They say location is everything in real estate. The same applies to the homepage on people’s smartphones.
The apps on people’s homepage tell you what they value most.
Here is my home homepage:
Let’s break down the value of the companies represented. There are some one-off apps like Notion (awesome note, project, and task app) and Pocket (my digital file cabinet), but over half the apps are owned by four companies.
- Google (blue boxes)-Google Maps, YouTube, Google Drive, Google Mail, and Calendar. (MKT. CAP: $977 BILLION)
- Facebook (orange boxes)-Facebook and Instagram. (MKT. CAP: $640 BILLION)
- Amazon (red boxes)-Amazon and Kindle. (MKT. CAP: $1.2 TRILLION)
- Apple-They own the default apps that come on the phone like messages, the App Store, and the camera app. (MKT. CAP: $1.3 TRILLION)
- Twitter, Spotify, Netflix, Uber, and The New York Times all have market caps above $5 billion.
This past week, I was looking at the apps on my homepage and wondering which ones were likely to be there in five years.
And after thinking about it, I believe my homepage will look the same. There might be a change here or there, but for the most part, nothing will change.
Why is that? Well, the apps I use for email, watching videos, listening to music, messaging with family and friends are part of my life. They adequately solve the “job-to-be-done.”
It would take something drastic to get me to switch. What’s going to replace Gmail or Amazon?
Which is why the question — how replaceable are you? — is a great starting point for determining the durability of a company’s product.
Another question I asked: Which app dominates their category but is not in the $100 billion club?
There was one. Spotify ($SPOT).
Spotify’s future business value will not be centered on music
Spotify’s business model problems have been well documented.
Namely, as its revenue increases, so do the royalties (cost of revenue) it pays to the record labels, songwriters, and publishers. The more money they make, the more they pay out.
This is in contrast to Netflix. It costs Netflix ~$160 million to produce The Irishman. It doesn’t matter if 100 people watch it, or 100 million, the cost remains the same.
For Spotify to make the jump into the Netflix and Disney tier of media companies (both companies have mkt. caps of $150 billion-plus), they need to get control of their marginal costs.
And that’s why their future might rest on other forms of audio besides music.
Netflix became dangerous when they started producing their own content. I expect Spotify to follow a similar path in the coming decade.
Why Bill Simmons sold to Spotify
I’ve followed Bill Simmons for years. And admire his style, in both his writing and his podcast.
Simmons started writing for ESPN in 2001 and brought a radical approach to sports journalism.
How? By writing as a fan.
From a 2011 Bleacher Report article:
He has transformed sports journalism from reporting to conversation. His greatest strength is that he talks to his audience.
Simmons writes like a close friend sharing his opinions in a bar. His readers aren't reading his inside access, they are participating in a conversation with him (his answers to reader mail have become a staple of his journalistic brand). His columns read like a dialogue the reader would have with a close friend while watching a game.
After his ESPN stint, he started The Ringer, a website about sports and pop culture, which he sold to Spotify in February 2020 for ~$200 million in cold hard cash.
I’ve always been curious as to why people choose to sell to company X instead of company Y. I’m sure money plays a big part, but Simmons is deeper than that. I don’t think it was just about the money, which is why I found this interview with Vulture so insightful.
A few snippets I found interesting:
Vulture: You sold The Ringer, and then the pandemic immediately shut everything down. How did that affect plans you had following the sale?
Simmons: There were two big reasons I went to Spotify. One was that they were going to blow out The Ringer — make it bigger, all that stuff. But the second was, they wanted me to figure out their global sports strategy with [Spotify head of studios and video] Courtney Holt, who’s my boss and who reports to [Spotify chief content officer] Dawn Ostroff.
Vulture: You mentioned that part of the reason behind the sale to Spotify was that you were going to lead the charge for global sports. When Spotify CEO Daniel Ek first talked about the deal, he mentioned feeling that they bought “the next ESPN.” What is Spotify’s goal with sports?
Simmons: Because Spotify wants to be the dominant audio platform everywhere. That was the No. 1 reason I wanted to go there. I’m at a point in my life where I really just want to win. I’ve been in situations of all kinds over the last 20, 25 years, but the most fun I had was probably 2009 to 2014 at ESPN when we had the combination of the reach, the right people behind the scenes, the right ambition, and a lot of money. And people who are willing to take chances with it. If you look back at the stuff we attempted during that stretch, it was a cool time for the company. It’s probably something that will not happen again for them because of the way subs went backwards and everything.
Spotify reminded me of that point when I was at ESPN and a lot of the stars had aligned. The big difference is Daniel. The guy is like a genius. He might be Steve Jobs for audio. That’s what’s different than ESPN. ESPN always had different executives, an upper level by consensus. Daniel’s somebody who has real vision for how this stuff works, and he’s been vindicated in a lot of ways already. So the chance to work with somebody like that was cool.
My thoughts: In last week’s piece, I talked about the importance of human capital. In the past two years, Spotify has added Gimlet Media’s team, Bill Simmons and The Ringer staff, and most recently Joe Rogan. They are accumulating world-class content creators.
The formula for a $100 billion company
While I don’t think there’s a single formula for determining which companies will join the $100 billion-plus club, the inputs below are a good start.
- A product that’s not easily replicated. And the company is number one or two in its category.
- A business model that captures a large slice of the value it creates.
- Top tier talent.
- A growing market.
Where Spotify sits (in my view):
- A product that’s not easily replicated. And the company is number one or two in its category✅ Its only real competitor is Apple Music. And as others have pointed out (see tweet below), does Apple give a hoot about Apple Music?
- My thoughts: It’s important to remember that Spotify’s entire existence is predicated on winning in audio. For Apple, music is a tiny part of its business. I have a hard time betting against a founder-led company whose sole focus is owning a category.
- A business model that captures a large slice of the value it creates❌ As we mentioned earlier, its current business model is challenged. We hope it will improve during the next decade.
- Top tier talent✅ On the content side, yes, on the executive side, it’s unclear. Thirty-three executives have left the company over the past three years. That doesn’t seem great. But maybe this type of turnover is common in a large company?
- A growing market✅ Streaming audio (music and podcast) over the internet is growing every year with no signs of stopping. Slowing, yes, but the trend is higher.
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