Spotify could transform its business by following TikTok’s lead

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Spotify (NYSE: SPOT) recently filed for a patent that could allow its users to create short “video moments” synchronized with their music. The deposit, which was first spotted by Digital Music News, also states that a viewer can search for a song’s name and artist on the video overlay, and then listen to the rest of the song on Spotify’s main platform.

A patent does not guarantee that Spotify will add the feature, but it appears that the streaming music giant is interested in winning some users of ByteDance‘s TikTok, the popular Chinese app facing the potential bans in the United States and other markets amid escalating tensions with China.

The file also suggests that Spotify could follow. Tencent Music (NYSE: TME), the biggest streaming music company in china, in the “social music” market. Tencent Music derives most of its profits from its WeSing karaoke platform instead of its streaming music platform, and TME and Spotify already have significant stakes one in the other – it would therefore not be surprising to see both companies draw their ideas from the same well. But would an extension of Spotify’s platform with short videos really boost its business?

Image source: Getty Images.

A review of the main challenges of Spotify

Last year, Spotify’s monthly active user (MAU) number increased 31% to 271 million, its premium subscribers increased 29% to 124 million, and its ad-supported MAU soared 32% to 153 million. Its total turnover jumped 29%.

This user growth continued in the first half of 2020: its MAUs grew 29% year-over-year to 299 million, its premium subscribers grew 27% to 138 million and its MAUs funded. by advertising increased by 31% to reach 170 million. However, Spotify’s total revenue only grew by 18% during this period.

Spotify’s revenue growth slowed significantly in the second quarter as the COVID-19 crisis reduced its advertising revenue from free listeners. The loss of that advertising revenue then reduced its gross margins and offset the higher margins of its subscription revenue.

Spotify expects its user growth to remain stable in the second half of the year, but it expects its revenue to grow only 7% to 18% year-on-year in the third quarter due to pressures on its advertising business and currency headwinds. and 11% -21% in the fourth quarter. It also expects to remain unprofitable throughout the year.

Against this backdrop, it makes sense for Spotify to launch a third growth driver beyond subscriptions and ads to generate higher margin revenue.

Can Spotify emulate the success of TikTok and WeSing?

TikTok generates most of its revenue from ads and virtual giveaways, which viewers can purchase for their favorite content creators. ByteDance is privately held, but Bloomberg says the company more than doubled revenue to $ 17 billion last year, with a net profit of $ 3 billion. TikTok and its Chinese counterpart Douyin currently reach over 800 million MAU worldwide.

A young woman listens to music in a library.

Image source: Getty Images.

Tencent Music’s WeSing generates most of its revenue by allowing viewers to purchase virtual gifts for their favorite karaoke artists. The app is at the heart of TME’s “social and other entertainment” segment, which increased revenue 36 percent to 18.3 billion yuan ($ 2.67 billion) last year. However, this business lost significant momentum in the first half of 2020 as cash-strapped users purchased fewer virtual gifts throughout the pandemic.

Based on these facts, Spotify could launch a short video platform with ads and virtual gift purchases, which could generate more revenue from its free users who will not commit to paying any fees. monthly subscription. If the feature takes off, Spotify could also bundle virtual tokens or freebies as perks for paid subscribers.

But that’s only speculation for now

Spotify’s patent filing suggests it is interested in expanding into the short video market, but investors shouldn’t assume that will happen anytime soon. This is only speculation for now, but it highlights some interesting ways for Spotify to expand its ecosystem, keep pace with social media platforms, widen its divides against its streaming music rivals, and eventually generate stable profits from a new high-margin business.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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