Thread by @Ankurocious

Business Model : Netflix vs Spotify

You'd think that both of them would have pretty similar business model, apart from the fact that NF is a subscription-only video streaming platform while SPOT is a freemium audio streaming platform

But there's more to it!

A thread (1/n)

1. NF licenses content copyrights from the producers and also produces its own content – NF Originals – which constitute 35-40% of the library.

SPOT licenses content copyrights from record label companies (2/n)

The relationships between producers and distributors are different in music and video. The music industry is an oligopoly, while, video industry is fragmented and spread out among a number of studios, reducing latter’s pricing power (3/n)

Thus, SPOT has low leverage. The Big 3 record labels (Sony, Universal, and Warner) own 80% of world's music. If SPOT upsets any of them (by negotiating hard/being a record label itself), it could lose access to that music. Spotify pays >75% of revenues to music labels (4/n)

Contrasting this with NF, which has aggressively expanded its ‘Originals’ library. This helps it maintain a high pricing power and gross margins (39%) vs. a commoditized music business model of SPOT. The graph represents NF's produced content as a % of total content (5/n)

2. While NF has high fixed costs on licensing fees. Marginal costs are almost negligible. So, every time a customer streams a show there is no incremental cost to NF. It can let you binge-watch shows for unlimited time duration (6/n)

While SPOT pays a royalty to music labels for every stream, so every time its customer plays a song, it’s also increasing its costs. The more you use the service, the less money they make off of your subscription !!(7/n)

3. From consumer's POV, NF has a leeway in that it doesn't have to carry every show/movie that’s ever been created in its catalogue as users are fine subscribing to multiple video streaming services (Hotstar, Prime). (8/n)

While SPOT is expected to contain the entire music library of every song in existence, more so if the user is a premium subscriber. (9/n)

This gives NF a bargaining power and ability to walk away if producers charge exorbitant licensing fees. However, when SPOT is negotiating with a music label, both sides are aware that it needs that label’s content in order to remain a viable option for consumers. (10/n)

This reflects in their numbers as well - NF ARPU has grown at 5% CAGR over past 5 fiscals backed by increase in prices. SPOT has much lesser pricing power with ARPUs lingering between $55-$60 (11/n)

SPOT is now trying to pull a NF - aggressively creating owned podcast content through acquisitions (Gimlet) and signing artists exclusively (Joe Rogan), to build a competitive advantage.

Will they succeed? Only time will tell (12/n)

@finbloggers @FinMedium @finshots @Finception__ @ParikPatelCFA @AswathDamodaran

#netflix #spotify #businessmodel #equity #FAANG #business #tech