EDITORIAL

As Spotify Eyes The Public Market, Incumbent Players Covet Its Market

Editor’s Morning Note: While Spotify remains in an IPO play, new offerings out today from Amazon and Pandora further complicate the industry.

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A quick hit this morning, friends, on what we both have pouring into our ears as we read: music.

Mattermark wrote about Spotify’s financial situation the other week, noting that the economics of its business are tough. The percent of Spotify’s revenue that it has to pay out to rights-holders is stiff, leaving it with a small pool of income to pay its own bills.

Today, two of Spotify’s competitors announced new services—Amazon’s Music Unlimited and Pandora Plus—that duplicate a number of Spotify’s main features, effectively putting them in competition for the same user pool. Spotify, after all, recently announced that it has 40 million paying users, a quick rise from the 30 million it announced in March.

I doubt that Pandora and Amazon are hoping to move people off of Spotify, but both companies can certainly slow Spotify’s growth by siphoning off future paying users from the market.

And as we have examined, growth is a bit of a big deal when it comes to valuation. Let’s see what just happened:

What’s New

Amazon isn’t as known for its place inside the music world like Pandora, but it does sell music in a variety of formats. And its Echo device recently gave it a beachhead into many new homes.

Hello, this:

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The price rises, as GeekWire notes: “To use Amazon Music Unlimited on multiple devices, including smartphones, you’ll need to pay $7.99 if you’re an Amazon Prime member, or $9.99 if you’re not.”

Here Amazon is using a hardware in, as well as a subscription advantage, to provide lower-priced options. It is unlikely that Spotify, with its narrow financial berth, has the same flexibility as Amazon.

And then there’s Pandora:

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Pandora’s new streaming option is a bit different than the others. To wit:

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It will be interesting to see if the new products announced by Amazon and Pandora will have a material drag on Spotify growth curve. If that’s the case, Spotify could see its valuation fall and its IPO process slow. At the same time, Spotify didn’t amass the number of paying users that it has by accident, and it certainly doesn’t lack momentum.

Harping again on our point concerning the emergence of hyper-platforms among the largest technology companies, we have another entry in our journal. To pick a few other examples: Microsoft’s working on Groove, after Zune and PlaysForSure, Apple is cranking away with a number of music offerings, and Alphabet’s Google is working on YouTube and many other music services. Every platform company keeps fighting across disjointed consumer touch-points, as any acquiescence of a core service—like music, web browsing, or maps—exemplifies a surrender to another giant technology company. There must be some marginal-utility driven breaking point where the granularity required to build out another platform plank is not worth the time and expense. Music, however, falls firmly inside the “we shall build it and hope they come” model for all major players.

Spotify and Pandora want to build full companies on top of music. If that can survive the current market remains to be seen.

Homework: Is every company just a feature if your conglomerate is big enough? What advantages would that bring? Disadvantages?

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© Mattermark 2017. Sources: Mattermark Research, Crunchbase, AngelList.
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