Image source @ Visual China
essentials:
1. The continuous decline in the macro economy directly affects the user's willingness to pay, and Spotify, which has the same streaming attributes, may be "doomed".
2. Sharing accounts is an urgent problem for Netflix and Spotify to solve, dragging down user growth and revenue.
3. Under the epidemic, Netflix's content differentiation advantage is no longer there, and Spotify's criticized homogenization is better.
4. Under inflation, Netflix's frequent price increases hurt the market, and Spotify's individual membership maintained $9.90 or the last straw.
Last week, Netflix released its first quarter 2022 financial report, with revenue of $7.868 billion, compared with $7.709 billion in the fourth quarter of last year, a sharp slowdown and less than expected.
On the subscriber side, the data is also not ideal. In the first quarter of this year, Netflix had 221.6 million subscribers, compared to 221.8 million at the end of 2021. That means that in three months, Netflix lost 200,000 subscribers. It's also the first time in 10 years that Netflix subscribers have declined.
Chart: Netflix's Annual Subscriber Growth Since 2014 Source@NFLX Subscriber Growth YoY Since 2014 (New Constructs, LLC)
On April 20, the day of Netflix's earnings report, the stock fell more than 36%, and Spotify, which also belongs to the streaming platform, was not spared, with the stock falling by more than 10%.
Industry insiders believe that the loss of Netflix users may be a signal, and the next most likely to face a crisis is Spotify.
First, look at Netflix's response, which said in its earnings report that it underestimated the extent of the slowdown in performance growth and attributed user churn to the following four aspects: first, the macroeconomic downturn is difficult to resist; second, the potential market is uncontrollable; third, the problem of sharing accounts is becoming more and more rampant; fourth, the competition in the streaming media track is intensifying.
The same applies to analyzing and predicting Spotify's current condition and future performance.
Spotify share price performance in 2022
Music payment growth is still optimistic?
Let's start with macroeconomic and potential market implications.
The U.S. Consumer Price Index (CPI) rose 8.5 percent year-on-year in March, the highest in 40 years, according to previous data released by the U.S. Department of Labor. In the context of supply chain bottlenecks, tight labor market supply, and ongoing Conflicts between Russia and Ukraine, it is difficult for the high inflation situation in the United States to improve in the short term.
The continuous decline in the macro economy directly affects the willingness of users to pay.
In early April, a report released by Kantar Consulting showed that under the influence of inflation, british consumers cancelled about 1.51 million subscribers in the first quarter of 2022, and Netflix, Disney+ and Apple TV+ were all affected. The report also notes that about a third of the 1.51 million unsubscribed groups said the reason for the cancellation was to save money.
The negative sentiment of the economic downturn does not seem to have spread to the music streaming market.
According to the RIAA, even during the worst of the pandemic, the music industry continued to grow. Revenue in the U.S. record music industry grew 9.2 percent in 2020, and in 2021, that number has climbed rapidly to 23 percent.
Earlier, Goldman Sachs said in the "Music In The Air" report that the epidemic has passed and the music industry is back on track.
The report said that music streaming revenue will continue to maintain a solid growth trend in 2021, predicting that this revenue will increase by $3 billion compared to 2020 to reach $21.1 billion. Goldman Sachs also predicts that this year, the global music paying users will exceed 500 million, reaching 527 million; by 2023, the global music paying users will reach 697 million; by 2030, it will easily exceed 1 billion music paying users, reaching 1.279 billion.
Image source @ Goldman Sachs "Music In The Air"
Last May, Goldman Sachs also said that by 2030, Spotify will continue to remain the world's first place in terms of the number of paid users with a market share of 33%.
Share the account into a hot potato
At present, Spotify can indeed continue to maintain its global leading position, but whether the number of paid users can continue to grow, there is still a question mark. After all, like Netflix, Spotify is also facing the problem of rampant sharing accounts.
Netflix estimates that more than 100 million users are using shared accounts other than home subscriptions to log in to streaming, with more than 30 million of them coming from the U.S. and Canada. In order to control this phenomenon, Netflix has recently begun to test a series of measures.
In March, Netflix tested in Peru, Chile and Costa Rica, allowing users to add additional sharers to their Netflix accounts for $2 or $3. Netflix said it is still experimenting with the charging model, which is expected to be rolled out globally within a year or so.
The phenomenon of sharing accounts will cause streaming media platforms to be unable to continue to expand their paying user base in the existing market.
Compared with Netflix, which is already in a passive situation, Spotify has earlier solved this problem in the following two ways.
First, Spotify has set up ordinary members and premium members, and on the basis of ordinary members, other functions are constantly added to attract people to a higher membership level. For example, Spotify allows songs to be hidden from playlists, making paid memberships more attractive; it also offers Hulu and Google Home Mini for free to premium members; and only opens modes such as multiplayer sharing music lists to premium members.
Second, since 2019, Spotify has been working on models such as "two-person subscription discount packages" and "family discounts", more than two years before Netflix. Typically, Spotify's loyalty subscription plan costs $9.99 per subscriber; a two-person shared subscription plan, which allows two users to subscribe to the service at a discounted price of $12.99 per month; a family-sharing plan that allows up to six people to enjoy the service at the same time for $15.99 per month; and a student base that only needs to pay a membership fee of $4.99 per month.
Image source @Spotify official website
Among young americans, shared accounts seem to have become the "new normal." Research firm Magid estimates that 35 percent of millennials in the U.S. choose to share streaming accounts and passwords, with younger users (21 and under) sharing accounts at 42 percent.
Not only that, providing more preferential solutions for shared users has even become the culprit of Spotify's user growth and revenue slowdown.
Image source@Spotify official website "New users can get a free 3-month membership experience"
Content homogenization as an advantage?
However, some insiders believe that Spotify's situation will be more turned around than Netflix, and the reasons are also twofold.
Netflix and Spotify as streaming platforms, content has been a constant barrier to its continuous construction.
First look at Netflix, as a film and television streaming media platform, the early stage of heavy investment to buy a variety of high-quality content copyrights, but slowly realized that although it is a platform, but can not just spend money to buy content, not willing to only do a broadcast channel. As a result, Netflix began to spend a lot of money to produce its own content.
Since Netflix decided to bet on self-produced dramas, it is equivalent to moving the cake of the upstream film production company in the industry chain, so Disney, Sony, Warner, etc., these former copyright providers, have begun to establish their own streaming media platforms on their own, so that Netflix cannot monopolize all the high-quality content.
In the early stages of the film and television streaming competition, Netflix quickly formed a differentiated location with self-made high-quality content and maintained its leading position.
Netflix VS. Spotify: Global paid subscriber size growth
The source of the image @Music Business Worldwide
For Spotify, it is only a "channel side" from beginning to end.
The three major record giants have an absolute monopoly position in the music industry, and in order to obtain authorization, Spotify has long stated: "We do not own any interest in music, and we will not play the role of a record company." ”
Therefore, after more than ten years of development, the content experience of music streaming media is still seriously homogenized. Because the way content is produced and distributed, it is determined that any music streaming platform cannot break through in the differentiated competition. Again, it's all $9.90 per month, and the music streaming platform includes almost all of its pop music libraries.
But after the epidemic, Spotify's content homogenization has become an advantage.
Before the epidemic, in order to obtain richer film and television content, users were willing to purchase multiple different film and television streaming services at the same time, but after the epidemic, the user wallet was "tight", and the exclusivity of the film and television streaming platform was equivalent to forcing users to make a choice and only retain the membership service of one platform. So, as the world's largest film and television streaming platform, Netflix has 220 million paid subscribers, and it is not surprising that there have been unsubscribes.
But in the music industry, because the content of streaming platforms is homogeneous, many people have already chosen between Spotify and Apple Music before the epidemic, and the number of users who buy membership services on multiple streaming platforms at the same time is not much.
After the epidemic, the economic downturn, Spotify's previous content richness and content homogenization, at this time, it has become a fortress to prevent the loss of paid users.
In addition to content, another important reason why Spotify's users won't easily churn out in the short term is its ever-changing $9.90 individual membership price.
For Netflix, sluggish or even shrinking paid subscriber growth could become the norm, so the platform has made multiple rounds of price increases in the past two years, and now charges are higher than other mainstream streaming services, which have reached $15.99.
Chart: U.S. Film and Television Streaming Monthly Fee Price Source@Netflix Price Vs Competition (New Constructs, LLC)
In January this year, Netflix also raised the membership fee for monthly subscription users in the United States and Canada, and the increase of $1-2 per month accelerated Netflix's decline in the North American market. Netflix said in its earnings report that the price increase strategy did help increase the company's revenue, but it also led to the platform losing 600,000 U.S. and Canadian subscribers in the first quarter.
This is actually related to the competition between music streaming platforms.
Spotify, which has no intention of planting willows and has not increased the price of individual membership fees, has now gained more user loyalty in the market, and under the impact of the epidemic, the platform has an umbrella.
As it stands, Spotify does have some advantages over Netflix. But this is not to say that the business models of the two are superior or inferior, but in the special period, there are some differences in the anti-risk ability stimulated by different business models.
The epidemic has not completely subsided, and Spotify still cannot be taken lightly.
Resources:
《WITH NETFLIX LOSING SUBSCRIBERS, IS MUSIC’S OWN STREAMING PARTY OVER?》
《GOLDMAN SACHS: UNIVERSAL IS WORTH OVER $50BN, AND GLOBAL MUSIC STREAMING REVENUES WILL RISE $3BN THIS YEAR》
《NETFLIX QUIETLY ADMITS STREAMING COMPETITION IS EATING INTO GROWTH》
《NETFLIX HAS RAISED PRICES AGAIN - HERE'S HOW IT COMPARES TO OTHER STREAMING SERVICES》