A Spotify investor lays out the case for music streaming — including that it’ll replace radio

Spotify founder Daniel Ek.

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Spotify founder Daniel Ek.
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Andrew Burton / Getty Images

  • Honeycomb Asset Management, a New York hedge fund started by David Fiszel, is bullish on streaming music.
  • People are paying about twice as much per year for streaming music now as they used to for CDs, says Honeycomb.
  • “In 2015, music industry sales grew sustainably for the first time in almost two decades, and entering 2018, we are still in the early stages of this evolution,” Honeycomb said in its fourth-quarter investor letter.
  • Honeycomb gained 21% last year.

Streaming music has changed the music industry for the better, according to New York tech-focused hedge fund Honeycomb Asset Management. Honeycomb, launched last year by David Fiszel, has more than $500 million under management and owns a private stake in Spotify.

“We believe streaming music will continue to grow at rates that far exceed investor expectations, with its market size quadrupling from $10 billion to $40 billion over the next eight years,” the hedge fund said in a fourth-quarter letter to investors seen by Business Insider.

The hedge fund laid out its thesis:

  1. “The music industry is reaching a key inflection point on both top-line and profitability
  2. The streaming music business model is fundamentally more attractive than the previous model
  3. Growth is open-ended and the Total Addressable Market is larger than investors expect”

The letter added (emphasis is ours):

“The music industry is currently undergoing an amazing transformation. Global music sales peaked in 1999 and, after the advent of piracy service Napster among other digital download services it entered a 15-year period of secular decline. Then, in 2015, a remarkable development occurred to halt the slide in music sales and eventually turn it around: The growth of streaming music. Services like Spotify, Pandora, Apple Music, and Amazon Music have amassed a streaming music subscriber base of well over 100 million subscribers. In 2015, music industry sales grew sustainably for the first time in almost two decades, and entering 2018, we are still in the early stages of this evolution.

Citing Goldman Sachs research, Honeycomb noted more reason for optimism – that people are paying roughly double what they used to for music.

People are spending about double what they used to for streaming music over CDs.

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People are spending about double what they used to for streaming music over CDs.
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Goldman Sachs

“Per Goldman Sachs research, the average consumer used to pay $50-60 per year to purchase five CDs,” Honeycomb wrote. “In the digital world, many US consumers are paying $120 per year for a $10/month subscription.”

Goldman said in a report last year that paid streaming produced EBITDA margins roughly three times greater than in physical music.

Wall Street projects the music industry to turn up.

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Wall Street projects the music industry to turn up.
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Honeycomb investor letter

Record labels are benefiting, too, according to Honeycomb.

“Labels used to make $3 of EBITDA per customer per year when it was selling physical music. In a streaming world, that number is $10 of EBITDA per customer due to higher revenue, as well as cost savings from not having to produce and distribute physical goods.”

The market for streaming music is growing, too, Honeycomb says.

“We believe we are in the early innings of different ways to listen to music which removes familiar points of frustration for the consumer,” the letter said, citing Amazon’s Echo growth, Google Home, and Apple HomePod. In addition, the letter said, “connected cars of the future will see streaming music as a replacement for terrestrial and satellite radio.”

Honeycomb says in its letter that it now manages more than $500 million. The firm’s class A shares returned 21% after fees last year. Honeycomb said its biggest contributors to gains in the fourth quarter were long positions in Amazon, Microsoft, and Google.

Fiszel started at billionaire Steve Cohen’s hedge fund, then SAC Capital Advisors, in 2000, left to run a hedge fund startup, Rhombus Capital, which closed in 2007, and later moved back to Cohen’s firm, according to previous news reports. He launched Honeycomb in 2016.