Last year was a big one for the music industry. The global recorded music market grew 10.2% in 2023 to reach $28.6 billion, according to IFPI, which represents the recording industry. That's up from the 9% boost the industry experienced the previous year.
Unsurprisingly in this digital age, the bulk of the growth came from streaming. Revenue from streaming subscriptions increased 11.2% and accounted for roughly half of total music revenue.
The reigning king of streaming is undeniably Spotify(NYSE: SPOT), which commands 31.7% of the global streaming subscription market. Apple Music and Amazon Music have market shares of just 12.6% and 11.1%, respectively.
Spotify's rise
Spotify launched its namesake platform in 2006 as a free, legal alternative to the all-too-common practice of pirating music. Spotify leveraged the "freemium" model, in which a free product is offered to get people in the door and income is generated from persuading users to upgrade to a paid version.
One of Spotify's early differentiators was its use of algorithmic music suggestions. The app learns a user's taste and tailors unique playlists for them. This is still one of Spotify's defining features and continues to keep users loyal.
What Spotify has done is impressive given competition from tech behemoths like Apple, Amazon, Microsoft, and Alphabet.
Podcasts
According to one 2023 survey, 42% of American adults had listened to a podcast within the last month, up threefold from a decade earlier. Spotify has gone all-in on the popularity of podcasting, and the bet has paid off.
In 2020, the company acquired Megaphone, a podcast software-as-a-service (SaaS) specialist, for $235 million, and reportedly paid another $200 million for exclusive rights to The Joe Rogan Experience podcast.
Rogan's podcast remains by far the most popular in the world, with nearly double the listeners of the next-biggest podcast. Buoyed by its success, Spotify remains the top podcasting platform globally.
Critical for investors, podcasting is one of the best mediums in which to advertise. Spotify's data suggests a whopping 81% of users have taken action after hearing an ad while listening to a podcast, making it valuable ad real estate.
The numbers
Spotify's fourth-quarter 2023 report suggests the company is in a strong position. The streamer added 602 million monthly active users (MAUs), up 23% year over year. Of these, 236 million were premium subscribers, a 15% increase from last year. Both of these figures exceeded previous guidance from the company.
This growth in the user base led to a big year for Spotify financially. The company brought in $14 billion in total revenue, up 13% from 2022.
Is the stock a buy?
Spotify had a net loss last year of $566 million. However, there is reason to believe 2024 is the year the company will turn a profit.
The company does not offer full-year guidance, but told investors it expects:
...healthy full-year 2024 user growth that should be close to the average of the last few years, and we expect strong subscriber growth as well. Gross margin and operating margin are both expected to improve throughout the year to deliver meaningful full-year expansion, with podcasting expected to deliver positive gross profit for the year. We also expect our free cash flow generation to meaningfully exceed what we generated in 2023.
Spotify has been working hard to reduce costs, including three rounds of layoffs last year that reduced its workforce by over 20%. At the same time, MAUs have been growing rapidly and the company is finally raising prices on its premium-tier subscription. I believe these factors will combine to make 2024 the year Spotify finally becomes profitable and sustainably turns the corner to long-term success, making the stock a buy for the long term.
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Johnny Rice has no position in any of the stocks mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, and Spotify Technology. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
