Spotify wants to create a video streaming service and is seeking a partner to help fund and create original programming, according to a report Monday. A lot of things are printed about Spotify. Some of them are pretty odd, frankly. This one isn’t all that far-fetched.
A Spotify spokesperson had no comment on Business Insider’s report. CEO Daniel Ek wouldn’t rule out the possibly of jumping into video in a recent interview with CNET but said “right now, we’re all focused on music.”
A Spotify video subscription service might not fit the company’s current time horizon, but there are numerous reasons why the company could choose to have video in its long-term plans:
1. Spotify is in the technology business more than it is in the music business. Once is has a music platform and the right relationships through music — especially with television manufacturers and cable providers — it can leverage many of those relationships to its benefit for a video platform. Case in point: competing service Rdio has already launched a private beta version of its on-demand video service, Vdio, in Europe and the U.S.
2. The paid music subscription market is still immature. On the other hand, there is a proven demand for subscription and on-demand video. Netflix alone had 30.3 million paid subscribers at the end of 2012. That’s 50% more subscribers than all of the music subscription services in the world (according to the IFPI’s Digital Music Report 2013).
3. People love to watch TV and movies. The average American watched television for 5 hours and 14 minutes per day in the fourth quarter of 2012, according to Nielsen’s latest cross-platform report. It’s no wonder about 84% of U.S. households don’t mind paying an average cable television bill in excess of $83 a month. (At $7.99 per month, Netflix’s streaming service is a relative bargain even if it doesn’t have new releases and content from all studios.)
4. A company that licenses content needs to follow the market. Video streaming may have similarly challenging licensing deals, but there would be greater financial opportunity in a larger video market. Netflix’s U.S. streaming business had a 16% contribution profit margin (profit contribution as a percent of revenue) on revenue of $2.2 billion in 2012. That level of profitability is achievable only if tens of millions of subscribers can be acquired. The video market has proven it has many tens of millions of subscribers.
5. Spotify’s strongest markets are in Europe, where Netflix has less of a presence than it does in the U.S. Just 4.9 million of Netflix’s 25.5 million paid streaming subscribers at the end of 2012 came from outside the U.S. Amazon-owned Lovefilm operates in the U.K., Germany and Scandinavia. Lovefilm announced it had 2 million subscribers in January 2012.
6. Exclusive content is more of a point of differentiation in video than in music. HBO, Netflix and other video companies are able to generate subscription revenue based on their ability to create exclusive programs that people want to watch but can’t get anywhere else. HBO has done this with “The Sopranos” and “Game of Thrones,” among others. Netflix recently debuted its first original programming, the political series “House of Cards.” But exclusive content in music tends to be exclusive only for a short period of time because the services merely license the content rather than own it outright. An artist that gave a perpetual exclusive to any single subscription service would risk alienating fans.
Don’t expect Spotify to take on Netflix any time soon. The company still needs to improve its music platform and expand into new markets. But why should we think Spotify would not aim to become something bigger someday?