What Will It Take for Spotify to Turn Profitable?

In this segment from Motley Fool Money , host Chris Hill is joined by analysts Matt Argersinger, David Kretzmann, and Aaron Bush to talk about Spotify Technology (NYSE: SPOT) , which reported its second-quarter results recently.

When it comes to revenue, user, and paid subscriber numbers, the streaming music powerhouse is humming along, but margins are a problem, and profitability remains elusive. If this is a zero-sum competitive game, what's the winning strategy? The Fools discuss.

A full transcript follows the video.

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This video was recorded on July 27, 2018.

Chris Hill: Second quarter revenue for Spotify came in 26% higher than a year ago. Spotify has now more than 80 million paid subscribers. It looks good, Aaron, but they're still not profitable.

Aaron Bush: Nope, and that's kind of a problem. I think they're doing a good job, they're just in a difficult position. What was impressive about this past quarter is, they grew their monthly active users and their paying subscribers by 30% and 40% respectively. That's important.

Perhaps less impressive is that revenue growth was not nearly that high. They're not making as much money per user that they have. Even worse than that is, they're not really making that much progress in their gross margins. They're still really low, about 25-26%. That's we're the largest problem is, and that's what's crippling their profitability.

I do see a path to them improving this. The more people that join them, which they are achieving, gives them a higher chance of making exclusive deals. I do think the future of music is shifting the power away from people who own the music to people who own the listeners. And the more that they can own the listeners, the more power they'll have getting those exclusives, and even more than that, negotiating prices with those who own the music. I do think that they might be making progress there, but it's not very evident, and they're still in a tough spot.

Hill: We've talked before about video streaming -- Netflix , Hulu, Amazon Prime, etc. -- not being a zero-sum game. People do and will continue to have multiple subscriptions. It seems like that's not the case with music. You're going to get one streaming service, and that's probably all you're going to get.

Bush: I think so. At least right now, that makes sense, because they tend to have the same content. Maybe one day in the future, if Apple and Spotify are competing, for example, for exclusives, there might be a reason why someone would have more than one. But I think now is the time when lock-in is most important, so they must chase that.

Matt Argersinger: Yeah, as Aaron has talked about, it's really the ownership component that separates video content from music content. The reason people are willing to pay for Netflix, for Amazon, for Hulu, Disney , is because there's that content that only exists on those platforms. For music, it's not quite there yet. As Aaron said, maybe the network eventually gets big enough for Spotify to actually accomplish that.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Aaron Bush owns shares of AMZN, AAPL, NFLX, and DIS. Chris Hill owns shares of AMZN and DIS. Matthew Argersinger owns shares of AMZN, NFLX, and DIS. The Motley Fool owns shares of and recommends AMZN, AAPL, NFLX, and DIS. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. 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.

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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