Is Spotify Kids a Smart Growth Bet?

November 7, 2019 by  Chris Erwin

What Is Spotify Kids?

On Wednesday October 30th Spotify announced Spotify Kids, a new app that creates a “place where younger kids can explore their favorite music and stories in a fun environment”. Spotify Kids is for children aged 3-10, will be part of the ad-free Premium Family Plan (six accounts for $14.99 / month) and is currently available in beta in Ireland only.

 

Why Is It Interesting?

The Kids app is designed to uniquely accommodate the needs of both parents and kids, a compelling product approach we covered in our Nike Adventure Club, a Subscription Service for Kids newsletter on October 22, 2019. Similar to Nike, Spotify’s focus on multi-generational delight allows youth consumers to enter the Spotify ecosystem extremely early (at just 3 years old!), which can create incredible brand loyalty across generations and drive high customer LTV.

With Spotify Kids, parents benefit from a safe listening environment for children and separate accounts for kids so as to preserve recommendation algorithm integrity (i.e. no more need for parent-kid account sharing). In turn, kids benefit from a bright, colorful and visual-heavy design which helps “guide young minds“, plus a hand-curated set of playlists (music and stories from hit shows, movies and plays), which collectively provide an easy listening and audio discovery experience. The product look and feel, as well as content, will vary among age groups…unsurprisingly, 3 year olds have very different consumption patterns relative to their 10 year old peers!

Per Tech Crunch, “This isn’t the first move Spotify has made in recent months to better cater to families. The company this summer launched a dedicated streaming hub in partnership with Disney, where families could find favorite songs, playlists and soundtracks.” (NOTE: Disney is now the sole owner of Hulu, which has bundled its AVOD offering with Spotify Premium, a partnership also announced earlier this year).

 

Family + Kids + Audio = Big Opportunity

Family and kids is a very attractive growth market for digital audio, and one in which we at RockWater believe is highly underserved – on a relative basis, there are few audio formats and consumption environments that well cater to this demo. Further, there are other applications such as curriculum supplements (with research that supports accelerated reading levels via audio accompaniment), as well as new hardware like Amazon’s Echo Dot Kids Edition smart speaker, that indicate incredible growth headroom for market entrants.

So, why are kids audio bets few and far between?

Likely because creating online content environments for kids has challenges due to US regulatory safeguards such as COPPA (Children’s Online Privacy Protection Act) and FTC protocols dedicated to protecting children’s online privacy, as well as doctor recommendations for limiting kids’ screen time due to complications that can arise in sleep, brain development and more.

Nevertheless, traditional incumbents and new market entrants are starting to make moves.

These players include traditional publishers like Sesame Street, Nickelodeon and American Public Media, as well as podcasters like Gimlet Media and Panoply, among others. And abroad in Europe, Fun Kids, the UK’s national children’s radio station, launched a new children’s podcast network back in August in order to cater to fast-evolving UK audio consumption habits, as well as to create a brand safe advertiser environment (in contrast to Spotify Kids, the Fun Kids shows are ad-supported).

Now, Spotify is throwing its hat into the kids ring in a BIG way.

The company claims its new Kids app is COPPA and GDPR compliant, and that more content (more stories and audiobooks, as well as the introduction of podcasts) will make their way onto the Kids app in the future. While there are many variables to manage in this new launch effort, the beta in Ireland will allow the music juggernaut to test, learn and iterate before a broader roll-out across all of Spotify’s operating territories.

And, while we don’t know the exact reasons why the beta launch kicked off in Ireland specifically (small but well diversified test market, product engineers in same timezone??), the European kids audio market activity and other European audio growth trends (Wondery / Stitcher JV in the UK, the RTL / Bertelsmann launch of Audio Alliance and Audio NOW) make the across-the-pond beta a bit less surprising.

 

An Impressive 2019 Growth Run via M&A and Product Innovation

Like all media subscription businesses looking to support their Wall Street valuations and prove a sustainable path to profitability, Spotify’s pursuit of growth in 2019 via both M&A ($500mm for Gimlet Media, Parcast, Anchor.FM and more) and product innovation has been operationally critical…and exciting to track.

 We at RockWater are impressed by Spotify’s product growth strategy: in July Spotify introduced its Lite app in 36 countries across LatAm / Middle East / Africa / Asia – Lite is a simpler version of the original Spotify app, reducing data needs, and thereby allows territories with low-cost phones, sub par data plans and poor network connectivity to access audio streaming. Considering public company growth pressures and ramping audio / streamer competition, it’s clear that Spotify saw early mover advantage abroad and pounced to accelerate needed subscriber growth.

 The launch of Spotify Kids is yet another aggressive (and smart) growth bet on the product innovation front.

 Like the Lite app, it’s too early to tell how well these bets are faring, but we at RockWater are fans of the dual-pronged growth strategy…M&A bets into premium content creation, which requires a skill set and creative pedigree that is not endemic to Spotify’s product-focused culture, and “build” bets into high value growth markets based on strong product vision and robust engineering teams, a definitive Spotify strength relative to peers. These actions highlight strong self-awareness, as well as a very clear POV on audio / media value frameworks by Spotify leadership – combined, they have allowed the company to accelerate progress on multiple yet aligned initiatives in 2019…not an easy feat!

 With strong performance momentum from Spotify’s recent quarterly earnings (positive net income despite Wall Street expectations for a loss, and 39% QoQ growth in podcast hours streamed), Spotify increasingly looks like the audio front runner in today’s fast evolving audio marketplace. Of course, one could have confidently claimed the same about Netflix back in 2017, yet consider the upheaval in the SVOD wars in just the past 12 months alone…these media markets evolve rapidly, so we say this with a grain of salt (that being said, we still believe Netflix remains very well positioned as the mass market streamer for B+ level content fare, though we do believe its valuation trajectory will continue to temper).

For 2020 Consideration…

Will Spotify M&A tone down in the new year, with more capital allocated to growth via a “partnerships strategy”, specifically in high profile talent deals like those in the SVOD race (e.g. JJ Abrams / WarnerMedia, Ryan Murphy / Netflix, etc)?

We think so.

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