SPOT

What Spotify's Move Into Audiobooks Means for the Stock

Last week, audio streaming giant Spotify Technology (NYSE: SPOT) announced that it will be adding audiobooks to its platform by the end of the year. This feature comes thanks to its new partnership with Storytel, a Swedish audiobook subscription service.

The announcement seems to have investors excited. The stock price jumped more than 4% on the day of the news. However, Spotify's share prices are still down more than 38% from 52-week highs set in February.

Let's see whether or not this new feature could be the spark investors are looking for.

What does the Storytel partnership entail?

Before getting into implications that audiobooks could have on the company and shareholders at large, it's important to understand what the partnership truly includes.

Spotify streaming on multiple devices at once.

The Spotify app. Image source: Spotify.

Storytel is a subscription streaming service that's home to more than 500,000 audiobooks available around the globe. The business model operates similarly to Spotify, but users pay a set rate per month of roughly $22 and get access to a full library of audiobooks through their mobile device.

This partnership will grant Spotify users access to the Storytel library through their Spotify app, but will still require those users to have a Storytel subscription. In other words, Storytel subscribers will be able to link their accounts to Spotify and listen to audiobooks in the same place as their favorite songs and podcasts.

Expanding to be all things audio

It's no secret that Spotify is trying to become more than just a music streaming platform. In recent years, the company has spent almost $1 billion on podcast-related investments in an attempt to diversify its offering into all things audio, and this is one more step in that process.

Now Spotify users can meet any of their audio needs, whether for music, podcasts, live conversations (thanks to the recent Locker Room acquisition), or even audiobooks, all from a single destination.

But Spotify's efforts aren't just focused on the consumer side. At the company's Stream On event in February, it announced the launch of its Open Access Platform, which allows individual creators the option to create paid-only content for their respective audiences. This means podcasters are able to release exclusive episodes for their most enthusiastic fans, and now with this partnership, Storytel will get that same functionality.

This should help Storytel in a big way since it provides direct access to Spotify's 356 million monthly active users.

What does this mean for Spotify shareholders?

While the full details of the partnership, like any potential revenue-sharing agreements, weren't disclosed in the company's press release, this looks like yet another step in Spotify's efforts to grow away from a music-only platform.

Spotify is somewhat notorious for its low gross margins of roughly 25%, a result of the company's payout structure to rights holders, namely the major music labels. However, new forms of audio also introduce new strategies for monetization.

Spotify recently saw 46% year-over-year revenue growth in its ad-supported segment in the first quarter, thanks in large part to its acquisition of Megaphone. Though it's hard to know exactly how Spotify will generate revenue through this Storytel partnership, it's probably safe to assume that the revenue will have higher profit margins since it costs Spotify nothing to generate the new content.

In the short run, it's unlikely that this new partnership will contribute anything significant to the company's financials. However, this should ultimately help decrease Spotify's dependence on the major music labels for content. And for shareholders, this should serve as another stepping stone on the company's path to becoming the singular platform for all forms of audio.

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Ryan Henderson owns shares of Spotify Technology. The Motley Fool owns shares of and recommends Spotify Technology. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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