Will Spotify pull a Netflix?

Is the online-music darling destined to follow the blueprint made notorious by Netflix CEO Reed Hastings?

By Benzinga Oct 27, 2011 3:30PM

By Louis Bedigian, Benzinga Staff Writer


There has been a lot of love for Spotify this year. But you know what they say: if you love something, you have to set it free.


I'm starting to wonder if this applies to entertainment services. I look at what happened to Netflix (NFLX) and cringe. This was the company that took down Blockbuster!


Netflix made being lazy fun. Why go to a video rental store when you could simply wait for a DVD to arrive in the mail? Netflix was cheaper and more efficient, and quickly became the dominant force in video rentals.


In the financial world, Netflix had become a sure thing. It was the company that couldn't lose. But once greed and stupidity entered the picture, consumers told chief executive Reed Hastings where to stick it, and investors scattered.


While some argue that the firm is twitching but not dead, the reality is that Netflix may never fully recover from its mistakes.


A Netflix-inspired strategy may be in Spotify's future -- unfortunate for music lovers who appreciate the low-cost, all-you-can-eat digital streaming service.


It's not that Spotify's execs are eager to imitate what is arguably the most hilarious stock decline of the year. Rather, Spotify is eager to dominate. And when it does -- when it believes it has achieved an appropriate level of success -- the company won't respond by showing a bit of gratitude. Spotify will respond by attempting to take advantage of a situation it thinks it controls.


That's what Netflix did. Hastings actually believed that consumers would accept a price hike because he framed it as "offering our lowest prices ever." He thought this not merely as a cocky CEO, but as a corporate exec who believed his company's product was too important for customers to walk away from. He was wrong.


Hastings may have also been using the logic that if Comcast (CMCSA) can do it, why can't Netflix? Comcast, however, has never raised its rates proudly and loudly; it does so on the sly with as little fanfare as possible. When consumers get their bills and discover what Comcast has done, they pick up the phone and complain. They often get a fee or two removed, but only after spending an hour or more on the phone.


Comcast knows there will be some consumers who won't complain. And some consumers will walk away, but Comcast doesn't care because, unlike Netflix, Comcast has a true monopoly in some markets. To be clear, Comcast isn't impervious. But its protective barriers are much thicker than those of Netflix.


Consequently, Netflix is the one that has lost more than 50% of its stock value, not Comcast. Netflix is the one who will struggle to turn a profit in 2012, not Comcast.


You might be wondering what this has to do with Spotify. Let's review a few facts:

  • Just as Netflix offers unlimited streaming of movies on a multitude of devices, Spotify offers unlimited streaming of music on Android and iOS.
  • Netflix became an investor favorite after experiencing rapid subscriber growth. Spotify's paid subscriber rate is also very impressive; in less than two months the service reached 2 million paid subscribers.
  • After its first success story, Spotify responded not by rewarding consumers but by forcing new users to sign in with Facebook. Consumers did not respond favorably.

"That's minor!" you say. "Lots of companies are turning to Facebook sign-ins!" Of course they are. But the fact that Spotify ignored the complaints is a sign that the company thinks it is too big and too important to suffer.


That might be true. But what will Spotify think when it has 5 million or 10 million subscribers? That day is coming. Millions of people love to pirate music, but millions more who would happily pay $10 per month to take a cloud-based music library wherever they go. Spotify is simple and quick. It has almost every artist people care about. And you don't need a hard drive to store any of the music, which makes it the perfect service for the iPhone.


All in all, Spotify is a can't-lose company. But wait… so was Netflix. Netflix had everything people wanted. Everything in the eyes of its subscribers, at least; I, however, was not persuaded by its lackluster streaming video lineup. But I don't matter. Netflix's millions of subscribers matter.


The same can be said for Spotify. Unfortunately, it is unlikely that these subscribers matter to Spotify. All Spotify cares about is its newfound cash cow, the millions, or perhaps billions, of dollars it will make in the future, and the potential to one day go public.


ACTION ITEMS:


Bullish:

Those who believe that Netflix will recover and that Spotify will learn from Netflix's mistakes (instead of imitating them) may want to consider the following trades:

  1. Well, for starters, how about Netflix? The stock is a potential steal at less than $80. If the company gets its act together, investors who buy now could be delighted by the results.
  2. If services like Netflix and Spotify prevail, data will continue to become a more valuable commodity, increasing the importance of and the reliance on Comcast, AT&T (T), Verizon (VZ), Sprint (S), and other broadband and mobile Internet providers.

Bearish:

If you don't believe that Netflix will prevail, and if you think that Spotify is doomed to make the same (or worse) mistakes, you may want to consider this alternate position:

  1. Apple (AAPL) is already the digital leader in music sales, and the new iCloud service will enhance that leadership. Over the next couple of years, Apple could also become a prominent player in streaming entertainment.

Neither Benzinga nor its staff offer investment advice, nor do they recommend that you buy, sell, or hold any security. 


More from Benzinga:

7Comments
Oct 28, 2011 3:25AM
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Netflix is a disgrace to its loyal customers and America..greed and arrogant management. 800,000 customers dumped Netflix so far..Never bite the hands that feeding you.
Oct 27, 2011 6:11PM
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Hopefully Spotify can follow the bad guidance of Netflix and actually think of the customers. I agree that people would be willing to pay a small fee. I just hope they don't do it abruptly and all at once like Netflix. Giving people an ultimatum doesn't always seem to go well. 
Oct 28, 2011 8:57AM
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I tried Spotify when they first came to America,And the very first thing they done is P me off by making me wait 4 days for a invite to join their service. Then i found out that their selection was not as good as what i had/With bad service. So I'll just stay with rhapsody and download any song that i want to my player or phone for $9.99 a month .
Oct 28, 2011 9:50AM
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Few people mention the impending loss of Starz content on Netflix as a reason Netflix is failing. Netflix online content is extremely thin when Starz is removed.
Oct 28, 2011 10:01AM
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Netflix had to increase their prices because the studios wanted a lot more money for the rights to stream their movies, not because of "greed."

 

That being said, they have made a lot of stupid moves regarding the way they tried to spin the price hike and by trying to split the service into Qwikster.

Oct 28, 2011 2:30PM
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The real story for Netflix and Spotify will ultimately be that neither provides a unique, unduplicated service.  Just like Tivo, anyone can duplicate what they do.  They don't own any content.  Because of that, they can only be considered short term trading plays.  As an investor, that's why Netflix's original decision to jettison DVD mailers seemed so non-sensical.  If they do that, then they just become hulu/amazon.  Spotify already has built in competition with every other streaming audio service.  They don't own any of their content.  And, they pull stunts like hidden pricing, streaming caps for the free service, and facebook hookups.

 

Apple and Amazon hold the only sway for, say, the next 5 years, because of their integration of their hardware with their marketplaces.  But, at some point, someone is going to make a cloud marketplace that is not hardware dependent.  And it will be game over for their dominance too.

Oct 28, 2011 10:26AM
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I bought some Netflix at the low and have already made 9%.  Think I'll buy a bit more.
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