Technology

What explains the $50.4 billion market capitalization that Spotify achieved last week?

Analysts talk about in-app ads strategy for podcasts and regionalized content

Spotify headquarters New York
Spotify brand at 4 World Trade Center facade, the company's headquarters in New York. Photo: Jer123/Shutterstock

In the last week, Spotify‘s shares reached a price of $271.49, which made the company reach $50.485 billion in market capitalization – it was the first European company and startup to do this. In one year, the company’s shares were up 86.13%. What explains this movement? According to analysts, the reasons behind this appreciation go beyond the COVID-19 pandemic and the fact that people are consuming more audio, video, and gaming streaming services.

Source: Yahoo! Finance.

As pointed out by Adam Levy, from the investment community platform The Motley Fool, one of the recent moves that are differentiating Spotify from its competitors is the company’s recently introduced ad solutions for podcasters, something that apparently starts to pave the way for better monetizing podcasts, and that can also be a path for diversifying revenue beyond subscriptions.

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Spotify started testing in-app offers, that is, special links and promotional codes in podcasts that lead to advertisers’ websites. As this type of strategy evolves, the company is likely to learn more about listeners’ spending habits, which can lead to more advertising revenue for Spotify itself and its podcasters. This is something currently limited to Spotify-owned podcasts, but it can be expanded to all the podcasts on the platform.

Levy also stresses that Spotify is using this data on its users’ habits to increase the number of people who actually listen to podcasts: 19% of monthly users engaged with podcast content during the first quarter of 2020, up from 16% in 2019 Q4. “If we’re able to own the consumer insights that inform us about where the demand is for that content (podcasts), then the margin will flow to Spotify,” the company’s CFO Barry McCarthy said on the first-quarter earnings call.

In Q1, Spotify launched 78 Originals & Exclusives (“O&E”) podcasts globally and completed the acquisition of The Ringer, rounding out its total number of studio operations to four: Gimlet, Parcast, The Ringer, and Spotify Studios. “There are now more than 1 million podcasts available on our platform, and more than 60% of them are powered by Anchor, which we acquired a year ago. In Q1 specifically, Anchor-powered shows accounted for more than 70% of new podcasts launched on our service,” the company said in a statement to investors.

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Using data to adapt and regionalize content

Another combined movement that may explain the recent enthusiasm of investors is Spotify’s strategy of adapting and regionalizing content, which includes podcasts and much more, to grow globally, especially in a market with greater potential, such as Latin America. This in the eyes of investors is crucial to increasing the platform’s number of paid subscribers.

In the first quarter of 2020, the audio streaming platform reported a 31% jump in paid subscribers to 130 million and a 22% increase in revenue. The firm added 6 million subscription accounts between January and March, and 30 million year-on-year. Total monthly active users (including non-paid) also grew 31% year-on-year to 286 million.

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Latin America now accounts for 21% of Spotify’s global subscriptions, with a total of 27 million paid users. The region is also home to 22% of monthly active users on the platform, or 63 million – 16 million users were added between the Q1 2019 and Q1 2020.

Last week, Spotify announced its plans to adapt locally popular scripted podcasts to different countries and regions, as a part of the audio-streaming service to gain subscribers globally. According to Reuters, the first show will be Sandra, released in 2018 by Gimlet, a company that was later acquired by Spotify. It will be released in Mexico and Brazil, as well as in France and Germany.