In many industries, only a small number of large companies hold the majority of the market share. 

This market structure, known as an oligopoly, arises when high barriers to entry exist that make it difficult for new competitors to challenge the dominant incumbents. 

Industries with significant economies of scale, high capital requirements, or network effects are often oligopolistic in nature.

A prime example is the semiconductor foundry industry, which is dominated by just a few players. 

Taiwan Semiconductor Manufacturing Company (TSMC) holds over 62% of the global foundry market share due to its massive scale and leading-edge manufacturing capabilities. South Korea’s Samsung Foundry is another semiconductor powerhouse that holds 14% of the global market. 

Together, these two companies control almost 80% of the worldwide semiconductor foundry market. 

In music streaming, Spotify (SPOT) has solidified its position as the clear market leader.

The music industry was once dominated by just a handful of major record labels in the 20th century. However, the rise of the internet and digital piracy in the early 2000s drastically disrupted the traditional business model of record selling. 

Rampant online music piracy allowed users to easily obtain songs for free, bypassing the need to purchase physical albums or digital downloads. This decimated the sales revenues that record labels and artists previously relied on.

Facing an existential threat, the music industry was forced to rapidly adapt to the digital era. New streaming subscription services emerged as a potential solution to curb piracy by offering users affordable and legal access to vast music catalogs. 

In 2008, Spotify launched its innovative on-demand streaming platform and became the first mover to popularize this new business model. 

Spotify’s platform disrupted the industry by providing a compelling alternative to piracy that was convenient, reasonably priced, and had a large library of songs. 

Record labels saw streaming as the best way forward and began licensing their content to platforms. Artists also embraced streaming as it allowed fans to access their full discographies and discover new works.

Spotify’s first-mover advantage and network effects allowed it to quickly dominate the emerging streaming market. It captured over 30% global market share and became the de facto platform for listeners, record labels, and artists. 

While new competitors like Apple Music have emerged, Spotify maintains dominance with over 625 million users worldwide including 246 million paid subscribers.

On top of that, the company is still growing rapidly. In the latest earnings, Spotify reported 14% growth in total monthly active users and 12% growth in premium subscribers YoY.

This growth is also reflected in the company’s financial performance as well, with its revenue growing 20% YoY and operating margin increasing 240 bps QoQ.

With high switching costs for users and a large network effect between artists, labels, and listeners, the barriers for new entrants to challenge Spotify’s dominance are significant. 

As long as Spotify sustains rapid growth of over 10-15% annually in key metrics like premium subscribers and revenue, it will likely retain its position as the preeminent platform in global audio streaming for the foreseeable future.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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