AMAZON & PANDORA PILE ON THE PAIN FOR SPOTIFY
The success of Spotify has always been best explained as consumers being willing to pay for the convenience of an activity – streaming music – that can perfectly easily be enjoyed for free. Add in a nice interface and some decent tools for playlist creation management then go ahead and charge $10 a month. Somewhat to my surprise, many people are prepared to pay that. It has the feel of this magic number “It’s only ten bucks a month. It’s nothing.”
Alas for Spotify, it looks like this cozy bubble of financial acceptance is about to be shaken up, and by two big fish at that. The New York Times reports that Amazon and Pandora are both gearing up in secret to offer alternative services with the same amount of polish as Spotify but for half the price. Pandora’s offering is perhaps less of a direct threat. For $5 a month (the same as their premium service costs currently) users will be able to skip more unwanted songs and store longer playlists. Pandora, however, still offers the same ‘our choice, not yours’ mentality towards tracks that define Internet Radio. The rumor mill is rife that they are going to offer a bigger, fully targeted service whereby you can select specific tracks, but since this is predicted to come in at $10 it’s not quite the seismic threat it might have been.
Amazon, meanwhile, are not known for doing things by half. Already, Prime members get to enjoy some fully targeted directly streamed content as part of their $99 annual fee. This includes original video content as well as audio. The change is that they plan to introduce a full music streaming service that will only be $5 a month if the customers are existing Echo users (the Echo is a voice-activated speaker system/home automation hub in the making). Otherwise if defaults to the magic bullet of $10.
Given that there are ifs, buts and maybes with both new offerings, why should Spotify be concerned? Frankly, their problem has been greed. Spotify are planning an IPO and have placed a valuation on themselves of $8bn. Whichever way you cut it, $8bn is an eye-wateringly high valuation and the market feels the same. There is nervousness around the Spotify figure given that the company’s track record in no sense justifies the price tag. In fiscal year 2014 Spotify lost $144m. In 2015 they lost $188m and that was despite seeing a significant jump in profits from $1.2bn to $2.1bn.
To make matters worse, Madison.com points out that Spotify’s deals with Universal, Warner and Sony have all expired. And to put all of that in context, Pandora – the older more mature big player in the market – has a long history of poor financial returns and Apple are able to run Apple Music at a loss until the sun explodes thanks to their vault-busting piles of money. It all adds up to a very ropey long-term forecast for Spotify and that makes them vulnerable.
While Spotify are not likely to buckle under this pressure it is still not good news for them. Their only ace in the hole is that several VC voices are not convinced that value alone is a strong enough incentive for users to defect. The New York Times points out that there have been other, cheaper streaming services that have come to a sticky end. At least one of these, Rdio, was bought out by Pandora. Consensus opinion is that the product experience is the key factor rather than the price point. This rings true, given that YouTube provides an entirely free music streaming, playlist-enabled, video-enabled service and yet millions of people choose to pay Spotify.
But even if the threat is more experiential than economic, Spotify must remain on their guard. Pandora have been doing this longer than they have and can be expected to come out with something polished while Amazon have a great deal of experience in this space also, thanks to Prime and Amazon Music. These challenges will not be half-hearted.
