Over the past week, Hollywood and Wall Street have been consumed by the share-price crash of Netflix. The overriding question has been: is streaming actually a bad business? Or put more simply: what have we got ourselves into?
Other media stocks have been pulled down with Netflix — a point of exasperation among executives who have spent the past few years trying to copy what Netflix did, and believing the stock market would reward them for it. A veteran media baron quipped to me recently: “I did everything you wanted!”
Perhaps no company has been hurt more by the sudden shift than Spotify, which has lost nearly 25 per cent from levels just before Netflix’s fumble. Similar to Netflix, Spotify’s market value has been sliced down to less than a third of its pandemic high to below $19bn.
To put this in perspective, Spotify, for all its brand recognition, is now worth about the same as Cincinnati Financial, an Ohio insurance company, and significantly less than Fastenal, a Minnesota maker of construction supplies.
I expect all media chief executives in the coming weeks will try to convince Wall Street that they are not too similar to Netflix after all. So is it fair to revalue Spotify? Spotify’s market capitalisation is about twice its $10bn revenue last year. In comparison, Netflix’s market cap of $88bn is about three times its 2021 revenue.
There are clear similarities between Spotify and Netflix. Both were the pioneers of streaming in their respective industries. Both have managed to capture hundreds of millions of subscribers and build brands that are known around the globe. Both are under pressure to keep churning out fast subscriber growth, because their stock prices rely on this. Both have spent the past few years searching the globe for new subscribers to juice.
The similarities mostly stop there, though. The music business has very different dynamics from those of television and film.
First, music is highly concentrated — four entities control nearly 80 per cent of Spotify’s music catalogue. TV is fragmented and complex. Dozens of studios, ranging from tiny to massive, produce the hits we watch on the small screen.
Second, Spotify does not own its own content, with the exception of its more recent podcast push. Spotify tried to tiptoe into music a few years ago, signing about a dozen unknown artists. The major labels were outraged, and Spotify abandoned it. Meanwhile, Netflix has become one of the biggest studios in Hollywood through sheer money and will.
Third, Spotify is selling a product nearly identical to those of its competitors. Sure, there are different playlists and interfaces. But Spotify, Apple, Amazon, Google and several others are all selling access to the same 80mn songs. Netflix, however, has different shows on offer than Disney or HBO Max.
Some of these differences have, in the past, appeared to be a weakness for Spotify. The fact that it offers the same product as the world’s richest tech companies — Apple, Google and Amazon — has made it difficult for Spotify to raise the price of its subscriptions. Its premium subscription still costs $10 a month in the US, the same as when it launched in 2011.
With inflation in the US reaching 40-year highs, Americans are rethinking their budgets. Paying $10 a month for virtually every song on earth is relatively cheap compared with Netflix, which costs $16 a month for its standard package in the US and only offers a fraction of available television and movies. Paying $0 a month for Spotify’s free option with advertisements, may be an even better deal for some.
It’s been a little confounding to see Wall Street change its mind so quickly on streamers. Yes, interest rates are finally rising and hyped up growth stocks have seen their valuation multiples shrink. But the challenges of the streaming model have always been in plain sight. Spotify’s business is, to put it simply, difficult. It doesn’t own the product it’s selling — music. So it paid $7bn in royalties in 2021. As a result, it is a low-margin business. Spotify last year made just €94mn in operating income on €9.7bn in revenue.
For the past several years, my inbox has been flooded with start-ups billing themselves as the “Spotify of X industry”. One reason for that might be how supportive investors have been of the big investment required to build out streaming services. Or, in other words: the luxury of burning cash. That advantage seems to be running out for Netflix and Spotify.