To my friend Adam who was asking about Spotify-

Entropy is the lack of order or predictability; a gradual decline into disorder. The music industry has been experiencing entropy since 1999 when Napster took the order of the music labels and introduced the disorder of being able to share individual songs. Apple continued this in 2001 with iTunes, and Spotify in 2006.

Companies can capture value by taking disorder and restoring order in a valuable way. That has been the story of Spotify's success up until now with music. They have taken the entropy of the individual song music-market and offered the ability to stream any song from a 50 million song library for either a low monthly price or for free, supported by ads. Order from chaos.

However, that's the old story. Its no longer differentiated (Apple offers the same thing). The story going forward is the competition to run the same playbook on podcasts. Right now it appears Spotify seems to be more perceiving that original podcast content is going to be a big differentiator (similar to how Netflix realized in 2013 they were going to need to have original video content). Spotify has been more aggressive than Apple in signing the biggest and best audio content creators: Joe Rogan, The Ringer, Kim Kardashian, and Michelle Obama a couple of days ago.

The bet: Spotify continues to be successful over the next five years in wrangling the entropy in the podcast world similar to how they created order from chaos in the music streaming world, and will create a moat of exclusive podcast content that can't be part of another service's library.

Another bet: Internet Advertising spend growth will continue to surprise, benefiting the likes of Spotify. Most are expecting that the rapid growth rates of internet advertising will have to slow down. But so far those growth rates have held steady if not accelerated. The oversight here is how much the internet itself can keep growing- a vastly bigger TAM can sustain enormous growth rates in internet ad spend.

Final bet: Spotify has a hidden moat. Most consumer subscription services have churn rates that goes down as a cohort ages. This is because subscribers who find less value cancel early, which leaves the service with more committed members over time. A new competitor to Spotify could have similar retention rates but because Spotify is older it will have a lower overall churn. This means Spotify will spend proportionally less of their revenue on marketing to replace churned subscribers, which frees up cash to spend on R&D to stay even further ahead on the competition.

A caveat: Don't expect Netflix like returns- Netflix was much more misunderstood in their early years while Spotify was valued much higher from the get-go.

My recommendation: Spotify is a buy and fits in well to a portfolio as a growth stock. I plan to hold Spotify for the next five years.

Thanks to @packym, @jwangark, and @ericstromberg.
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