its not clear how you expect operating income to increase. would it be due to podcasts having bigger margins, and how? or promoted content? Nice presentation.

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Mar 4, 2022Liked by Antonio Linares

Hey Antonio,

I watched you stream with Robert on YouTube and read your blog posts on Spotify afterwards. Thank you for the writeup.

Are you familiar with the podcast "Spotify: A Product Story"? A bit meta, but very interesting to get a glimpse of the major milestones and challenges over the years from their point of view. Episode 7 is especially interesting, where they discuss their move from music to broader audio (including, but not limited to podcasts).

In the podcast they speak about a model for content companies with three phases:

1. Access - as long as Access is limited, it solves the customer need to provide the content. Spotify started by streaming music faster than anybody else. Currently advanced search functions play a role into access as well, I would argue.

2. Exclusive Content - This is where Spotify is right now and explains their investments in Joe Rogan & other celebrity podcasts. Netflix is in this Phase as well, with a major issue of large costs to create their content. Spotify solves this more elegantly. I

3. Platform - Users join because of the content, creators join because of users & monetization potential. Spotify is on a good path here. Including creator tools on their platform for producing podcasts & music. The more people use the Spotify the more they convert to paying premium users. And I know firsthand how sticky the personal recommendation engine and tailored playlists are once you have use the service a bit.

It will be interesting to see what a future Phase 4 could look like - maybe your thoughts on Web3.0 will play out here. Who knows.

I like that the flywheel currently provides ample growth opportunity, but I don't see how their margins will improve anytime soon. The (exclusive) podcast content is seen as a differentiator to other platforms/competitors and therefore provided for free or with minimal monetization even to non-premium users. Therefore cashflows to shareholder will be farther down the line and should be discounted accordingly.

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Dec 7, 2021Liked by Antonio Linares

What about competition in the high-quality resolution end of the music business? I believe there are three serious competitors offering this already. Spotify is said to be moving on this soon.

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Good work. Especially in understanding the company’s moat. Here are a few points I don’t fully agree with: 1. Spotify’s R&D is unusually high. Can’t look at it as % of revenue (most software companies margins are MUCH higher). May be look at it as % of gross profit. $1B in R&D tells you there are tons of innovations lined up and MOST of the company’s value is in the future (hence, can’t value the company looking backwards). 2. Your valuation model is too simplistic, especially if you are going to go as far as 10 years. It is likely that music review will be substantially smaller part of the company’s total revenue. Margins associated with other revenue segments are likely going to be software like. 3. “$SPOT today is reasonably priced at around 4 times sales” Too simplistic and likely incorrect way to value this business. 4. On risks: Not sure if the competition can substantially reduce prices. Spotify has been under pressure from the content owners (Labels and creators) to INCREASE prices. 5. “Labels could get together and produce their own streaming platforms” This would be anti-competitive.

They are in land-grab mode. They shouldn’t be flexing their “pricing power” muscle so much. I see it as a bit concerning. Could be more related to keeping creators and labels happy than trying to squeeze customers.

Again, good work researching this company. Not an easy company to understand or value.

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