Recently, a friend of the company mentioned that he had bought into Spotify as a “long-term investment.” I am not writing this to target him, seeing as he had a 120% return last year I probably should not say anything to him, but because I believe Spotify violates many important tenets of my investing thesis (“A thesis is a statement that is put forth for discussion or proof. It can also be an idea or theory that is expressed as a statement and is discussed in a logical way.”) For the friend of the company ;).

In 2022, Spotify made a big investment in podcasts. That investment has…not been particularly successful. Despite dropping a cool billy in podcasting, Spotify is simply not making money on podcasts or podcast personalities. Their initial strategy was to pull together celebrities and throw them at listeners, celebrities like Meghan Markle who they gave a cool $20 million and whose podcast was canceled after 12 episodes. Spotify gave a hundred million to Joe Rogan, signed Obama, and Kim Kardashian. It was not just celebrities that Spotify was ape-flinging dollas at; it was also straight-up companies. To build the infrastructure necessary to develop a listener base, Spotify bought companies.

One of the biggest of those buys was the production company Gimlet. Spotify bought Gimlet for hundreds of millions of dollars. Gimlet is used on practically all Spotify podcasts right now to level up the quality of podcasts. Then, Spotify bought a true crime podcasting company, Parcast. Then, Spotify bought The Ringer. To reveal a bias, I love The Ringer. My top five most listened-to podcasts of 2023 had four Ringer shows in them, including Plain English which is awesome, and The Ringer Fantasy Football Show, which is also awesome. Spotify’s strategy here was to buy listeners, similar to how Netflix bought subscribers with the show House of Cards. A strategy like that can work, but it has to go nearly perfectly and it has to be fast. A Third Punic War, rather than a first to make a reference to the YouTube channel Oversimplified. If you are trying to buy an industry like Spotify did, you have to use a blitzkrieg-style approach, anything less will leave you in a hole. Spotify is now in that very hole that you, as a shareholder, want them to avoid. Spotify is not making money from podcasts, they only have about 28% of podcasting market share, and a complete retreat is necessary or a redoubled effort.

Music streaming is not a business: at least right now. The entire reason Spotify thought they had to get into the podcasting business was because the music streaming business S-U-C-K-S. Spotify is one of the best in the industry in finding ways to make money in music streaming. Their payments to their artists, for example, are atrocious. Even Spotify can barely make money in music streaming. Spotify has NEVER made an annual profit. Spotify can string together a quarter of profitability, but music streaming always brings them down. One of the biggest reasons Spotify is consistently dragged down is the fact that Spotify has to shell out 70% of incoming money from subscriptions and advertising to labels, artists, and publishers. The margins are razor-thin, and there is very little room for negotiation. In fact, the EU right now, is considering forcing Spotify and other major music companies like them to pay their artists more. I see a very thin and precarious path for Spotify to make this a genuine money-making business, and there are better places to put your money.

Now, I know what you are saying, “Well Henry, obviously the path is thin and precarious that is why I am buying, I am getting a discount.” And yes, that would have been true a year ago. However, the prices now have leaped up so far that you are, in fact, paying a premium for the risk.

Spotify has only risk, no discernible path toward sustainable profitability, a black hole of dollars, and a leadership team shedding officers, which frankly may be necessary. Now, I would not call you a fool for investing in them. Spotify is an exciting company and it always will be, I am simply unsure of its ability to become an adult company.