Google-Spotify deal on billing choice seen boosting content apps
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Google's (NASDAQ:GOOG
+0.4%, NASDAQ:GOOGL
+0.3%) deal to allow app developers to bill users directly in-app is starting with a smaller pilot with Spotify (SPOT
-1.7%) - but is likely set for far-reaching impact on app makers after a contentious few years in the area of app-store fees.
Spotify analysts are largely positive on the opportunity to boost subscriber growth.
Benchmark's Matthew Harrigan maintained a Buy rating and a $260 price target on Spotify (SPOT
-1.7%), implying 78% upside, noting the move "reduces user communications friction." It's high-impact for Spotify: Its app has been installed nearly 1 billion times from the Google Play Store, Sensor Tower has reported, and Spotify makes up 180 million premium users of a global total of 523 million paid streaming accounts.
J.P. Morgan echoes that the move should "reduce friction" in Spotify sign-ups. It doesn't change the firm's view that Google Play payment enforcement will move forward in April, but that's understood by investors, the firm said.
Deutsche Bank agrees that the move could drive incremental subscription additions for Spotify, while roping in the other providers who could see outsize benefits if and when they're part of the deal: It's a positive for Warner Music (WMG
-1%) and Universal Music (OTC:UNVGY), and dating apps including Match Group (MTCH
+1%) and Bumble (BMBL
-1.9%) could see a significant margin tailwind if included.
KeyBanc sees the move as a "happy compromise that appeases regulators and large developers without sacrificing Google Play Store revenue or trust and safety." Ultimately, analyst Justin Patterson expects consumers will gravitate toward payments with large providers like Spotify and continue to use Google Play billing for most other (smaller) services - a "soft landing" scenario for app stores.
Meanwhile, it lessens EBITDA risk for Match (MTCH
+1%), Patterson says. "Match's EBITDA outlook for 2022 assumed flattish margins, which assumed (more than) $650M of app store fees and the view that Match would not have to implement Google's payment system in April 2022. Since Match noted implementation would represent a ~$60M headwind, investors were concerned about another EBITDA cut."
Duolingo (DUOL
+2.8%) is earlier in the monetization curve than other digital content businesses, but it could face a large benefit from direct billing as well, Patterson notes: Every 5% of users that shift to direct billing could represent a 1% boost to gross margin for the company.
Meanwhile, the major rival App Store from Apple (AAPL
+0.4%) isn't quite set to follow in Google's footsteps. Apple doesn't make revenue deals with individual developers regardless of size - and while Apple won't allow app makers to embed billing systems in apps, the company has provided a path for media apps to bypass its cut by linking users to the Web to finish payment (as had previously been the case at Google).
Sensor Tower notes that last year, consumers spent $133 billion on apps, two-thirds of it on Appleâs platform.
Google's move is likely to ease scrutiny of its practices, which drew an antitrust lawsuit from state attorneys general in 2021.