Spotify – The wrong 99.9.

99.9% of India will be free not $9.99.

• Hopes of edgy investors are being raised by the notion that Spotify is now in a position to launch in India, but anyone hoping for an immediate deluge of premium subscriptions is likely to be very disappointed.
• Spotify appears to have secured rights to stream music in India (see here) which is no small feat as India is a notoriously difficult market when it comes to music.
• There are two main reasons for this:
  • First, Bollywood. Unlike any other market, the Indian music scene is primarily driven by Bollywood movies.
  • These are as plentiful (if not more so) than Hollywood and very often have an extensive music score.
  • It is from these that many of the hits and popular music in India are derived.
  • Hence, Indian music is a big part of Indian culture and the Indian rights owners know it.
  • Second, music labels: There are a number of local music labels in India but it is a few like T-Series and Saregama that hold most of the cards.
  • Hence, it is these that need to be licensed in order to have a credible offering.
  • These companies are notoriously difficult to deal with as they have long known the potential value of streaming and securing rights deals with these companies is incredibly difficult and time-consuming even for local players like Hungama.
• Despite these hurdles, it appears that Spotify has closed a deal with T-Series and can now launch its service locally in India.
• While this is should meaningfully increase the subscriber number, it is also very likely to cause the revenue per user to fall substantially.
• This is because there will be very few $9.99 subscribers with almost everyone opting to be a free, advertising-supported user.
• If Spotify is privately hoping for a slew of upgrades from free to premium like it has experienced in developed markets, it is going to be disappointed and it would be advised to set investor expectations accordingly.
• This is because India is a very low-end market where around one-third of the world’s poorest people live.
• There is a large and growing middle class, but I suspect most of these users will be happy to take the free, ad-supported model.
• This is evidenced by the fact that Apple has just 1% of the handset market in India and I suspect that it is only these type of users that represent any opportunity to convert free to premium.
• Therefore, I think that the business case for India has to stand on advertising alone.
• This is possible, but it will do nothing for Spotify’s gross margins which are an area where the company badly needs to improve to meet its long-term aspirations.
• There is also the opportunity with Indian expatriates who are far better off than the domestic average and will see value in having Indian music added to the Spotify catalogue.
• Many of these may already be subscribers but adding Indian music will make them more sticky and less likely to defect elsewhere.
• The net result is that India is likely to do far more for subscriber numbers than it will for short-term revenue or profits.
• However, it does mean that Spotify’s data lake will get even bigger, further improving its ability to categorise and recommend music.
• This means that in the long-term it could have the opportunity to deal directly with artists and Bollywood studios rather than a 3^rd party.
• It is at this point that India will pay off for investors as the income will then only have to be split two ways rather than three.
• Until then it is likely to be 99.9% free rather than $9.99 a month.