This Unstoppable Revolution Is the Future of Music

Bob Dylan just sold his music catalog – and it wasn't cheap...

Record label Universal Music Group bought the rights in a deal that was likely the largest of its kind: a rumored price of between $300 and $400 million.

Dylan isn't the only one getting a hefty price tag for his music rights – an unnamed fund bought Taylor Swift's music catalog recently for around a rumored $300 million.

According to the Wall Street Journal, other deals for music rights are being done at 10 to 20 times their annual royalty fees. That's up from 9 to 13 times just a few years ago, the WSJ said.

And that's all thanks to streaming...

Every time someone listens to a song on an online music-streaming platform, the owner of the rights receives a royalty fee. These deals are a big indication of how streaming has revived the music industry. In 2019, music revenue totaled $20.2 billion, according to music industry group IFPI. That's up from a recent low of less than $15 billion in 2010.

Streaming is the key to this growth, as it accounted for more than 40% of total music revenue last year. And it's doing its part – paid subscription streaming revenues jumped 24.1% in 2019. For comparison, physical music sales (like CDs) fell 5.3%.

This trend should only continue from here. And today's company is at the center of the revolution...

Spotify Technology (NYSE: SPOT) is the largest music streaming service in the world.

There are two ways to listen to music on Spotify – either a free ad-supported version or a paid ad-free version. And you don't need hardware for either version... just the mobile app or the Spotify website. That approach ensures seamless integrations with as many platforms as possible.

For $10 per month, subscribers get access to Spotify's entire music library, as well as personalized playlists.

If you don't want to pay $10 per month for Spotify's premium subscription, you can still use the service free of charge. Spotify just limits some of the features and flexibility of its service. Free users have a cap on how many songs they can skip, and they can't save songs to listen to while they're not online. Plus, they have to put up with commercials.

As of the company's third quarter, Spotify had 144 million paid subscribers. That's up 27% from the same quarter a year ago and double the paid subscribers that it had at the beginning of 2018.

And it's nearly twice that of its closest competitor – Apple Music.

Spotify also has 185 million free, ad-supported subscribers. And these are the key to the company's growth. Spotify's biggest competitors – Apple Music and Amazon Music – don't have a free tier.

This approach helps Spotify pull free subscribers in the door more easily, and then focus on converting them to paid subscribers. And Spotify has a great conversion rate – above 40%. So there's a good chance that many of those 185 million free subscribers will become premium subscribers in the near future. They're valuable even before then, too... Free subscribers brought in $464 million worth of advertising revenue so far this year.

Ad-free listening is one thing that inspires those free subscribers to start paying up, but it's not the only reason. Earlier this year, Spotify said its investments in podcast streaming – not just music – helped drive free subscriber upgrades to premium accounts.

Since it began streaming podcasts on its platform, Spotify has signed exclusive deals with some of the most well-known podcasters in the world. This includes people like Joe Rogan and Michelle Obama. Now, 22% of Spotify's users listen to podcasts through its platform, according to company data.

This drives incredible growth for Spotify...

In 2018 and 2019, Spotify grew revenue by more than 20% per year. And revenue should grow about 13% this year, based on Spotify's guidance. While growth is decelerating as Spotify matures, it's still moving in the right direction.

And so is Spotify's stock price...

From its IPO in April 2018 until the start of 2020, Spotify's shares were flat. But this year, the stock has really taken off... Shares have more than doubled so far in 2020 and just hit a new all-time high.

Music streaming is an unstoppable trend. People aren't going to stop using streaming services and switch back to CDs or other ways of listening to music. And Spotify is the clear leader in the industry. This should continue to push its share price higher.

Sometimes investing is simple.