Here’s Spotify’s biggest problem – in a Netflix-shaped nutshell

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The MBW Review gives our take on some of the music biz’s biggest recent goings-on. This time, we take a look at Netflix’s revelatory latest quarterly results – in which it posted $2.8bn in revenue and nearly $70m in profit – within the context of recent updates from Apple and Spotify. The MBW Review is supported by FUGA.


That wasn’t the original headline to this article.

The original headline to this article was actually: ‘Netflix is growing faster than Apple Music – despite being 20 years old.’

That’s true (although Netflix’s video-on-demand service didn’t technically launch until 2007 – so ‘despite being a decade old’ might have been a tad fairer.)

Yet in the process of writing up this story, and putting together some research for its arrival, we discovered something more important.

It’s a single graph which explains in a snapshot why Netflix is storming ahead as a profitable subscription company… and why Spotify is not.


But before all of that, a bit of background.

Yesterday, Netflix issued its latest quarterly financial results, for the three months to end of June (Q2 2017).

The big story for the subscription video company was that total users of its platform in the period topped 100m, at 103.95m people.

However, this figure included those taking advantage of its month-long free trial and other freebie accounts.

In terms of those coughing up hard cash, Netflix counted 99m paying subscribers at the end of Q2.

That was up 4.7m on the prior quarter (Q1 17) – an average of just under 1.6m net subscriber adds per month.

This growth helped Netflix post $2.8bn in quarterly revenue in Q2, up 32% year-on-year.

Net profit came in at $65.6m, up 60% on Q2 2016.


How did that subscription growth compare to Apple Music and Spotify’s recent performance?

Apple confirmed last month that Apple Music had surpassed 27m subscribers.

That meant the service added 7m subscribers in the first six months of 2017.

Spotify, meanwhile, last officially updated its subscriber count in March, when it confirmed that it had topped 50m subs – up 10m on the number it revealed six months previously.

Now, take a look at the below: a comparison of Spotify and Apple Music growth numbers, run alongside Netflix’s official updates for each nearest quarter.

As you can see, in the six months to end of June, Netflix added no less than 9.9m paying subscribers (from 89.1m to 99m).

That showed significantly faster growth than the 7m climb at Apple Music. (Apple Music has a neatly comparable business model to Netflix in terms of no ‘freemium’ tier – although Apple’s free trial period is three months long.)

Netflix’s increase so far this year is also in line with the six-month subscriber growth (10m) last seen at Spotify.

These stats got us thinking…


MBW recently reported that Spotify’s average subscriber is now paying around $30 a year less than they were three years ago.

The dilution of this average spend is down to a number of factors.

Some of these are to do with promotions/marketing (mobile phone telco bundles, three-months-for-$1 loss leading deals etc.) and some of them are to do with international expansion (a premium Spotify sub in Indonesia, for example, will cost you Rp 49,990 per month – the equivalent of US $3.80).

If Spotify could have just pushed up its average annual subscriber spend by $8 across 2016 – or $0.67 a month – Daniel Ek’s company would have posted an annual operating profit (as opposed to a $387m operating loss).

Makes you wonder how Netflix’s average subscriber spend might have changed over the same period.

The answer? It’s gone up, as Spotify’s has gone down.


The above comparison needs a little further explanation.

Netflix’s average monthly subscriber spend has been calculated by taking the firm’s total subs revenue at the end of Q4 of each year, then dividing it by the firm’s total paying subscriber count in the same period – and then splitting by three to give a mean monthly average.

Spotify’s has been worked out slightly differently: dividing its total annual subscription revenue with its subscriber base at the end of December in each case.

On Spotify’s side, this gives us an inevitably low-end approximation of Average Revenue Per Subscriber (ARPS), but it’s still within the realms of accuracy.

So, science done… back to ‘Netflix up, Spotify down’.

Here’s the line graph that gave us our headline above. Just look at the difference between 2012 and 2016.


Interestingly, in 2016, Netflix raised its prices – moving up its standard HD subscription charge in the US from $9-a-month to $10-a-month.

Alongside this move, the company brought in an SD subscription tier at $8-a-month, while also launching an ultra-HD tier at $12-a-month.

These new prices, and the opportunity to upsell customers to an ultra-HD/4K package, explains the near-dollar rise in ARPS in the chart above. (In Q4 2016, Netflix’s streaming operation generated $2.35bn, up 41% YoY.)

Recent reports suggest more Netflix price hikes could be on the way later this year.

Remember: Netflix and Spotify are now growing at almost exactly the same rate of 10m net subscriber additions every six months.

But only one of these companies is pushing the average spend of these new customers further and further down.

Guess what? It’s the one that’s losing money.


Screen Shot 2016-04-04 at 13.35.51The MBW Review is supported by FUGA, the high-end technology partner for content owners and distributors. FUGA is the number one choice for some of the largest labels, management companies and distributors worldwide. With a broad array of services, its adaptable and flexible platform has been built, in conjunction with leading music partners, to provide seamless integration and meet rapidly evolving industry requirements. Learn more at www.fuga.com

 Music Business Worldwide

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  • Well, it’s obvious what Spotify has to do – they have to imitate Netflix’s success in producing content exclusive to the platform!

    So, like Netflix, they should seek out producers and writers themselves, make this music exclusive to the platform … perhaps some production houses local to them in Sweden … I’m sure nobody at MBW will find anything to object to in that.

    • dinocelotti

      Indeed, difference is how each party is going about it though.

      • Yeah, the record industry doesn’t feel that Netflix owes it a living.

        As Alan Cross pointed out, these in-house tunes can’t be saving more than $3 million total. The record industry is pishing and moaning over someone who isn’t them getting literally 0.1%.

        Still waiting for Tim’s SEARING EXPOSE!! of the FAKE ACTOR!! Kevin Spacey in the FAKE SHOW!! House of Cards on the FAKE NETWORK!! Netflix. Notice how House of Cards can’t be seen on any other network? VERY SUSPICIOUS!!

        • Tim Ingham

          For what it’s worth, David, I’ve never had a problem with Spotify producing its own content. In fact, I’ve written time and time again that it would be a sensible strategy.

          (The optics of market control in the music business are very different to that in film, which is probably why Spotify is scared of doing so.)

          I do, however, have a problem when companies deliberately obscure the truth in order to improve their commercial standing. Especially when it’s at the expense of all traditional rights-holders – from bedroom artists to major labels.

          Everyone knows Kevin Spacey is also Frank Underwood. Netflix has spent many millions ensuring that’s the case. Your argument is nonsense.

  • magnolia

    All very interesting, but the fundamental here is, I suspect, the basic fact that people want TV drama more than they want music. The vast majority of people already own all the music they want and they can play it anywhere they wish even without a streaming service. Spotify is, for most people, a useful convenience; whereas Netflix is an essential. The demand for Spotify is very likely to be inelastic as its prices rise, whilst the demand for Netflix is only going to get more elastic as they build their content library. ‘New’ music just isn’t that big a mass market and multi demographic pull anymore.

  • dinocelotti

    What do the numbers for Netflix look like further back in time? aka, when Netflix was at the same period in its growth as Spotify is now. (my question is essentially – is this just normal flow of going cheap to bring in users and then raising prices later once they’re already into the platform?).

  • I think this also has something to do with the competitive landscape in music streaming.

    Netflix, in its competition with other services, doesn’t need to drop its price, because of all its originals / exclusives. For music streaming services, it’s harder to compete on catalogue, since so much of it is going to overlap by default.

    Also, for music services it’s important to build habits with users — it’s easy to switch from one video services to another for a month, but if you’ve been using Spotify for a few months, it’s painful to make the switch to another company.

    Therefore I think the ARPU drop is the result of a competitive strategy necessary in music streaming’s maturing market. Once the market’s been divided (and some players pushed out), we should expect ARPU to rise again.

  • seth keller

    Regardless of the delivery system, it’s a mistake to compare visual and audio mediums as apples to apples. We modern humans are visual people. It’s why everyone wants HD TV but virtually no one cares about HD audio.

    Also, since the 1950s, we in the Western world have been conditioned to “watch TV” when we’re bored or lonely or want to turn off our brains or want to be entertained. Now this is generalizing, but it’s safe to say the vast majority of people watch much more content than they listen to.

    Lastly, the number of actual “music fans” in the world is relatively small compared to the number of people who are fans of TV and movies. Yes, music creates more of an emotional connection in us than TV or films and in large groups can have a nostalgic or bonding effect, but many more people have common experiences with TV and movies–even in (or maybe because of) this age of fragmented media.

    I agree that raising the average subscription price would be a great idea for Spotify to help it turn a profit, but expecting it to keep pace with Netflix in wooing subscribers is unrealistic.

  • Paul C

    Not sure what the actual conclusion was of this article… was there a point to it? The headline doesn’t seem to match anything in the article itself (and oh wait the article is “sponsored” as well..but I clicked on it so thats its done its job)

    Aside from the whole cultural/social difference of listening to music and watching television, Netflix and Spotify are completely different business models in completely different industries. In any digital business the only way to succeed is to scale. That’s it. Scale, Control your product or content costs at a fixed price, and then scale out the subscribers. That’s what you can’t do in music. The more subs you have the more you have to pay out to labels and rights holders. You own nothing apart from a pipe. Spotify can have 500 million subs and they’ll still have the same issue. Netflix can control its content costs and then scale out its subscriber growth. Any content it produces itself it owns, which is financially amortized on its books (as well as having a valued asset) giving benefit from a financial standpoint. Any licensed content it pays for outright and then amortizes over the term of the license. So buying 10 films from a studio or producer on Netflix will cost them a one time fee of $50k with no rev share, no royalty, nothing. Flat outright buy. Once it covers its acquisitions costs, tech, marketing etc the rest is profit margins.

    You need to sort your reporting out guys. MBW used to be a good place to come for industry news but post Sony/Believe fake news piece (and others) you’re becoming a bit click-baity especially with your sponsored posts which seem to only be the reason you write content these days.

  • The real difference is that Netflix owns a lot of it’s content and when Spotify invests in its own music, the world goes in scandal mode

    • Spotify hid, Netflix operated in plain sight….

      • I think that even if they did in plain sight, as you said in another comment, people would approach it differently because it’s music and still be up in arms. Youtube invests in creators and there’s no drama because it’s video. If Spotify had a record label, people would cry favoritism. But when major labels control playlists with huge numbers and use them to game the system, small creators are blind to that

  • Netflix also owns a lot of content + yanks content down at any given moment so they don’t have to license it indefinitely. That helps to keep their costs from getting crazy out of control. People accept that movies and TV shows can come and go, but they assume that music should always be around because we play it everywhere. I get what this article is pointing out here, but it’s important to remember how consumers approach these different forms of media.

    • occono

      Most accept it with Movies. With TV shows it causes a fuss, because there’s no weekly schedule so lots of people can be halfway through something at the time.

  • Paul C

    Aside from the whole cultural/social difference of listening to music and watching television, Netflix and Spotify are completely different business models in completely different industries. In any digital business the only way to succeed is to scale. That’s it. Scale, Control your product or content costs at a fixed price, and then scale out the subscribers. That’s what you can’t do in music. The more subs you have the more you have to pay out to labels and rights holders. You own nothing apart from a pipe. The labels will never allow any type of streaming service to make more of a rev share than they do, hence why streaming services end up forking over most of their revenues to the labels. Spotify can have 500 million subs and they’ll still have the same issue. Netflix can control its content costs and then scale out its subscriber growth. Any content it produces itself it owns, which is financially amortized on its books (as well as having a valued asset) giving benefit from a financial standpoint. Any licensed content it pays for outright and then amortizes over the term of the license (sometimes up to 5 years, and exclusive). So buying 10 films from a studio or producer for Netflix will cost them a one time fee of $50k with no rev share, no royalty, no ongoing publishing costs (which is also why there is not much music content on Netflix apart from docs from studios, because the labels want a piece of Netflix’s subscription revenue and won’t do a per title fee), nothing. Flat outright buy. Once Netflix covers its acquisitions costs, tech, marketing etc the rest is profit margins.