Final week, Hollywood and Wall Road have been consumed by the drop in Netflix’s inventory worth. The overriding query has been: is streaming actually a foul deal? Or, to place it extra merely: what are we getting ourselves into?
Different media shares have taken off with Netflix – some extent of exasperation amongst executives who’ve spent the previous few years making an attempt to repeat what Netflix has accomplished and believing the inventory market would reward them for doing so. A veteran media baron joked with me not too long ago, “I did every part you needed!”
Maybe no firm has been damage extra by the sudden change than Spotify, which has misplaced almost 25% from ranges simply earlier than the Netflix debacle. Much like Netflix, Spotify’s market cap has shrunk to lower than a 3rd of its pandemic excessive to lower than $19 billion.
To place that in perspective, Spotify, for all its model recognition, is now price about the identical as Cincinnati Monetary, an Ohio insurer, and considerably lower than Fastenal, a Minnesota-based constructing supplies maker.
I hope all of the chief media execs over the subsequent few weeks will attempt to persuade Wall Road that they are not very similar to Netflix in any case. So is it honest to re-evaluate Spotify? Spotify’s market capitalization is about twice its income of $10 billion final 12 months. By comparability, Netflix’s market cap of $88 billion is about thrice its 2021 income.
There are clear similarities between Spotify and Netflix. Each have been the pioneers of streaming of their respective industries. Each have managed to seize a whole bunch of hundreds of thousands of subscribers and construct manufacturers which might be recognized around the globe. Each are beneath strain to proceed producing speedy subscriber development as a result of their share costs rely upon it. Each have spent the previous couple of years trying around the globe for brand spanking new subscribers to the juice.
The similarities largely cease there, nevertheless. The music enterprise has a really completely different dynamic from tv and movie.
First, music is very concentrated – 4 entities management almost 80% of Spotify’s music catalogue. TV is fragmented and sophisticated. Dozens of studios, from tiny to large, produce the hits we see on the small display.
Second, Spotify does not have its personal content material, except for its newest podcast launch. Spotify tried to tiptoe into music a couple of years in the past, signing a few dozen unknown artists. The key labels have been outraged and Spotify dropped it. In the meantime, Netflix has grow to be one of many greatest studios in Hollywood via cash and can.
Third, Spotify is promoting a product that’s almost equivalent to its rivals. After all, there are completely different playlists and interfaces. However Spotify, Apple, Amazon, Google and several other others are promoting entry to the identical 80 million songs. Netflix, nevertheless, gives completely different reveals than Disney or HBO Max.
A few of these variations, up to now, gave the impression to be a weak point for Spotify. The truth that it gives the identical product because the world’s richest tech corporations — Apple, Google and Amazon — has made it tough for Spotify to lift the worth of its subscriptions. Its premium membership nonetheless prices $10 a month within the US, the identical as when it launched in 2011.
With US inflation hitting a 40-year excessive, Individuals are rethinking their budgets. Paying $10 a month for just about all of the music on this planet is comparatively low cost in comparison with Netflix, which prices $16 a month for its commonplace US package deal and solely gives a fraction of the tv and films obtainable. Paying $0 a month for Spotify’s free advert choice could be a good higher deal for some.
It has been a little bit complicated to see Wall Road change its thoughts so rapidly about streamers. Sure, rates of interest are lastly rising and buoyant development shares have seen their valuation multiples shrink. However the challenges of the streaming mannequin have all the time been in sight. Spotify’s enterprise is, to place it merely, powerful. She does not personal the product she’s promoting – music. So it paid $7 billion in royalties in 2021. In consequence, it is a low-margin enterprise. Final 12 months, Spotify made simply €94 million in working revenue and €9.7 billion in income.
In recent times, my inbox has been flooded with startups calling themselves the “Spotify of X trade”. One cause for this may very well be investor assist for the massive funding wanted to create streaming providers. Or, in different phrases: the luxurious of burning cash. That benefit seems to be operating out for Netflix and Spotify.