SPOTIFY: $55 BILLION BY 2020 9 NEW CONTRACTS WITH LABELS Will Drive Gross Margins As Spotify continues to accumulate a significant number of subscribers its bargaining power with labels dramatically increases. In 2017 alone the firm struck critical deals with both Universal and Sony Music and have therefore signed new deals with all four big labels. These deals – along with those to come – will help to positively increase its gross margin as costs related to labels will steadily decline. Costs associated with labels are by far Spotify’s most crucial cost item in its path towards profitability. The gross margin estimates are in line with our previous published research reports at 28% for 2020 and 30% in a blue sky scenario. STOCK MARKET INTRODUCTION OVER $22BN $55bn by 2020 & Long-term Potential of $100bn Our valuation reasoning and valuation multiples have not changed since the last report published in September 2016 – subscriber growth, however, has been stronger than we anticipated. We therefore believe Spotify will be valued at over $20bn at a stock market introduction. In this scenario we have estimated 70m premium subscribers and 100m non-premium subscribers. Given that this will most likely take place in the coming months we do believe these user values to be conservative as the latest released values were accounted for in July – thus paving the way for subsequent strong growth. In our scenario Spotify is valued at 3.5x revenue which – when looking at Spotify’s closest comparable companies – can also be seen as quite conservative. E.g. Netflix which many analysts see as Spotify’s closest comparable is currently trading at 7.3x 2017 revenue and 5.9x 2018 revenue. Given the reasoning above we believe there is room for an increase in valuation multiples once the firm is publicly traded. Our previous best case valuations of ~$50bn from reports published in 2015 and 2016 has now become our base case valuation estimate for 2020. The difference is mainly due to stronger than expected subscriber growth – as revenue per premium subscriber, revenue per non-premium subscriber and gross margin are relatively in line with previous research. Given that Spotify’s growth continues and that emerging market growth keeps average revenue per premium subscriber relatively in shape we envision that Spotify has a long term potential of being valued at $100bn. There is a long way to go for Spotify and the streaming music industry in general. But the most efficient way to get there is by continuing to create a product that hundreds of millions of diverse users fall in love with every day.