After having investigated and read further about Streaming music market, there are some aspects to be called out and analysed.
I am going to talk about two of the most leading companies at this economic sector. Spotify and Pandora Radio, as well as their business performances over 2014.
Spotify, the Swedish company started up the business in 2008 in Stockholm, the volume of users has increased incredibly over the time. If the company attracted over 10 millions of users in September 2010, business metrics show over 75 millions on 30th of June 2015.
Spotify is a subscription-based-model, therefore there are two types of users. Subscribers, who pay 10$ monthly fee to get access without advertising, and non paying users who get access for free, but getting ads every three or fours tunes played. Therefore, there are two revenues streams, subscriptions and advertising. On 30th of June, 20 millions of users of 75 millions in total, are paying theirs subscriptions on a monthly basis.
On the other hand, Pandora radio. An american company created in San Francisco in 2010, which operated in NYSE (S&P 500).
It operates in three countries, USA, Australia and New Zealand, in opposite to Spotify which is trading over 58 countries worldwide. The business model is pretty much the same, subscription without advertising, and free access with advertising. However, just 5% of users are paying the monthly fee to avoid ads. Well, at this point, we have two different companies, the same service provided, one business model, and two different responses from the audience when demanding the service. Spotify is getting the revenue from subscriptions mainly, and Pandora radio from advertising.
Just check out this graph below. Revenue streams breakdown belong to 2013 period, but those percentages are quite similar, currently.
Let's come through Financials in 2014 to see which option should be the best one.
Spotify reported an increase on year to year revenue by 45%, up to 1.08 bn. Surprisingly, net losses increased by 190%, from 68m to 197m in 2014. The reason is the increasing on operating costs, such as product development, international expansion, and personnel, as the head-counting went up by 43%. Also, royalties and distribution costs represent 82% of the total revenue.
Pandora radio: The company has increased its revenue by 40% from 2013, as well as gross margins by 12% (from 30% in 2013 to 42% in 2014) drawing an operating profit (EBIT) increasing by 62%. Great metrics initially. But the problem comes along. Research and development went up by 62%, and personnel costs has increased by 50%, both. (just note, under US GAAPS Research and development costs must be written off on the same accounting period, other accounting conventions allow capitalise those expenses over years, if specific criteria are met, like IFRS).
Once again, overheads are upsetting figures eventually.
However, Pandora radio has incurred in losses for three years in a row, 30.5 ($)m in 2014.
Under this scenario, it would be easy to understand, no investors will put any money in, but it is NOT like that at all!!. This kind of industries are utterly dynamic. New upgrades on the services, business internationalisation and implementation costs use to be expensive, but those investments (rather than costs) are completely needed to develop the service and going forward. However, those investments beyond the revenue, (what makes both business incur in losses), frame a promising market with great expectations. For example, Spotify has received a volume of capitalisation for 400 ($)M from different investors, among them, Goldman Sachs. Due to the launch of the new video network service (similar to Youtube), among other company plans still unknown publicly.
On the other hand, Pandora radio has increased its equity by 415% from 99($)M in 2012 to 508 ($)M in 2013, and other 15% in 2014, up to 583($)M in accordance with its balance sheets. What makes a capitalisation increasing of 430% in two years!!.
Also, Apple through iTunes will come on board shortly throughout its new adquisition Beats Music.
Great insights about one industry which is not still taking off, but it seems to be flying high in the future.
I am going to talk about two of the most leading companies at this economic sector. Spotify and Pandora Radio, as well as their business performances over 2014.
Spotify, the Swedish company started up the business in 2008 in Stockholm, the volume of users has increased incredibly over the time. If the company attracted over 10 millions of users in September 2010, business metrics show over 75 millions on 30th of June 2015.
Spotify is a subscription-based-model, therefore there are two types of users. Subscribers, who pay 10$ monthly fee to get access without advertising, and non paying users who get access for free, but getting ads every three or fours tunes played. Therefore, there are two revenues streams, subscriptions and advertising. On 30th of June, 20 millions of users of 75 millions in total, are paying theirs subscriptions on a monthly basis.
On the other hand, Pandora radio. An american company created in San Francisco in 2010, which operated in NYSE (S&P 500).
It operates in three countries, USA, Australia and New Zealand, in opposite to Spotify which is trading over 58 countries worldwide. The business model is pretty much the same, subscription without advertising, and free access with advertising. However, just 5% of users are paying the monthly fee to avoid ads. Well, at this point, we have two different companies, the same service provided, one business model, and two different responses from the audience when demanding the service. Spotify is getting the revenue from subscriptions mainly, and Pandora radio from advertising.
Just check out this graph below. Revenue streams breakdown belong to 2013 period, but those percentages are quite similar, currently.
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Let's come through Financials in 2014 to see which option should be the best one.
Spotify reported an increase on year to year revenue by 45%, up to 1.08 bn. Surprisingly, net losses increased by 190%, from 68m to 197m in 2014. The reason is the increasing on operating costs, such as product development, international expansion, and personnel, as the head-counting went up by 43%. Also, royalties and distribution costs represent 82% of the total revenue.
Pandora radio: The company has increased its revenue by 40% from 2013, as well as gross margins by 12% (from 30% in 2013 to 42% in 2014) drawing an operating profit (EBIT) increasing by 62%. Great metrics initially. But the problem comes along. Research and development went up by 62%, and personnel costs has increased by 50%, both. (just note, under US GAAPS Research and development costs must be written off on the same accounting period, other accounting conventions allow capitalise those expenses over years, if specific criteria are met, like IFRS).
Once again, overheads are upsetting figures eventually.
However, Pandora radio has incurred in losses for three years in a row, 30.5 ($)m in 2014.
Under this scenario, it would be easy to understand, no investors will put any money in, but it is NOT like that at all!!. This kind of industries are utterly dynamic. New upgrades on the services, business internationalisation and implementation costs use to be expensive, but those investments (rather than costs) are completely needed to develop the service and going forward. However, those investments beyond the revenue, (what makes both business incur in losses), frame a promising market with great expectations. For example, Spotify has received a volume of capitalisation for 400 ($)M from different investors, among them, Goldman Sachs. Due to the launch of the new video network service (similar to Youtube), among other company plans still unknown publicly.
On the other hand, Pandora radio has increased its equity by 415% from 99($)M in 2012 to 508 ($)M in 2013, and other 15% in 2014, up to 583($)M in accordance with its balance sheets. What makes a capitalisation increasing of 430% in two years!!.
Also, Apple through iTunes will come on board shortly throughout its new adquisition Beats Music.
Great insights about one industry which is not still taking off, but it seems to be flying high in the future.
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