M+E Daily
Spotify’s Netflix hangover
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By Paul Sweeting
Spotify is closing in a new $100 million financing round that values the streaming music service at just over $3 billion, according to the Wall Street Journal. While impressive for a company that is yet to turn a profit and can’t say exactly when it will, it’s below Spotify’s earlier goal of a $4 billion valuation.
What happened to the other billion? AllThingsD’s Peter Kafka blames Netflix:
Investors already know what a digital subscription business looks like at scale.
That would be Netflix, which has some 27 million subscribers at around $8 a month. Today, after Carl Icahn goosed it a bit, Netflix has a market cap of $4.3 billion.
Spotify says it has 4 million paying subscribers at around $10 a month. Bear in mind that if you value Spotify at $4 billion today, you’re really saying it will be worth three times that — $12 billion — in a few years, when it would presumably go public [snip].
So even at $3 billion, Spotify backers will need to work hard to explain why their digital subscription business is worth so much more than Netflix when it comes time to IPO.
I’d add another explanation, that affects both Netflix and Spotify. Both companies have built their businesses largely around a single use case: on-demand subscription streaming (Spotify also has a small advertising revenue stream). Use cases, for both music and video, are evolving, however, and consumer preferences for how they access content services are not settled.
Some device-centric platform providers, moreover, are pressing rights owners to let them offer content across multiple use cases and under multiple payment plans in an effort to monopolize consumer spending, as Amazon has done in video by offering pay-per-view rentals, electronic sell-through, subscription streaming and DVD sales (and subscription DVD rentals in the U.K. via LoveFilm). Microsoft is now doing the same in music with Xbox Music, which offers free ad-supported streaming, subscription streaming, paid downloads and streaming from cloud-based storage.
The question hanging over both Netflix’s and Spotify’s valuation is whether a standalone content service, based around a single use case, can compete effectively in a world likely to be dominated by broad, device-based content ecosystems.
