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Analysis: Diversifying distribution, content key for Spotify to compete

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Analysis: Diversifying distribution, content key for Spotify to compete

Spotify Technology SA's planned initial public offering should give its streaming music unit Spotify AB more leverage to invest in its product, but the company must expand on its core business to stave off competitive threats from tech giants and reach profitability, industry observers said.

The European company's hyper-focus on music is a weak spot compared to larger, more diversified competitors like Apple Inc. Analysts suggested that Spotify should look to both new distribution and content initiatives to propel it to a more sustainable place in the industry.

"[Spotify is] completely reliant on music," said Peter Leitzinger, an analyst with SNL Kagan, a media research division of S&P Global Market Intelligence. "When Apple started Apple Music, that wasn't its core service. Apple can withstand to lose millions of dollars on its music service because it does so many other things."

In addition to making sure its service is widely available, including on new voice-activated smart speakers and other connected devices, Leitzinger said Spotify should explore growth opportunities in other types of content, including podcasts and news, to build on and bolster its business. "That's going to be where [Spotify] can really grow," he added.

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Spotify's leading position in the streaming music market earned it a valuation of $8.5 billion in June 2015 after raising $526 million in funding. Going forward, GP Bullhound, a technology investment bank and partial Spotify owner, estimated that Spotify's growth could translate to a valuation of more than $20 billion when it comes to market and at least $55 billion by 2020.

In an October 2017 report, the firm said that Spotify could reach 100 million premium subscribers by mid-2018, and around 200 million by the end of 2020. With an estimated 42% share of the global streaming market in 2016, Spotify leads its competitors in paid subscriber numbers. The streaming service giant had 71 million paying subscribers as of the end of 2017, compared to Apple Music's 36 million and Pandora Media Inc.'s 5.48 million.

But Spotify's current reliance on music labels for content limits its profit potential, said Gene Munster, a managing partner at venture capital firm Loup Ventures.

"The music streaming model gives the vast majority of the profits back to the artist, so we expect Spotify to find additional revenue streams around original content, advertising, ticket sales and artist promotion," he said.

Rob Kniaz, founding partner of venture capital firm Hoxton Ventures, agreed, saying that Spotify needs to develop its own pipeline of content and become an alternative to the record labels. He argued that the industry's "supplier monopoly" was the main reason that every other stand-alone streaming service before Spotify had "pretty much failed."

"For Spotify to survive in these market dynamics, they have to outcompete the record labels by managing the artist, distribution and marketing," he said.

According to Spotify's Feb. 28 IPO filing, the company, which has yet to earn a profit, posted a loss of €1.24 billion in 2017, exceeding losses of €539 million in 2016 and €230 million in 2015. It recorded revenue of €4.09 billion in 2017, up about 39% from the prior year, and a 29% year-over-year increase in Monthly Active Users to 159 million as of Dec. 31, 2017.

In the filing, Spotify listed companies including Apple Music, Pandora, Amazon Prime, Google Play Music and SoundCloud as those that could pose a threat to its business model. These companies, according to Spotify, could "have higher brand recognition, more established relationships with music and other content licensors and mobile device manufacturers, greater financial, technical, and other resources, more sophisticated technologies, and/or more experience in the markets."