Spotify (NYSE:SPOT) shares experienced volatility Wednesday following Google's announcement of a new AI-driven music capability, yet an equity analyst argues the innovation could be a net positive for the streaming company.
Google has incorporated Lyria 3, a generative music model, into its Gemini app. The tool enables users to generate custom music snippets lasting 30 seconds each. The feature is being released in beta across eight languages, with higher usage allowances for subscribers of Google AI Plus, Pro, and Ultra.
Justin Patterson, an analyst at KeyBanc, framed the development as "more positive than negative for Spotify," saying the expansion of AI-created content has the potential to boost engagement and discovery mechanisms on Spotify's service. Patterson also noted the change could create "optionality on margins and new products/pricing tiers."
Patterson does not view Google's Lyria 3 as a direct competitive threat to Spotify. He pointed to Spotify's appeal to creators and rights holders, which he described as "broad reach and engagement, deep discovery tools with rich user data, and a proven monetization model." According to Patterson, those attributes underpin Spotify's value proposition to artists.
The KeyBanc analyst assessed Lyria 3 as more comparable to AI-first music creation platforms such as Suno and Udio. He highlighted the 30-second track length as a constraining factor for adoption, noting other services offer pieces in the two- to three-minute range.
Patterson further suggested that a broader influx of AI-generated tracks could ultimately work in Spotify's favor. He pointed to evidence of rising AI-originated uploads elsewhere, citing Deezer's report of a sixfold increase in daily track uploads over the past year. That growth, Patterson said, could mean more content eventually finds its way onto Spotify, expanding long-tail catalogue depth and potentially improving margins.
Still, the analyst acknowledged ongoing headline risk tied to advances in audio models, as companies including Anthropic, Meta, and OpenAI increase investment in the space. Even so, Patterson argued that "the risk of new digital service provider competition is overstated."
Key takeaways
- Google launched Lyria 3 in the Gemini app, enabling 30-second AI-generated music in beta across eight languages.
- KeyBanc's Justin Patterson views the development as "more positive than negative for Spotify," citing potential benefits to engagement, discovery, and monetization flexibility.
- While Lyria 3 competes more directly with AI music creators like Suno and Udio, its 30-second limit may restrict adoption versus platforms offering 2-3 minute tracks.
Risks and uncertainties
- AI-related headline risk persists as Anthropic, Meta, and OpenAI invest in audio models, which could influence investor sentiment in streaming and tech sectors.
- Limitations of Lyria 3's 30-second output could constrain user adoption, leaving uncertainty about the scale of content generation and distribution impacts.
- Competition among AI music tools may shift usage patterns in content creation platforms, with uncertain downstream effects on music distribution and streaming economics.