Should Spotify Investors Worry About Free Competitors?

Spotify (NYSE: SPOT) has historically differentiated itself from other streaming services by offering a free ad-supported tier. Ad-supported Spotify listeners don't get all the same features as premium subscribers, but Spotify offers enough value to attract some 141 million global listeners to its free service. Importantly, the free tier is an on-ramp for listeners to become paid subscribers, and management has shown an excellent ability to convert them.

But Spotify's free tier is becoming more common. Earlier this year Amazon (NASDAQ: AMZN) and Google, the Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary, each announced that their smart speaker users would get access to a free ad-supported music service. Amazon recently outlined plans to expand that service to smartphones, tablets, and its Fire TV devices. Google also offers ad-supported listening on mobile through Google Play Music and YouTube Music.

Investors are concerned these tech giants will be able to throw around their considerable heft to slow Spotify's growth. News of Amazon's expansion to mobile devices sent Spotify shares tumbling. But investors shouldn't worry about the competition offering free streaming. Here's why.

Several smartphones displaying the Spotify app.

Image source: Spotify.

Spotify's strong where it matters most

Mobile is one of the most important modalities for streaming music. Spotify uses unlocking additional features on mobile as a key selling point for its premium subscription. And Spotify's success on mobile is notable. Management described its position on mobile as "very, very strong" during its third-quarter earnings call.

Importantly, Spotify faces competitors with significant advantages. Apple (NASDAQ: AAPL) and Google combine to own practically 100% of the operating systems installed on consumers' smartphones. That allows them to pre-install their own streaming apps and highlight them for new users. Still, Spotify remains the most popular music-streaming service on mobile.

Another key area for music streaming is in the car. Streaming is quickly replacing traditional radio. Spotify says 70 million of its listeners stream content in their cars at least once a month. 

Amazon, Google, and Apple all have auto-specific integrations. Amazon offers the Echo Auto device, while Google and Apple provide Android and iOS-based dashboards, respectively. Again, Spotify's device-agnostic approach has enabled it to see broad adoption in the car.

Indeed, Spotify's strength on mobile and in-car listening has led it to grow twice as fast as Apple Music and faster than Amazon's music listeners as well.

It's investing in a third mode of listening

Spotify just ended a promotion offering its premium subscribers a free Google Home Mini smart speaker. The company has run similar promotions in the past. "The primary benefit really is bringing Spotify into your home," CEO Daniel Ek said on the company's third-quarter earnings call. "We look at something like the Google Home Mini plan as a great way for us to get into people's homes and get competitive against all the other services that are there."

Just as Google and Apple have a home-field advantage, so to speak, on mobile, Google and Amazon have the edge on smart speakers. But Spotify has shown an ability to overcome those advantages because it works seamlessly across all devices.

Solidifying its position as the streaming service on devices like Google Home or Amazon Echo will be key to defending its position in mobile and in-car listening. Consumers want to be able to listen to their content seamlessly across devices, so when they go from their home, then to their car, then to the gym, they don't have to worry about finding where they left off in their favorite album or playlist.

Spotify's well-positioned on mobile and its growing audience speaks to how much listeners love the mobile experience. There's nothing Amazon or Google offer on mobile Spotify doesn't. Meanwhile, promoting Spotify streaming on smart speakers with things like the Google Home Mini giveaway is a smart move to keep listeners engaged on Spotify instead of defaulting to Google's or Amazon's services when they adopt a smart speaker. That's how Spotify can play offense and keep the big tech companies at bay.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares), Amazon, and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Spotify Technology and recommends the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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