Spotify/Netflix: music streaming is proving sticky, but not necessarily more profitable

Video streaming businesses are stuck in the doghouse. Viewers, freed from lockdown leashes, go out more and watch less TV at home. Penny pinching consumers are becoming pickier about subscription services. Netflix lost nearly 1mn subscribers in the second quarter, after losing 200,000 in the first quarter.

Improbably Spotify has bucked the trend. The music streaming group ended the second quarter with 188mn paying subscribers. That is a 14 per cent jump from the year ago period, just topping analyst expectations. Total users — which includes freeloaders — also trounced forecasts at 433mn. The figure is expected to reach 450mn in the current quarter, including another 6mn paid subscribers.

Spotify gets stick for its lack of differentiation. The group sells the same product — access to a catalogue of 82mn songs — as cash-rich tech heavyweights Apple, Amazon and Google. This makes raising prices hard. Its US premium subscription still costs $9.99 a month, the same as when it launched in 2011.

But this weakness may have become a bulwark against a consumer exodus. Listeners stay with Spotify because they only need one music streaming service to access all music. Given the different content on offer, the same users may well cancel Netflix if they also subscribe to other TV streaming services like HBO Max or Disney Plus.

But stickier music demand does not mean profits. With just three major record labels controlling most of the music industry, Spotify has little power to squeeze down variable costs. While it made €9.7bn in revenue in 2021, it also paid out $7bn in royalties. It ended last year with a net loss of €34mn.

Advertising revenue — small but fast growing for Spotify — is vulnerable to the slowdowns seen at other online tech companies.

Investors’ wariness of lossmaking tech companies is reflected in Spotify’s depressed share price. At $118, these are worth just a third of their 2021 peak. Spotify must extract more money from loyal subscribers to change that.