There's a reason Wall Street is increasingly bullish on Spotify and streaming music - this graph shows why
- The bull case for Spotify is built on the notion that there's lots of growth ahead for the company.
- Morgan Stanley's Benjamin Swinburne thinks the evolution of the streaming music market in Sweden bolsters that case.
- Some 23% of Swedish adults now subscribe to streaming music services, potentially indicating where penetration rates could go in the US and elsewhere, Swinburne argues.
Spotify may be losing lots of money and struggling to turn its millions of users into a source of profits, but some on Wall Street are super bullish on the company and its prospects.
If you ask why, one particular analyst - Morgan Stanley's Benjamin Swinburne - will point at Sweden. Spotify's home country is the place where it first launched its streaming music service, and it's where the company has had its greatest success thus far in convincing consumers to pay for its offering.
"Penetration of paid music streaming in Sweden has more than doubled in the last 5 years," Swinburne said in a research note this week. Noting that 23% of adults in the country are now paying for streaming, he argued that rate represents "a global benchmark."
Even though Sweden is Spotify's home base, it wasn't a natural market for subscription music, Swinburne said. Consumers there had little appetite for paying for music prior to adopting Spotify, he said. But the portion of adults now subscribing to a music service has gone from 0% to nearly a quarter in 10 years, he said.
Here's what that growth rate looks like:
Sweden is a leading indicator of for how other countries will adopt subscription music, Swinburne argues. The company's growth will be boosted for years to come as penetration rates in other countries follow Sweden's path.
By contrast, here are the penetration rates in the three biggest music markets in the world and how they've changed over time.
The biggest music market in the United States, but it trails significantly behind Sweden:
The next biggest is Japan, where paid streaming music has barely started to take off:
And in Germany, the no. 3 market, where adoption rates lie between the US and Japan:
Spotify may be poised to take advantage of a growing market
Overall, Swinburne estimates that the total number of paid streaming music subscribers will grow from about 180 million users at the end of last year, to about 575 million by the end of 2022.
"We argue the strong value proposition of paid streaming services will drive penetration higher over time," he said.
Spotify is valued at $29 billion, and its potential growth is a key reason why. Streaming music is already accounting for more revenue for the music industry than digital downloads and the sale of CDs combined. But Swinburne and others on Wall Street believe the streaming music business can get much bigger, and Spotify will remain one of the major players in the industry and so benefit from that growth.
Even if that does happen and Spotify's revenue swells, it will have to find a way to bring more of that revenue down to its bottom line. Right now, much of its revenue goes to paying licensing costs to the record labels and music publishing firms, leaving it with large and growing losses.