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How Spotify should be more like Amazon (but perhaps not in the way you’re thinking…)

Updated: Jan 31, 2019

Very interesting and well written Medium piece by music tech writer Cherie Hu on how Spotify can’t be just a music service if it’s going to prosper in the long term. Rather it needs to be a more rounded audio company, offering podcasts in particular alongside music so it can realise the much vaunted ambition of being the audio equivalent of Netflix.

I think this analysis hits several marks spot on, but I also think a secure long term future for Spotify will require more than just podcasts, and to understand what that might look like it’s instructive to look at the example of Amazon and how they’re continuing to grow and expand.

Spotify’s copyright challenge

The biggest issue and risk for Spotify is that it doesn’t control the intellectual property behind the bulk of its current output, music. It is working hard to shift this balance more in its favour, through building its own IP through its tech and brands, directly licensing some music and reaching out to certain groups of artists to build its own links for example.

But it will likely never be able to deal directly with the biggest stars of the day on an exclusive basis for the simple reason that becoming a big star takes lots and lots of cash, which up to this point in time is still only being provided by record labels, and big stars and their managers will always want to maximise both their earnings and their audience, which means being everywhere, or at least wherever they want at the times of their choosing. A single destination will never be able to satisfy that requirement.

Which all means in music Spotify will always be dependent on others - either labels or big stars who control their own rights - for the rights it needs to deliver the most popular music to its subscribers. Maybe there are examples of highly profitable businesses that don’t control the raw material of their service, but I can’t think of any I have to say.

So while music is and should and indeed must remain central to Spotify’s offer - Spotify is synonymous with music and has great power as a music brand - it needs non-music to really prosper. And that’s where the lessons or Amazon are highly instructive.

The pillars of Amazon

Amazon is a very large and complex business but for the purposes of this analysis we need to divide the company up into four main groupings to understand the trajectories of each and the lessons they hold for how Spotify needs to grow.

The first is what we can call traditional Amazon. This is the online store, products provided by Amazon directly or from others via its marketplace. You go online, order stuff and it’s delivered directly to you.

There are some digital products in this mix, but essentially we’re talking about physical things which then have to delivered. Amazon has all its giant warehouses and logistics network and does this more effectively and efficiently on an international basis than anyone else out there.

Despite being a quarter of a century old this business has never been known for its profitability when you include all its true costs and it’s not clear how that might change. When Amazon started out its retail competitors were nowhere to be found online and Amazon was able to out compete and out innovate them easily. Not having legacy physical assets gave Amazon a huge advantage in price and ability to be nimble.

Now however the picture is more complex. For a start retailers who have made it this far are very clear on the importance of online commerce, even if many still have some way to go. Plus it turns out that having those legacy assets can actually be very helpful as long as they’re in the right places at the right rents with the right products inside. Try before you buy, click and collect and the ability to simply drop off returns in your own shop can be very attractive for consumers and are features that are much harder for Amazon to offer (not that it isn’t trying of course).

Plus to keep growing and evolving Amazon have had to sink billions into those warehouses and that logistics network which means they now have very extensive fixed cost base that needs constant financial feeding. And none of this even touches the gigantic variable cost of traditional Amazon’s model - shipping. Amazon are the clear leader in online retail and an impressive innovator, but they’re now spending tens of billions of dollars a year on shipping packages to individuals. That's right, tens of billions, just on shipping. That's a lot of postage & packing.

Sure Amazon can afford it, and none of this is to suggest that this business is in trouble, but the original advantages of Amazon’s traditional model aren’t what they were. All those warehouses and all that shipping are huge and rapidly growing costs.

The second part of Amazon is Amazon Web Services. After a relatively low key and gentle start in the early 2000s this business has galloped ahead in size and become seriously profitable and is currently the main profit driver of the whole company. While the technology and platform behind AWS is used throughout the company this division is strategically entirely distinct to traditional Amazon in that the performance of one will largely have little effect on the other than affecting combined profitability. And cloud computing is a seriously capital intensive business with some seriously powerful and well-capitalised competitors which makes maintaining a consistent lead year-after-year a very difficult task. But for now, Amazon has maintained its position at the the top of the cloud services tree.

Third is Amazon Prime. This is a particularly interesting part of the company given how fluid and open it is. Still with its original free shipping benefit, a Prime subscription now comes with all sorts of extras. The exact mix varies from place to place but can include music, film, TV, video games, ebooks, discounts, food, takeaway food, additional delivery options, all sorts of things.

That’s what’s so interesting about Prime - from its origins as a shipping subscription now nothing would be a surprise if it suddenly was added to the mix. Subscriptions are a highly profitable business model so as long as Amazon can keep the Prime subs going this business has a bright future.

The final Amazon segment is everything else. That’s not to be flippant or dismissive of any of these - whether its Alexa, Echos, Kindles, Fire, Twitch or whatever. On the contrary, this fourth segment includes Amazon’s new ideas and R&D. Many will not make it, but there’s every reason to believe that some will emerge in time to become future pillars of the business, just as AWS and Prime did in their time.

Spotify is still like early days Amazon

So what does all this mean for Spotify? Well go back through Amazon’s evolution and you have the traditional business, where it all began, never actually contributing all that much to that profitability itself but instead providing a secure launchpad for the true drivers in current and future profitability - AWS and Prime so far with plenty more to come.

As I mentioned at the top, Spotify’s music service is always unlikely to become highly profitable because so much of its IP is controlled by others (labels and artists). But that’s ok. As Amazon has shown, you don’t need your core business to be the key profit driver if you establish it as a stable and secure platform that creates a long term relationship with your customers so you can create alongside it the things that will drive your profits in the future.

Rather than targeting profits on the core music service, Spotify would be better placed growing other areas of audio listening. As discussed in Cherie Hu’s piece, podcasting is an obvious step and one Spotify are clearly targeting. They interestingly find themselves in a mirror image to every other podcasting producer and platform at the moment - they all have the podcasts but haven’t yet found a way of creating much revenue from them. The in-podcast ads and sponsorships we currently see are curiously reminiscent of the early advertising attempts seen in radio and TV in the US and like those will clearly have to evolve, but into what is still an open question.

Spotify however already has an ongoing billing relationship with millions of people and so adding podcasts into that and therefore earning revenue for them is a relatively easy step.

However podcasts, while undoubtedly popular, will be tricky for Spotify to establish a beachhead of its own IP in. Unless they invest heavily in new podcasts, and even if they do, there are already so many podcasts out there and other big platforms delivering them (Apple, Google, BBC, Pandora, etc) that Spotify will have its work cut out to gain a meaningful share of that. So while podcasts are an essential part of listening that Spotify has to be a part of, why stop there?

Audiobooks seem a key space as their share of listening is rapidly growing. The biggest player in this space is as it happens Amazon through their Audible subsidiary, but that could work to Spotify’s advantage as publishers will be happy to have another big player in the mix. Plus the rapid growth of self-published books looks like an easy space for Spotify to capitalise on as well.

Bring on the radio star

And then the other big area of listening, one of the longest running media segments, is of course radio. There’s been some speculation about Apple maybe investing in iHeartMedia, which personally I’m somewhat sceptical about as Apple have never been one for minority stakes, but it definitely makes sense for Spotify to target radio. Their big playlist brands are clearly playing a similar curator role for many listeners that radio has traditionally fulfilled, and their free tier is going after the same ad dollars that radio currently takes.

But I think the biggest opportunity linking up with traditional radio offers is in actually getting Spotify closer to the ’N’ goal, the Netflix of audio. Music from labels, podcasts not directly produced by Spotify and most if not all audio books will all ultimately be available on other platforms as well. Spotify could become the most effective and best known provider of all of these, but it will still suffer from the issue it currently has in music of not controlling the IP. Get the right radio content however, and that could be exclusively provided through Spotify, whether live or otherwise, giving Spotify valuable audio content that no one else has for the first time.

This model could soon be tested in the real world when the impending merger of Pandora and SiriusXM completes. Pandora has never been considered a particularly serious competitor to the top streaming players given its very different business model of internet radio stations. It does have an on demand service with the same label catalogue as Spotify, Apple, etc however, and via SiriusXM will have both access to exclusive radio content (eg Howard Stern) and millions of American cars.

Overnight the competitive landscape is going to change and Spotify will need a strong response. Its own play with existing and successful radio brands and programming could become a competitive essential very quickly. For all the rapid growth in music streaming, radio remains a massive listening activity the world over. Playlists only go so far in taking listening time away from radio. Seems that for lots of people radio still suits them just fine.

All this only covers potential audio services of course, and Spotify will have to act creatively if they are to become new pillars of the business that complement rather than cannibalise their core music offering and revenue, and there are other areas they can explore to create new businesses. Data is a often mentioned favourite, and I'm not discounting that, but selling data about where listeners are to new artists seems like a limited play to me as new artists struggle to make any money in live anyway and an additional cost, however useful, is still an additional cost. And good luck selling data on listening habits from their own music back to the major labels.

But wherever these additional pillars emerge, whatever shape they take, I am convinced that Spotify needs to take inspiration from Amazon’s path for its long term security. Selling access to other people’s stuff is never going to be enough.

Like Amazon, Spotify needs to nurture its core business and never take it for granted, but the true gold? That it will find elsewhere.

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