Mega $SPOT thread incoming...
1/23) In the past year I've done a lot of work on $NFLX. My well documented conclusion was that Netflix is the structural winner in the global video market thanks to the inherent fixed costs nature of its business model, and will be highly profitable at scale
2/23) That raises the question: "what makes Netflix scalable?" The answer is multifaceted but a key ingredient in the scalability of Netflix (and video in general) is rooted in a special characteristic of the video business: the ability to differentiate
3/23) The reason why differentiation in video is possible is pretty straightforward. Watching video is neither a particularly personal experience nor an interactive one
4/23) In practice that means that an individual will subscribe to a video service even if said service won't hold every piece of content he wants to watch and that he might subscribe to multiple services (because the friction in using multiple video services is relatively small)
5/23) And that enabled Netflix to break free from the networks, focus on producing original content and differentiate the service (which is possible in video because customers are willing to subscribe to multiple services)
6/23) And that's where we get to Spotify… my thoughts on Netflix made me think that Spotify doesn't have a scalable business. Music lacks the main characteristics that make video scalable, namely: differentiation in music is exponentially harder than in video
7/23) Why is content differentiation (almost) impossible in music? The answer is personalization and interactivity. The nature of the service involves a highly personalized and immersive experience
8/23) The consequence is that a user is very unlikely to simultaneously subscribe to multiple music services. A situation where each service contains a differentiated library will create a horrible customer experience in music (in contrast to video)
9/23) So at maturity, each music service has to contain practically everything. A music service can't suddenly lose 30% of the catalog, it will destroy the customer experience (again, in contrast to video)
10/23) And that means that Spotify will never be able to cut ties from the content owners and create its own content like Netflix. And without content differentiation, will Spotify ever be able to scale and become profitable?
11/23) After initially thinking that the answer is NO, that Spotify is a shitty business, I've had an insight that made me come around. I now believe that Spotify is the BEST long in the market and a potential 10 bagger.
12/23) What changed? I realized that what I perceived as a weakness is actually Spotify's biggest strength – personalization vs differentiation. the highly personalized nature of the product means that there is a strong inverse relationship between the duration of use and churn
13/23) The personalization creates significant switching costs for users (that only increase with time) and a delightful user experience. Eventually, both factors will lead to pricing power with users and market power with the suppliers (the labels)
14/23) When you couple the personalization with a focused dedicated owner\operator and a first mover advantage, you get a platform that is primed to win the music platform wars
15/23) The only viable alternative is Apple music which is basically only relevant in iOS and is an inferior product. The other mega-tech players are too late to the party and their products are destined to be inferior as well
16) So what is the potential? Spotify currently has ~75M paying subs and ~170M freemium subs. What is the TAM? JPM estimates 1.5B for paying and 3B for freemium which seems reasonable to me 
17/23) Let's say at maturity Spotify gets to 600M paying subs at $8 ARPU and 35% gross margins. That adds up to $20Bn gross profit without even accounting for the massive potential of the freemium subs (which by itself might create an additional $5Bn-$10Bn gross profit stream)
18/23) I used 3 strong assumptions. Let's go one by one: a) 600M paying subs: I strongly believe Spotify is going to win the market. If it will indeed win, that's not a controversial assumption.
19)b) $8 ARPU – might seem more problematic. ARPU is at $6 and declining, why would trajectory change? twofold answer: 1. we're currently at the land grab phase. Current trend doesn't mean much 2. Untapped pricing power-ask long time users what they'll do in case of a 2$ increase
20/23) c) 35% gross margins – Spotify is currently at ~24%, how will it get to 35%? The answer is shift in market power once the platform reaches scale. Yes, Spotify depends on the labels, but at scale, the labels will depend on Spotify even more.
21/23) So adding it all up, Potential earning power is >$20bn gross profit for a company that is currently valued at ~$30Bn. In addition, downside is protected by the immense strategic value of the platform to a prospective buyer.
22/23) Let's say you are Disney and you want to launch a global DTC platform. Wouldn't you want a unique existing global media platform with 250M users to jump-start the service? Wouldn't you pay a meager $30Bn for the privilege?
23/23) To sum it up, I'm LONG $SPOT, I'll sell when it gets to 1,500$.
