It looks like Spotify will pay directly with its listeners and thus recoup big money

• Google is included in Spotify’s direct billing option.
• Spotify has been working for years on the possibility of direct billing.
• While it’s not about changing games, it should bring in more revenue and raise SPOT inventory.

Spotify (NYSE:SPOT) just announced a multiannual contract with Google, which is unlikely to do much for SPOT shares this year, but should contribute to higher revenue in the long run.

Below new arrangements, when you download Spotify from Alphabet (NASDAQ:GOOG, GOOGL) Google Play Store, you will have two payment options instead of one. Payment options will be installed in parallel in the application. Users will be able to charge directly via Spotify or Google Play.

While this probably doesn’t seem like much, the change is yet to come and will add more dollars to the top line. How much more remains to be seen. Spotify still needs to work with Google engineers to make this happen in the U.S. and elsewhere.

Billing at the choice of the user for Android should be published by the end of 2022. Meanwhile, investors can discuss the benefits of such a move for Spotify shares.

It doesn’t change the game, but it’s an important step on Spotify’s path to profitability. Here’s why.

A large chunk of processing fees are lost due to SPOT stocks

Developers of apps like Spotify pay Google 15-30% of the monthly subscription collected from users of the audio streaming platform. This fee is for Google to process credit card user payments.

Assuming you sign up for Top Spotify service (Individual), which is without ads, you will pay $ 9.99. Google Play will need $ 1.50 to $ 3 each month to process your credit card. It’s not something you spend; these are revenues that do not come into Spotify’s coffers.

With this new agreement with Google, Android users will be able to pay directly through Spotify payment processing. However, the biggest problem is that Google will still charge a fee for Spotify, even if it collects monthly subscriptions. In South Korea, Google charges an 11% commission when the subscription is paid through a third party payment system.

Therefore, it is difficult to know how many premium subscribers will switch to direct billing from Google Play. It is also important to note that Apple has not yet responded to the news. This would mean a difference in additional revenue that would flow directly to Spotify.

However, it is possible to speculate about a possible increase in revenue.

Score on the back of the napkin

At the end of December, Spotify had 180 million premium subscribers, with 155 million at the end of 2020. In 2021, it generated 8.46 billion euros ($ 9.29 billion) in revenue from its premium subscribers. That’s $ 51.61 per subscriber per year or $ 4.30 per month.

According to the allegations Statistician, had a Google Play store € 10.86 million Download Spotify apps globally compared to 3.6 million downloads from the Apple App Store. In my back calculation, I assume that Android users represent 75% of premium subscribers and revenue [10.86 million divided by 14.46 million]. That would mean $ 7 billion in revenue for premium Android subscribers.

This is certainly a rough estimate. It ignores other users and app stores like Amazon, etc.

The $ 7 billion in revenue from above is after Google cut it. Mark this by 15% – the lowest price charged by developers – and you get an additional $ 1.05 billion in annual revenue. Based on 192.2 million outstanding shares, that’s an additional $ 5.46 per share of revenue he missed.

Currently SPOT shares have been traded 2.66 times its revenue in 2021 of € 9.67 billion ($ 10.62 billion). Add $ 1.05 billion and a multiple drop to 2.38 times sales. It’s not a big drop, but given that it’s on the verge of earning, the future expansion of its multiple price-to-sales ratio is a real possibility.

SPOT shares have fallen by 37% since the beginning of the year.

Spotify is currently trading where it traded with the correction in March 2020 and where it traded after the April 2018 release.

Click to enlarge

In the last three years, it has shifted from an operating loss of $ 73 million and $ 293 million in 2019 and 2020, respectively, to an operating profit of $ 94 million in 2021. Its income statement is in better shape today than it was then. when it was published, but it traded with a P / S ratio that was lower than it had ever been as a public company.

The agreement with Google should be good for Spotify and SPOT stocks in the long run. It gives businesses more control over their revenue stream while giving users a better payment experience.

In mid-March, the SPOT hit a 52-week low of $ 118.20. It has since bounced off what looks like the bottom. So if you’ve been thinking about buying, the latest news should convince you to follow.

A SPOT is a purchase on the news.

On the day of publication Will Ashworth did not hold (directly or indirectly) any positions in the securities referred to in this Article. The opinions expressed in this article are the opinions of the writer who are the subject InvestorPlace.com Guidelines for publication.