Lucas Gonze shares his response to Mark Mulligan’s piece on why Spotify struggles with profitability, and takes a look at what the streaming service’s most logical path forward may be if it hopes to make money down the road.
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Guest Post by Lucas Gonze on Medium
Mark Mulligan asks why Netflix is profitable but not Spotify, and concludes:
The main reason for Netflix’s stronger position is that it owns so much of its content, while Spotify and co rent their content.
So what is Spotify’s path forward?
The record labels are undoubtedly wary of streaming services becoming record labels themselves, but this might just be Spotify’s route to profitability.
And of course he’s right. Spotify and its ilk pass most of their revenues to labels —at least 70% and sometimes more than 100%. Yes, they can keep some of that by becoming a label.
No doubt they are investigating that.
But beyond seeking to own recordings, they are resetting the focus on playlists.
It’s not a music business
First and foremost, Spotify is not a music provider. The customers can get the same music elsewhere. Spotify is a technology company which sells:
- Reach. The catalog is big enough to allow a customer to satisfy their needs in one place, more or less.
- Interactivity. Compared to non-interactive webcasts like Pandora, the listener can skip back, play specific tracks, and so on.
- Safety. Compared to black-market venues like Bittorrent, the listener is not risking malware.
- Navigation. Discovery tools are valuable to listeners.
Music comes from musicians. Spotify is staffed by technologists.
Playlists Not Recordings
But Spotify does create content, and it is massively popular: the playlists.
Public playlists created manually by in-house editors are hugely successful. Rap Caviar, for example, has almost 5.5 million subscribers.
Public playlists shared among friends are classic user-generated content.
Private playlists make it painful for a subscriber to leave.
Algorithmic playlists like Discover Weekly are an important part of the benefit of Spotify for many people.
And the labels have zero leverage. Spotify owns that shit.
Amortize It
So how does this play out in the market?
Netflix’ original content is an asset that accumulates. It is creating durable goods and building an enduring base of value. Per Mark Mulligan again:
Netflix’s original shows are a balance sheet asset and so can have costs amortized and offset to help profitability. (eg Netflix has a cash flow line item ‘Amortization of streaming content assets’ for +$4.8 billion).
Given that Spotify’s content development is concentrated on playlists, are playlists an asset that accumulates?
Not user playlists: a user’s playlists, private or public, are irrelevant to accounting because the company doesn’t pay for them. And not auto-generated playlists like Discover Weekly, because they go stale once a week.
But playlists authored and funded by Spotify are durable, at least for as long as they remain useful.
It’s just that there’s one rule that they fail: amortizable assets have to be things that are completed. There needs to be a finish line. The 2001 edition of a dictionary is an asset, while ongoing work to keep the dictionary up to date is just an expense. And any halfway-popular playlist needs to be an ongoing thing.
So playlists for the most part are not a balance sheet asset.
Playlist Power
How does Spotify turn playlists into profits? Indirectly, through the leverage they create.
Yes, for users who have authored their own playlists and don’t want to lose them, the playlists make it harder to leave for another service.
But, more than that, playlists can become the primary brand for listeners, supplanting artists. When a listener reaches for Rap Caviar before Drake, Spotify isn’t just the gatekeeper, it’s the music.
Labels covet placement — a whole business of pitching playlist owners has emerged. Spotify can use that power in negotiations with labels. Playlists are the new radio, and US radio pays zero to labels.
The long game for playlists is commodifying recordings. Yes, recordings will continue to matter, but in the context of an ongoing playlist the individual recordings are ephemeral. Songs come and go, the playlist remains.