The Take

Spotify needs to put their plans on shuffle28/08/18

Publications Officer Heath Gabbett streams his thoughts on internet giants Netflix and Spotify, in this week’s edition of The Take:

Digital streaming has dramatically changed the entertainment industries. Streaming has overtaken physical sales in the music industry, and it seems Netflix is poised to surpass cable in its prosperous North American market. But Netflix’s dynamic strategy over the past few years demonstrates that streaming companies need to be adaptive. This piece will examine Spotify’s position in the market and recommend what changes are necessary to become profitable.

Spotify dominates the music streaming market, but is far from profitable

Spotify controls around 36% of the music streaming market, more than double their closest competitor, Apple Music (17%). Despite this dominance in the market, Spotify has not yet reached financial success.

Spotify’s revenue has doubled since 2015, but their losses also continue to rise. In the most recent quarter of 2018, the company had revenues of €1.27 billion, but posted a net loss for the quarter of €394 million. It is hard to imagine the company’s market share growing much more dominant, especially with the emergence of Amazon, Google and YouTube as legitimate competitors. Instead the company needs to consider the dynamics of the market they operate in and find an alternative path to profit.

The bargaining dynamics of the entertainment industries inhibit streaming companies

One of the biggest challenges in the entertainment industries is the bargaining power of the suppliers – the producers and labels which provide content to the platform. In both the music and movie/TV industries, the market is dominated by an oligopoly of suppliers.

In the case of music, the three biggest record labels, Universal, Sony Music and Warner Music Group, make up just under 80% of the market. Missing out on any of these three labels would be losing countless popular artists from the platform, which could definitely affect a consumer’s choice of streaming service.  Not signing Universal would mean missing out on Drake, the biggest artist on the planet; for Sony Music, J. Cole and ASAP Rocky; and Ed Sheeran for Warner Music Group. Needless to say missing any of these top talents could definitely swing consumer preferences. This means Spotify has very little bargaining power with their suppliers, and is forced to pay between 70 to 90% of revenue as royalties.

A very similar dynamic exists in the movie and television markets. After the acquisition of 20th Century Fox by Disney, there are now five big firms controlling around 75% of the market. Netflix faced the difficulties this bargaining dynamic creates and adapted its strategy.

Following Netflix’s strategy, Spotify should consider diversifying its content

Responding to the bargaining power of its suppliers, Netflix began focussing heavily on producing its own content from 2016 onwards. The company had deep data on what viewers wanted in content and was able to produce it, allowing it to wrestle back some control from the production companies.

Spotify should consider a similar approach, acting almost like an online label. Spotify has enormous ability to influence people’s music choices through their playlists, and could offer great benefit to musicians who choose to partner direct with Spotify. Similar to Netflix, this strategy would allow Spotify to gain more bargaining power from the music labels that currently dominate the market.

Spotify needs to do more than the status quo for its business to become profitable.

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