But the week’s drubbing wasn’t a new development. Since the beginning of August, the day after the company’s second-quarter earnings were released, Spotify shares have fallen 27.6%, knocking $7.7 billion from its market value. Nearly the entire decline came in the last 12 trading days dating back to Sept. 12.
Key Takeaways From This Article:
(1) Content owners will benefit from streaming competition.
(2) Streaming companies are losing value as competitive pressures have heated up in 2019.
(3) Pure-play streamers are at a disadvantage to tech companies and film & TV studios that operate in consumer products, movie theaters or broadcast television markets.
Spotify can take the most credit for bringing subscription music to Europe, North America and, later, Latin America and Asia. The 11-year-old Swedish company follows the time-honored strategy of the software-as-a-service startup: grow at nearly all costs, grab as much market share as possible, don’t turn a profit -- and it gives more than 70% of its revenue to rights holders. Spotify is still growing quickly; at the end of the second quarter it had 108 million subscribers. But analysts’ average estimate was 108.5 subscribers, according to Bloomberg, and on the low end of Spotify’s expected range.
All of a sudden, growth looked like a problem. Rich Greenfield, analyst and partner at LightShed Partners, tells Billboard that even though the streaming space is still young, the question for Spotify is, “Why aren’t they growing faster given the lack of competition outside the U.S.?”
Tencent Music Entertainment has different problems. Chinese antitrust authorities are investigating the company’s exclusive licensing deals with the three major music groups, Universal Music Group, Sony Music and Warner Music Group. Tencent Music has a side business that provides white-label licensing to third parties, and authorities are determining whether the prices it charges amount to anti-competitive behavior. Outside of government intervention, Tencent Music has relatively few issues. It dominates the Chinese market with three services -- QQ Music, Kugou and Kuwo -- and China is a localized music market that’s a barrier to entry to Western music services. Nevertheless, Tencent Music shed nearly $1 billion of its $21 billion market value when the antitrust news reached investors; since Aug. 1, its market value has fallen by $2.2 billion.
In contrast, investors are bullish on content owners’s stock. Although not a pure-play content company, Vivendi, the parent of Universal Music Group, has gained more than 18% this year. Comcast Corporation (owner of studio NBC Universal) and AT&T (owner of WarnerMedia) have gained more than 30% this year. The Walt Disney Company is up 19%. (Comcast, AT&T and Disney are each planning their own video subscription businesses. See below.) Hasbro, which acquired Entertainment One in August, has gained 47% year to date.
Since its battle with Blockbuster a decade ago, Netflix’s performance recalls the 1985 album by metal band Megadeth, Killing is My Business...and Business is Good. The company can take credit for causing, or at least helping to cause, consumers’ decisions to unsubscribe from cable in exchange for online options -- including Hulu and online subscriptions by premium networks like HBO and Showtime.
Yet Netflix shares have fallen 26.2% through Monday (Sep. 30) since releasing disappointing growth numbers on July 17. Lower-than-expected subscriber growth in the second quarter sent Netflix shares down more than 10%. The company blamed the shortfall on weak original content and customer defections due to a price increase, and doesn’t believe competition was a factor. But throughout the year, Netflix investors could see the steady flow of information on new market entrants: NBC Universal, Disney, WarnerMedia and Apple are throwing their weight behind video subscription services with original and owned content.
Taken together, these three pure-play streaming companies -- Spotify, Tencent Music and Netflix -- have fallen an average of 19% in the third quarter, a cumulative loss of $53.6 billion in market value.
Spotify has two problems that start with the letter A and have market values in the $900 billion-$1 trillion range: Amazon and Apple. Kevin Rippey, co-head of Internet Equity Research at Evercore ISI, cites both tech giants in his assessment of Spotify. “My overarching view is it’s a pure play in a loss-leader category,” he says. “They’re trying to make money in a sector where its primary competitors are trying to operate at break-even at worst.” Apple sells high-margin hardware (and increasingly cloud-based services). Amazon sells every consumer good imaginable -- a list that now includes fresh produce and clothing.
Rippey, who gives Spotify an “underperform” rating, sees parallels in the wearables and consumer-hardware categories. “So long as you have the largest tech players in a market,” he says, “these products aren’t able to drive attractive margins.” On June 24, Rippey lowered his price target from $125 to $110 -- the lowest on Wall Street -- while Spotify was still trading at $150.
Wells Fargo analyst Steve Cahill, in a note to investors, said Spotify will continue to add subscribers but suffers from “limited pricing power due to deep-pocketed competition.” Although some experts believe the basic subscription price could increase a dollar or two above $9.99 per month -- at least in the U.S. -- its larger competitors have less incentive to raise standard prices. An unknown variable is Spotify’s move into podcast distribution and content. Will Spotify become more attractive and stickier with the addition of podcasts? The company has not released information on podcast users or listening habits.
Even so, companies can charge more by giving subscribers greater value. Last week, Amazon announced a new tier, Amazon Music HD, that provides high-quality audio for $14.99 (or $12.99 for Prime members). Audiophile-quality audio isn’t a mainstream product, especially in markets with relatively little broadband access. That Tidal and Qobuz were alone in the space before Amazon hopped in speaks to the public’s demand. But as more people gain access to faster Internet service, and without obvious alternatives to charge higher prices, audio quality will take on greater importance -- and Spotify and Apple Music will be playing catch-up.
Netflix, too, is facing a host of challengers, which have shown their seriousness with their checkbooks. For its upcoming HBO Max, WarnerMedia reportedly spent more than $1 billion for all 12 seasons of The Big Bang Theory (including an extension on cable syndication) and $425 million for the rights to Friends for five years. NBC Universal paid $500 million for five years of The Office (the U.S. version) for its low-cost service, Peacock. And Netflix will shell out more than $500 million for streaming rights to all 180 episodes of Seinfeld. “It’s either buy it now or it’s gone -- we’re gearing up for war now,” a studio chief told The Hollywood Reporter. Apple TV+ will launch with expensive, original programming and a $4.99 monthly fee. Disney’s subscription service will launch mid-November priced around $6 or $7. Again, competition has been good for content owners.
In spite of its struggles lately, Netflix is still worth around $125 billion and owns the video subscription category. With Peacock, Disney+ and other arrivals, movie and TV distribution will go through more disruption. The losers will be cable and satellite TV companies that bundle dozens to hundreds of channels, says Greenfield: “We think its very early days for streaming and lots of these services will be successful.”
Spotify, too, is backed by positive factors. It benefits from the broad acceptance of subscribing for digital content. Ten years ago, consumers showed little interest in paying to access music. Five years ago, the access-versus-ownership decision remained in favor of downloads. U.S. recorded music revenue from paid subscriptions were $770.3 million in 2014. This year, U.S. consumer spending on subscription should exceed $6 billion while global growth could exceed 30%.