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Why Apple’s Beats acquisition will hurt Spotify more than Pandora

Why Apple acquired Beats for $3 billion—its largest acquisition (Part 4 of 5)

(Continued from Part 3)

Spotify is at an even bigger risk of losing business to Apple than Pandora

In the last part of this series, we discussed how Apple (AAPL) has a long history of disrupting established business and how it could replace Pandora (P) as the leader of the Internet radio and music streaming market. Here, we’ll discuss another potent player in the music streaming market—Spotify. Spotify has a slightly different business model than Pandora. While Pandora generated about 72% its revenues from advertising and the rest from music subscription as of Q1 2014, Spotify, on the other hand, earns the bulk of its revenues from subscriptions and only a little bit from advertising.

Beats Music is also into the similar business of subscription-based streaming music services, so Apple’s acquisition of Beats positions Spotify at a greater risk of losing business. If Apple is successful in disrupting the streaming music business and gaining market share, it will help the iShares Dow Jones US Technology ETF (IYW), Technology Select Sector SPDR ETF (XLK), and Vanguard Information Technology ETF (VGT), which have about 20% allocations in Apple.

Despite losses, Spotify is valued at $4 billion

As the chart above shows, Spotify continues to take losses and its loss widened from $60 million in 2011 to $77 million in 2012. Similarly, Pandora also took a net loss of $20 million in 2011 and $38 million in 2012. The main reason for the losses is the high royalty fees these companies have to pay to play songs. Despite these losses, Spotify was valued at $4 billion according to the Wall Street Journal. A Wall Street Journal report commented, “Spotify AB has secured about $250 million in new financing that values the music-streaming company somewhere ‘north’ of $4 billion, according to multiple people familiar with the deal.”

Continue to Part 5

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