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Comments on model:
How Spotify's business works:
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1. Spotify will likely incur net operating losses for years to come.
1. Spotify first attracts users (see Monthly Active Users, or "MAUs") through its free offerings (ad-supported segment).
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(Makes DCF valuation challenging.)
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2. Over time, Spotify aims to convert free (ad-supported) users into premium subscribers.
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2. Personnel expenses comprise >50% of operating expenses
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(and grew 30.9% per year on average).
3. Without factoring in ad-hoc offerings, revenue is thus:
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3. In contrast, revenues grew 22.3% per year on average from FY18-22.
Revenue
= Ad-supported + Premium
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= (Ad-supported users * Ad-supported ARPU) + (Premium subscribers * Premium ARPU)
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How to use the model:
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Such that growth in revenue depends on:
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1. Feel free to edit inputs as indicated by yellow boxes:
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(Most should not create imbalance in balance sheet.)
- Growth in total users (ad-supported users + premium subscribers)
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- Conversion rate (from ad-supported to premium subscription)
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2. Expand grouped rows to project line items with greater detail.
- Increase in ARPU (e.g., through faster innovation).
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3. See remarks (column AS) for rationale for projection approach used.
Thus, the modelling approach used.
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