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Competition, Cost Structure Threaten Spotify's Lead

The power of record labels and competition from behemoths lead to our no-moat rating on the music streaming service.

Ali Mogharabi: Swedish-based Spotify is the world's leading music streaming service provider, and we foresee the fast-growing digital streaming space as becoming the primary distribution platform of choice within the ever-changing music industry. We believe Spotify can benefit from various network effects that will help the firm increase its users and amass valuable user data and listening preferences. However, the firm faces intense competition and has a mostly variable cost structure that may limit Spotify's future operating leverage and profitability. Thus, we don't have sufficient confidence that it will generate excess returns on capital over the next 10 years.

Spotify is ahead of the pack in the growing music streaming market, but it faces stiff competition from behemoths such as Apple, Google, and Amazon. Unlike Spotify, these firms aren't solely reliant on streaming music to drive profitability and can actually potentially run at break-even, or even as a loss leader, while monetizing listeners via other products and services.