Spotify (NYSE:SPOT) can be more than just music on the ‘SPOT’

Spotify (NYSE:SPOT), the world’s largest music streaming service, appears to be working on a new feature that may allow users to play DJ with a suite of mixing tools. It might be just what the company needs to start making money.

The possible service was noticed last week by an app researcher who captured screenshots of code that detailed a “Music Pro” premium subscription tier to “flex your DJ skills with different transition styles to create the ultimate mix.” These tools would allow users to “set the tempo range” by filtering “genres, moods, activities, and more,” and the code promises the ability to “quickly blend in the next track to keep the energy going.” 

The development shows that Spotify is thinking of new ways to provide value to its customer base and develop products around the core business model of streaming. Spotify currently takes nearly 32% of the global music streaming market, followed by Tencent Music (NYSE:TME), Apple Music (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) with 14.4%, 12.6% and 11.1%, respectively. Most importantly, this type of new functionality could separate Spotify from the field even further. 

While Spotify shares have surged 119% over the past year amid excitement about consistent growth and millions of new free and paid premium users, the Swedish company has never turned an annual profit. At the heart of Spotify’s challenge is that it currently pays as much as 70% of all streaming revenue to music labels. A growing user base for most tech companies with apps typically leads to enhanced profit because of lower average costs and economies of scale, but in Spotify’s case, it simply leads to increased costs and more royalty payments. Further upping the stakes for Spotify is the fact that it competes with companies that derive most of their revenue from other sources. While Apple and Amazon can afford to subsidize streaming services or at least break even, that’s not a model that Spotify can survive with in the long term. For that, it’s got to either drive down costs by fighting with the music labels, or it can try and figure out how to enhance its platform and increase engagement it can monetize in other ways. It appears to be doing the latter.

CEO and founder Daniel Ek told investors in the company’s latest earnings call that, after a round of cost-cutting and layoffs last year, it now planned to focus on “strong product development, which leads to strong growth but with an increased focus on monetization and efficiency, which in turn drives profitability.”

“I know some of you may start to wonder if we are sacrificing growth for profitability,” he continued. “Long term we believe that the real value of Spotify is in solving problems at the intersection between creators and consumers. With scale, there will be even more opportunities to do so.”

That’s exactly why initial reports about a new set of DJ tools that could be on the way are worth investor attention. For starters, while Spotify has a high percentage of so-called “power users” who open the app daily, a large part of that engagement comes with phones in pockets as the music is delivered through headphones. A suite of power tools could make some of that engagement much more active, with eyeballs on screens as users fiddle with controls to mix and blend their favorite hits. The increased screen time and possible opportunities for sharing are just what the company needs to better compete with social networks, and it also opens up possibilities for new forms of advertising revenue.

Spotify may be poised to soon break out from the competition with an exciting new feature, but it could also be getting ready to break free from a restrictive business model. While a growing user base and rising engagement have in the past just meant more money for the record labels, meaningful changes to the platform could finally allow the company to turn momentum into profits for shareholders.