19.06.18 | Adding Spotify, removing iSelect.

By Jessica Sier 19 June 2018 5 min read

Newsletter: Published Tuesday, 19, June 2018.

  1. Something World Cup something;
  2. Portfolio shift and the ASX200;
  3. iSelect: The negative network effect;
  4. Spotify: The case for agnostic apps.

🌳 Hello.

I’m reliably informed the World Cup will drown out all other news for the next month. So, something something World Cup something offside red card something World Cup.

Observe businesses all over the world cash in on the goodwill that emerges from such a unifying sporting event.

Here’s a list of all the peculiar finance models that banks are using to predict who will win. Spoiler: they’ve basically applied the efficient markets hypothesis theory to the draw.

In the hope of appearing friendly and athletic, they might get some more customers! I’m employing that same strategy to get more newsletter subscribers! Something World Cup something something.

Anyway, on to some actual news of the relevant variety.


We've made some changes.

We’ve changed some of the companies in your Spaceship Universe and Index portfolios.

Every three months we revisit the portfolio and may make adjustments to the companies in which the portfolios invest and where the circumstances have changed.

We are adding Spotify, Interactive Corp, PushPay and Netwealth to Spaceship Universe.

We are removing Liberty Global, Johnson & Johnson, iSelect and Iress.

Check them out in your Voyager app. We’ve also provided information about the business model of each company we're adding and why we like them as a long term investment. Feedback is always welcome. Something something World Cup something.

In other portfolio news, two Universe companies - Melbourne-based AfterPay and Sydney-based Appen - have been bumped into the ASX200.

If you’re starting out in investing, this is an index of the largest 200 companies in Australia. It’s often quoted as an indicator of the general health of how Australian companies are performing.

But it’s important to point out that just 10 of the largest stocks account for over 44% of the entire index.

And of those ten stocks, five are banking businesses. After that 44% slab, 19% is made up of mining companies.

That means, an enormous portion of the ASX200 is beholden to the performance of banks and mining companies.

Yes, it's very last century, but that information should give you some context next time you hear “the ASX200 is in the red today”.

That basically means banks and mining shares are having a tough day, and it doesn’t necessarily spread to the rest of the Australian sharemarket where businesses like AfterPay and Appen are happily motoring along and growing.

It’s a nice signal to technology investors to see these mid-tier technology companies make the transition into the ASX200.

Slowly but surely the Australian economy is evolving.


Why iSelect is out of Spaceship Universe.

When iSelect reduced how much they were spending on search engine marketing, their user numbers fell off a cliff.

This Melbourne-based comparison website aggregates pricing for insurance and utilities businesses.

And while they were a comfortable business for a long time, iSelect was ensuring there were millions of eyeballs looking at its matrix thanks to a steady money-flow to Google Search.

As a result, plenty of insurance, utility and financial companies were happy to pay a commission to have their services returned in that matrix. (Making iSelect a happily profitable company).

That formed a neat network effect: the service became more useful, so more businesses wanted to be on it and as such more customers wanted to use it.

But three things kind of knocked the business around, and one was their Google spend became less efficient. It became much harder to acquire customers.

And it seems the business was shocked at how abruptly the flow of eyeballs stopped.

It suddenly became much more expensive to acquire customers and there was volatility in the market from its energy and utility customers.

The CEO departed and iSelect was forced to slash its 2018 underlying earning expectation from between $26 million and $29 million to between $8 million and $12 million.

It was a clear reversal in the business model: in fact, the network effect went into reverse.

A negative network effect appears to be where you aren’t making enough money to cover the cost of acquiring the eyeballs for your website, and because you don’t have enough eyeballs the advertisers decide to go elsewhere, but because what those advertisers were advertising was the only reason eyeballs would get to that site in the first place, they keep dropping off…

Important! We're sharing with you our thoughts on the companies in which we invest for your informational purposes only. We think it's important (and interesting!) to let you know what's happening with Spaceship Voyager investments. However, we are not making recommendations to buy or sell holdings in a specific company.


The Spotify case.

We like Spotify because it transcends devices.

Rather than stay beholden to iOS the way Apple Music needs to, Spotify can easily switch between your smartphone, your office speakers, your car and your home device.

And as home devices become more prevalent throughout the world, we think your Spotify account will smoothly travel with you throughout all your daily device interactions.

Spotify also effectively leverages a “freemium” model - where its basic music streaming service is free - while additional features come at a cost. This upgraded Spotify Premium service normally costs around $11.99 a month (but can vary depending on what promotions are pushed).

The business model relies on the advertisements ultimately driving you crazy and nudging you towards the premium service (which has wiped all advertisements and offers offline listening).

Apart from generating revenue through Spotify Premium from paid subscribers and telecommunications partners who include these subscriptions in their plans (premium), Spotify also makes money from the free user base by charging for those ads.

The Swedish company listed on the Nasdaq in the first half of 2018, and took the unusual step of “direct listing” instead of a traditional initial public offering.

This basically meant the company didn’t raise any new money, or use investment bankers to drum up interest, instead it just put its shares out on the market to begin trading.

Spotify’s enormous user base give it an incredible insight into consumer behaviour which allows it to fine-tune its algorithm that serves up customised playlists.

The more entrenched this is in your daily music habits, the more difficult it becomes to leave the platform.

On demand internet streaming is replacing the radio experience, and we think Spotify is at the forefront of this trend. In 2016, digital revenues grew by 17.7% to US$7.8 billion, driven by a sharp 60.4% growth in streaming revenue – the largest growth in eight years.

And while Spotify is one of those breeds of technology companies that isn’t actually profitable yet; in the last few quarters it has actually become cash-flow positive.

That means, while it’s still spending billions of dollars to acquire customers and pay record labels etc, it has more cash left over than ever before.

On top of this, the company is also debt-free, meaning it has no pressing obligations to creditors.

Also, it’s possible you do not care about Beyonce or Jay-Z at all. Or you care a little bit privately. Or you care about them in a screamy-Twitter kind of way.

But Spotify has also managed to cement streaming the couple’s new album, a signal that perhaps the power of Spotify’s eyeballs and reach is enough to entice even the most hardened of self-promotional capitalists

Words by
Jessica Sier Right Chevron

Jessica Sier is a financial journalist. Prior to that she led content at Spaceship and was a reporter at the AFR where she discovered that breaking down financial jargon was a public good.

19.06.18 | Adding Spotify, removing iSelect.