Spotify's Listener Growth Indicates Network Effect, but Monetization Is Trailing

Sweden-based Spotify is the world’s leading music streaming service provider. We expect the fast-growing digital streaming space to become the primary distribution platform of choice in the ever-changing music industry. We believe Spotify can benefit from various network effects that will help it increase users and amass valuable intangible assets associated with user data and listening preferences. However, it faces intense competition and has a (mostly) variable cost structure that may limit future operating leverage and profitability. Thus, we do not have sufficient confidence that it will generate excess returns on capital over the next 10 years.