Why a Spotify for News can’t fly

Frederic Filloux
Monday Note
Published in
4 min readMar 5, 2018

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by Frederic Filloux

Spotify’s IPO is scheduled for this spring. Its SEC Filing offers an interesting perspective on the future of the news industry. A rather grim metaphor.

Periodically, I hear someone say, “Oh, I intend to be the Spotify of news,” or, “What the news industry needs is a Spotify-like platform!” In fact, it is far from certain that the news industry could pull out a profitable model based on Swedish streaming. Why? Because, after ten years of operation, Spotify’s future is still uncertain, and a news version of would face the same issues.

Let’s consider the following elements:

Spotify currently has 159 million monthly active users (MAUs), of which 71 million are paying subscribers. That is an impressive ratio of paid to free (by comparison, large news media outlets have only 3–5% paid-for subscribers). MAUs grew 29% overall in 2017, and 46% for paid-for segments. These are impressive numbers too. But this growth is declining: In 2016, the progression was respectively, 35% for the total and 71% for paying subscribers. Competition is taking its toll. Spotify retains an amazing capacity to convert free users into premium ones, but the fundamentals are eroding. Like the ARPU, which is dwindling too:

In two years, the revenue per user (all sources combined) has dropped by 22%.

As a result, Spotify had a 2017 revenue of $5bn, but a staggering loss of $1.2bn, and the deficit is growing at a faster pace (+130% Y/Y) than the revenue (+38%).

This unfolds in the context of a service that dominates the ever-growing segment of the music streaming industry: According to The Trichordist, an interesting music business site, Spotify commands a 48% share based on the number of streams, vs. 21% for Pandora and 10% for Apple Music and 8% for YouTube. This position is the primary motive for the IPO. The company is aiming at a valuation of $20bn that will help to distance it from its competitors.

So what is Spotify’s problem? The platforms. Namely, Apple, YouTube, Amazon.

Four factors are at play:

1. Size. Spotify is present in 61 countries, Apple is in 115, as are the other two. Spotify’s yearly revenue is 2% of Apple’s, 3% of Amazon’s, and 25~30% of YouTube’s.

2. Hardware. Apple has the support of 1.3 billion active iPhones; its music business will receive an additional boost from the HomePod speaker (read Jean-Louis’ columns about it here and here). Amazon will boost its music business with its Echo smart speaker that already dominates this emerging segment. As for YouTube, it is counting on Google Home and the Android. To stay in the game, Spotify is working on its own appliance. Good luck.

3. Ability to lose money. The big three can sustain nearly any amount of loss, in order to defend or conquer the top position in the music streaming business. Amazon has demonstrated an unparalleled capacity to impose large and consistent losses on its shareholders for the sake of market shares. Apple has the luxury of paying much more than Spotify for its music, while making more money in the end, again here is what The Trichordist says (emphasis mine):

Apple’s current effective rate of $0.00783 is pretty close to double the Spotify effective rate of $0.00397. There’s more good news for Apple as their market share has risen from 7.18% last year to almost 11% this year. But the bigger story is that Apple Music is now accounting for over 22%+ of music streaming revenues up nearly 11% from last year. This is good news and shows the power of both Apple’s commitment to streaming, and the value of a paid only platform. Apple Music is actively taking market share away from Spotify.

4. Original production. In the cutthroat business of streaming, whether it is for music or video, the big differentiator is the capacity of a platform to create its own pipeline of original productions. Netflix is the best example: this year alone, it will release about 700 TV shows at a cost of about $8bn, by far outspending anyone else in the entrainment industry. And size also calls for discounts: while Spotify spends 79 cents in royalties for each dollar of revenue, Netflix spends only 66 cents per dollar.
As for Apple, it will commit $1bn this year to original content. Even Facebook is considering joining the fray of original videos. Such vertical integration is out of reach for Spotify.

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What does all this have to do with the concept of a Spotify for news?

Well, the same forces apply: platforms are calling the shots. They control a large chunk of news distribution, capture all the advertising growth, are technologically way ahead, and can up-sell across all their product lines, and withstand any loss necessary. When it comes to original production, only the fake news mess has delayed the “Four” from entering the news market. Hard news will continue to be spared for a while (we don’t see Facebook or Google opening a bureau in Delhi or sending a videographer to Syria). However, we will soon see these big players enter “soft,” relatively inconsequential segments of the news business, like entertainment, then probably lifestyle and, finally sports. I’m looking closely at how Apple News works, with its unique aesthetic and attention to detail, implemented by competent people. And I see the looming wave.

frederic.filloux@mondaynote.com

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