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It appears Spotify may well be expanding into video streaming, and competing directly with the likes of Netflix and YouTube. Is this a smart move, or is Spotify punching above their weight?
With over €1 billion (about $1.2 billion) in revenue, and 15m paying subscribers, one would expect Spotify to be in a pretty healthy financial position. So, naturally we’d be forgiven for believing rumors of Spotify’s expansion into video as a successful company’s fierce growth tactic. In truth though, last year the company suffered a €165 million (about $185 million) operating loss.
Music streaming really isn’t that profitable.
So with Spotify looking over its shoulder at the likes of Netflix, YouTube, Amazon Instant Video, and Hulu — who all seem to have much more sustainable business models — its no surprise that the company is tempted to join that circus.
If Spotify takes this leap and joins the video streaming party, what would it take for the move to be a success, and would this really be a sensible decision?
Why Does Spotify Need to Change?
Spotify’s Swedish founder, Daniel Ek, always envisioned Spotify growing to the point where it’s immense reach, and rich features, meant that it would become the primary platform from which to reach fans. Thus, the platform would have the upper hand at the negotiating table, at last helping the company turn a profit.
In reality, this hasn’t happened. Despite Spotify achieving it’s behemoth status in the music industry, producers and creators have remained belligerently protective over their royalties. Some of the world’s largest artists and bands still refuse to stream their music on the platform, including Thom Yorke, Tool, Taylor Swift, Pink Floyd, and Prince.
So far, Spotify’s dream has remained a castle in the sky, but directors Martin Lorentzon and Pär-Jorgen Pärson retain faith that their plan will still enable them to convince/force those higher margins from the industry:
“We believe we will generate substantial revenues as our reach expands, and that, at scale, our margins will improve. We will therefore continue to invest relentlessly in our product and marketing initiatives to accelerate reach.”
Despite this confidence, Spotify still needs to focus primarily on increasing revenue, and secondly on protecting itself from a potential boycott from artists.
Without cash, it can’t expand. And without closing the gap between revenue and expenditure, the company will fail to attract the funding it needs to realize it’s lofty plans.
And without diversifying what’s on offer, Spotify runs the very real risk of a large swathe of the music elite boycotting the company, demanding what they see as fairer royalty payments, massively undermining the completeness of it catalogue.
Video streaming enables Spotify to potentially kill both of these birds with one stone.
What Could This Change Look Like?
According to the New York Times, Spotify has been in talks with NBCUniversal, Viacom, Vice Media, Conde Nast and Fox. The Wall Street Journal also added Tastemade, Full Screen, Maker Studios and publisher Time Inc. to the list. With names like these, along with Spotify’s recent raising of $350m to fuel expansion (on a valuation of $8bn), we should expect any expansion into video to be big, bold, and brash. There are four things that we should expect from this change:
#1 Spotify’s Repositioning
Spotify may well end up simply shifting its overall focus to being the “center of a consumer’s music [and video] ecosystem rather than as replacement for all of it”. Just as “Netflix and its competitors were never promoted as full replacements for a cable subscription [or] trips to the movie theatre” (Hypebot).
Even in the face of a boycott, offering video and a large (but incomplete) music catalogue leads to Spotify becoming very tempting to those who want access to both music and video under a single subscription.
#2 More Original Content
With the huge success of Netflix’s House of Cards and HBO’s Game of Thrones, it’s clear that original content could well be king in this game. The idea is that people subscribe to watch an un-missable series, and continue to be subscribers long after they’ve finished watching.
With consistently amazing, original content being published, customers can very quickly become loyal to a video streaming company, leading to much-needed long-term revenue. To stand up to the oligarchs already present in this space, Spotify may have little choice but to follow suit.
#3 More User-Generated Content
Rumor has it that Spotify intends to also compete more directly with YouTube (which, in return, is now focusing also on streaming music). This will mean a large focus on user generated video, enabling the company to distinguish itself from primary rival, Netflix. The sheer number of videos and replenishment of content that this could lead to, could easily overshadow Netflix’s attempts at expanding their own catalogue.
How Spotify enforces quality of content, without resulting in direct competition with YouTube (something it’s unlikely to wish for), however, is yet to be seen.
#4 Music Videos
Spotify’s fast-growing competitor Tidal already offers music videos alongside audio. Vadio, another notable player in the industry, recently announced “a $7.5 million Series A funding round to deliver music videos to platforms like Spotify, Pandora, iHeartRadio, and any other digital music platform” (Wired).
In short, the music industry is pushing music videos heavily, partly because “when you’re watching a video, you aren’t doing anything else, typically unlike when you’re listening to music,” making ads alongside videos worth a lot more than ads alongside audio.
Could It Work?
Essentially, if this is the option Spotify is choosing, it has to work. The company cannot continue to rely on funding rounds to finance its relentless expansion, and this shift to video will not come cheap. But with the rest of the music industry already turning to video, it seems a sensible option for Spotify to take.
Unfortunately, the two biggest rivals Spotify is up against are Netflix and YouTube. Netflix currently has 60 million paying subscribers, and is committed to spending almost $10bn over the next few years on video content rights. YouTube has over one billion monthly users, a ridiculously large, untapped catalogue of both audio and video, and huge reserves of cash.
For Spotify to make this a success, they have to draw people away from one of the other available video streaming services. After all, there’s room for a few companies at the top here, just not too many. Spotify needs to overtake those currently struggling to gain traction. In light of this, pulling people directly from Netflix, or HBO will be difficult. Poaching customers from less-daunting music-streaming rivals such as Amazon Instant Video, and Hulu would be a preferable strategy. This would enable Spotify to scramble over the backs of Hulu and Amazon to appear as one of the forerunners in this game, with Netflix and YouTube only slightly ahead.
What Spotify has on its side is the ability to offer video and music in one subscription, and the resources in place to offer entertainment offline, which is something Netflix has steered away from.
If the choice is between Netflix, with no-offline availability, no-ads, but a larger choice of professional video, or Spotify, with music also on offer, music videos, and offline availability, it’s a close call that could see both companies leading the industry.
What Do You Think?
No one predicts it will be easy, but Spotify does have a good shot, provided it’s sensible and cunning with its relatively (compared to Netflix) measly amount of cash, while providing a better choice of video than Amazon and Hulu. Spotify is expected to make a big announcement soon on May 20th. Just ahead of Apple’s own relaunch of its music streaming service. The streaming space is heating up and that can only be good news for consumers.
What do you think? What would it take for you to leave your current video streaming service and sign up to Spotify?