Since the Great Recession, the Four – Amazon, Apple, Facebook, and Google – have amassed a combined market cap greater than the GDP of France. The accretion of stakeholder value (for consumers, investors, and employees) is staggering. If we could suss out the underpinnings of these horsemen, we could focus governments and universities on investing in the infrastructure that blooms these attributes (great engineering schools, bankruptcy laws, after-school music programs). And we’d be better stock pickers.
Several traits combine to make a company a possible candidate for a trillion-dollar valuation. The T Algorithm:
— Global — a product that leaps geographic boundaries
— AI — behavioral data that senses your tastes and tailors the product to you
— Benjamin Button — aging in reverse, an algorithm that improves with use
— Likable — seen as friendly
— Citizenship — perceived as doing good in the world
— Accelerant — being able to attract top talent
The shorthand is firms that become operating systems, dashboards, or portals for a large consumer category, and have network effects that reverse the aging process. Every Google search makes the algorithm more agile, stronger, younger. The Four have achieved OS status for their respective categories, and use their portal power to launch other businesses like X-15s being dropped from a B-52 … able to reach the speed of sound much faster than any startup.
In addition, the firm needs to speak to a specific instinct so scale is enabled both by digital technologies and our caveman selves. The Four tickle our need for a superbeing, for love, consumption, and procreation. Searching, connecting, consuming all feel … natural, easy.
So, who’s the fifth horseman? Each year, we try to ID who might join the medals podium of firms who personify us and whose leaders we anoint the Jesus Christ of our religion: innovation. At the beginning of 2017 we posited Netflix had become the OS for the second most important screen in our lives, the TV. It had begun to build an AI that made your viewing experience better as you viewed more. Storytelling that educates and bonds communities is key to survival, and it’s why we love Search Party. Since we labeled Netflix “the next $300B firm,” the stock has tripled in value
In 2018 we proposed that Disney could be a viable competitor to Netflix / Amazon Video, as it could offer the mother of all video bundles, and then merchandise a Frozen doll / Disney World weekend / Disney Cruise Line experience, and move from a transactional firm, valued at a multiple of EBITDA, to a recurring-revenue business valued at a multiple of revenues. However, the acquisition of Fox assets has hit some bumps (Brian Roberts), and the latest word from the Mouse is they’re going to have several streaming properties (Hulu, ESPN+, “Disneyflix” )— dumb, just dumb. Fairly obvious that exponential growth in shareholder value stems from one type of brand architecture — a master brand. However, I’ve come to believe …
There Is Another
I believe Spotify could be the next horseman.
Steven Pinker said music is auditory cheesecake, serving no evolutionary purpose. Others disagree. There has to be a pretty deep reason in our lizard brain why Mick Jagger gets to date ballerinas four decades his junior. Music plays a key role in educating the young (see above: storytelling), and Dr. Geoffrey Miller at the University of New Mexico believes musical ability is a sexually selective indicator, as it’s a signal of underlying fitness. I registered early that if you can dance, or make people laugh, women will kiss you. Also, musical ability seems to mirror fertility. Darwin found that female birds prefer more complex songs from their suitors, putting males under pressure to evolve the neurological apparatus to create and sing them. Think of the great artists, and when they were really productive, so to speak. Bottom line, they were young and virile/fertile. In sum, music does join the ranks of food and sex as something where there’s “something else” going on. Young people spend an eighth of their waking hours listening to music.
The Whole Social Thing
Social features that let you access others’ playlists and signal your attractiveness via your musical taste — while also entertaining and strengthening bonds with friends — give the streaming music company instinctive scalability. Every time you use Spotify, grouping songs into playlists, and your music pops into your friends’ feeds, giving them ideas, Spotify gets better, making it a Benjamin Button firm.
A recent study found that the more social elements a service has, the more likely it is to make users unhappy (like passive browsing on Facebook). On the flip side, the more a site focuses on entertainment and discovery, the happier its users say they are. Spotify is entertainment focused but has a social element — the best of both worlds.
Pandora was first, but though it tailors to your taste, there is no social aspect. It’s also only available in the US and is seriously uncool. Spotify has better technology, merchandising (like discovery playlists), and brand. Unlike Apple Music, being a pure-play (as opposed to being owned by a tech giant) gives Spotify more cred among purists, young people, and influencers. The instinct / T Algorithm cocktail has resulted in a firm with 170M users, 75M of whom are premium subscribers. The firm registered €1B this quarter, representing 37% growth. Spotify accounted for 36% of premium music subscribers globally.
Real Estate Play
The most valuable consumer organizations of the 20th century were often real-estate based: Sears, Walmart, the Yankees, Stanford, Disney. Things have changed, but not really. The most valuable consumer firms of this century are also real-estate based: the icons on your smartphone’s home screen are the most valuable firms in the world. Spotify has the second-best space in the mall, next to the Apple store — if not in the dock with the most-used apps, it’s often on users’ home screen.
It’s likely more young affluent people feel passionate about Spotify than about any clothing or tech brand — even Apple, as many of us are becoming aware of compulsively checking notifications. But the zone your favorite music puts you in fuels work and play. Music is inextricably linked to our deepest reward centers, and it accompanies most of our daily activities. The only apps that are a bigger part of young people’s day are firms worth well north of $100B. I think there is a decent chance Spotify could join them.
There Are Risks
The biggest risk to Spotify is arguably the biggest risk to our economy — that incumbent big tech firms continue to employ anticompetitive behavior. Apple Music is … awful. Every time I get in my car and U2’s Songs of Innocence autoplays, I feel my boys’ image of me eroding. Tim Cook has ruined U2, but that’s another post. Anyway, despite a substandard offering, Apple Music is growing faster in the US (5% monthly) than Spotify (2%), as the Apple Music icon is on the home screen dock of 1B iOS devices. Apple charges Spotify a 30% tax to be in the App Store and denied an update to the iOS Spotify app, essentially blocking iPhone users’ access to the latest version of the Swedish service.
Oh wait, it wasn’t a mistake, but intentional anticompetitive behavior that our elected officials are too stupid and enamored with “innovators” to actually hold Apple accountable for. Amazon is also abusing their platform, the Echo, to juice another inferior product, Amazon Music. In sum, it’s considered anticompetitive behavior when a portal/OS leverages its portal power to send consumers to an ancillary service that’s distinctly shittier than other services. Google keeps signing consent decrees saying they will send us to the best place, instead of another place they can monetize. They keep violating these decrees, last year absorbing a $3B fine from the EU. Btw, that fine amounted to 3% of their cash on hand. Neither their business nor their stock was affected.
Expensive, but a Great Value
Like most platform/network players, the firm is “investing” — Latin for hemorrhaging money. Spotify lost €378M, on €4B, this year.
As I write this, Spotify stands at $150/share. At $28B in value, or 5x revenues, it’s trading at Amazon-like multiples (expensive). However, it’s hard to see why Amazon or Netflix wouldn’t endure 7% and 25% dilutions, respectively, and pay $50B+ to cement a leadership position in what may be the last media battleground — music. Netflix would be the dominant streaming company, vs. just video streaming, and Amazon would further buttress the intensity across the two-thirds of households that are Prime members. So, is Spotify worth $28B in its current state? Maybe. But it’s worth $50–100B to one or more of the Four.
Prediction: Spotify stock doubles in the next 12–24 months.
The Gangster Move
What takes Spotify to $300B, and true horseman status? They launch video, and become the most successful streaming entertainment firm, full stop. Netflix’s legacy is on the second most important screen, TV. Spotify was raised on the most important – mobile. Netflix needs to become Spotify before Spotify becomes Netflix. Nobody has cracked social and TV, and as half of young people no longer watch cable TV, if Spotify were to launch video and captured any reasonable share and engagement via unique playlists, then cable and Netflix would begin ceding market cap to Spotify.
Many of us would rather have a playlist / curation from friends of the great art form of our age, TV, in addition to music. It would lead to better distribution and sharing. Spotify now means streaming music – it could mean social entertainment. It’s also a better model than Facebook or Google, as 90% of revenues are from subscriptions. We’ve come to the realization that social is nicotine (addictive, but not that bad for you), but advertising is the shit that gives you cancer (tobacco). The quest for more ads and engagement renders these firms arms dealers that traffic in rage and negligence. Subscription-based media won’t be saddled with a parent company tempted to tear at the fabric of our society to make their numbers.
It took Spotify 12 years to become a unicorn. In another 3–5 … it could be a horseman.
Our Spotify playlist is so rich,