music: Chinese Version Of Spotify Trades At 0.3x PEG And FCF Yield Of 5% (NYSE:TME)

Business Overview

Tencent Music Entertainment Group (NYSE:TME) is China’s largest online music and social entertainment platform in terms of monthly active users (MAU; 4Q19 total MAU: 903m). TME is a leader with twin growth engines. (Online music & social entertainment). TME, found in July 2016 through the merger of China Music Corporation (CMC) and Tencent’s online music business, is China’s largest online music entertainment platform ranked by MAU.

Source: Company Prospectus; Bloomberg

Chinese online music industry with long runway of growth

China’s online music streaming service has one of the highest long-term structural growth potentials as it benefits from rising purchasing power of Chinese middle class.

Source: Prospectus

TME’s online music platform has amassed a large user base and is currently under-monetized. According to the prospectus, the paying ratio (number of paying users divided by total number of users) of music subscription in China was only 5.3% in 2018, much lower than 22.5% for online video, 14.1% for online games and 7.5% for online literature, while users’ willingness to pay for music content reached 46.3%. Compared to the US (specifically Spotify), China online music industry’s paying ratio (c.5% in 2018 vs 70% for the US) and average revenue per paying user are much lower reflecting Chinese infant online music industry.

Source: Prospectus

With music entertainment features continuing to improve, and considering the shift from pay-per-download to pay-per-stream, I believe this will spur an increase in online music entertainment payment penetration rate in the long run. Consensus forecasts that the paying ratio could reach c. 20% in the long term when TME widely adopts the pay-per-stream model in China.

TME a dominant leader in the Chinese online music industry

Leveraging Tencent’s considerable user traffic from its WeChat ecosystem, TME achieved collective MAU of 903mn in 4Q19, compared to the 116mn MAU in Sept 2019 (per QuestMobile) of NetEase Cloud Music, the second-largest music entertainment provider in China by MAU.

TME is also the online music platform with the most comprehensive music content library in China; it owns more than 90% of music copy rights in China through different music sourcing channels. . In addition, TME is the only online music platform in China entitled to distribute music copyrights of the country’s top 3 music labels (Universal Music Group, Warner Music Group, and Sony), which in aggregate accounted for 59.9% of China’s music market revenue and 68.6% of global music market revenue in 2018. Thus, I believe TME has strong bargaining power when negotiating for content licensing.

Source: Company Filings

TME’s joint investment with Tencent for up to 20% of Vivendi’s Universal Music Group (UMG) should help the company to progress with its pay-per-stream strategy. TME’s investment in UMG will allow TME to provide more paywall content which will accelerate adoption of its pay-per-stream strategy and will boost its paying subscriber numbers going forward. TME’s long-term strategy is to lead rapid innovation in online music industry in China and increase user engagement within its ecosystem over short-term financial results. The company’s social entertainment business generates enough cash flows for the company to reinvest in online music business. In addition, TME leverages large user base of its parent (Tencent) so there is a limited downside risk for shareholders from this strategy.

TME has developed complete all-in-one music ecosystem which connects artists and users

TME has formed an online music ecosystem that connects music production and music distribution. For music production, TME’s Tencent Musician Program helps independent musicians to produce original music pieces. TME also produces self-made music variety shows, for example Produce 101 and The Coming One, to diversify content offerings. For music distribution, TME has strong operating capability to maximize the value of pop stars and idols. One important distribution channel is its popular songs rankings, which incentivizes fans to consume and pay for their idols’ music content so that their idols can top the ranking list. TME also sells tickets for offline music events such as live house concerts to engage with users.

Source: Prospectus

Financial Analysis & Valuation

Source: Bloomberg; Author’s calculation

TME reported strong cash flow and EPS growth over the last four years. Given TME’s strong FCF profile, the company is in a strong position to re-invest capital in music content, as well as produce its own content. I expect TME to sustain growth in EPS and FCF via monetizing large MAU base within its music ecosystem.

The key assumption here is that revenues growth will fall to 15% in 2020 then make a recovery to 26% in 2021. This includes a slowdown in social entertainment revenue due to Covid-19, partially offset by growth in streaming revenue.

I also conservatively assuming costs will increase faster than its revenue in FY20-FY21 as TME increases revenue sharing ratio with live-broadcasting hosts to retain talent, and will invest in long-form audio content.

For the exit price at 2022 year-end, I assume a 26x P/E, which is much lower than TME’s 30x level before the Covid-19 outbreak. This gives a share price of $13.3 at 2022 year-end.

I believe this represents a solid, attractive return, given the uniqueness of TME as a high-quality and fast growing business. I believe there is a meaningful possibility of positive surprises, for example, if revenue growth does not deteriorate as much as I assume.

Compared to Spotify’s MAU of 248m, TME’s MAU (903m) is still under-monetized. The number of online music paying users for TME was 39.9mn in 4Q19, which was equivalent to 32% of paying users for Spotify. I believe the gap in paying user between the two entities will narrow as TME progresses with its pay-per-streaming model with TME has much better growth outlook due to its massive MAU versus Spotify.

Source: Bloomberg

Key Risks

Failure to maintain deep content library

Failure to maintain/grow MAUs

Slow growth in paying subscribers

Rising content costs


I believe a risk of capital loss is very low, given the company’s rock solid balance sheet and its ability to generate strong cash flow. Return can be much better if the company can grow its music subscription business quickly than market anticipates.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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