Below I include a recent article from Barron’s Magazine, presenting the financial challenges to Spotify, the dominant music streaming service. Here’s why I believe it’s dead:
Spotify [is] a “pure play on a loss-leader category.”
Streaming music has been priced as a loss leader, in other words the costs of streaming music exceed what platforms receive from subscribers in revenue. This is not atypical for networking platforms as the platforms hope to monetize the data these networks create through their users. Of course, a network does not really become valuable until it is of dominant size and able to maintain continued user engagement. Facebook is the one we are most familiar with. And Facebook did not become profitable until it had been in operation for 6 years and experienced phenomenal user growth. Also, FB has an ad revenue model (more on this later).
The problem with Spotify is that its major product line loses money, a lot of money. Streaming unlimited music costs a lot more than $10/month per subscriber. But raising the price merely loses subscribers, and customer acquisition costs (CAC) on the margin often increase over time. So, the desperate strategy is to find a way to generate revenue from the data sharing network.
But Spotify faces some serious competition: Apple, Amazon, and Google. All three of these tech titans can afford to lose money on streaming for a long time, much longer than Spotify can stay solvent or keep the support of its investors. Spotify is a dead man walking. Its subscriber base will be auctioned off before it depreciates to zero. Or not.
For example, how does Spotify compete with this?
Facebook may be next
I expect the revenue squeeze will also hit Facebook’s main advertising model. Digital advertising is dominated by Google and Facebook. Google monetizes search routines it gathers every time you invoke its search algorithms. Facebook monetizes social sharing and likes. Each then sell access to this data to third-party advertisers. Now, search is a more robust indicator of interest than likes, so Google’s ad reach and keyword auctions offer greater value than FB “likes.” FB tries to increase its value through social network dynamics, but there is so much noise there that there’s a real question how much that is really worth in terms of advertising conversions.
But both platforms need to look at the big shadow hovering just over their shoulders and bearing down on their ad models. Amazon knows what people buy on its platform, which reveals a far more robust indicator for what people will buy again. Access to Amazon’s data will be worth that much more than FB and even Google. I expect FB has the weakest attention model and thus Amazon and Google will continue to eat into its ad revenues. I’m sure FB is working overtime trying to figure out how to pivot and leverage its massive user base. Libra Coin is a clear indicator of that. FB is hoping to use crypto tokenization to monetize peer-to-peer finance and banking. Unfortunately it faces some serious regulatory opponents in the central banks and the commercial payments industry. But I suppose FB has much cash to burn trying to find its next lily pad.
The real problem with the scramble for data real estate is that there are only so many hours in a day. On top of that, users and consumers are becoming cognizant of the value of their personal data and will be less inclined to give it away for free. This blows up most of the “mobile app” bubbles vying for attention in the digital economy. The future, if one is to believe in technological progress, is a far more decentralized digital universe where users reap much more value from the data they create and share, and successful platforms will need to deliver much more value than a free app for their users.
The question for us all is who will eat whom on the way to this future? (If we believe Elizabeth Warren, she will be eating them all. Politics is always a wild card.)
Spotify Stock Has Had a Miserable 6 Months. Wall Street’s Optimists Are Wrong.
By Avi Salzman
Barron’s October 5, 2019
A miserable few months have made Spotify’s stock as dull as elevator music. Now, some analysts think the stock is beaten down enough that a rally is coming, and Wall Street is ready to groove on the remix.
Spotify Technology (SPOT) has fallen 17% since Barron’s wrote a skeptical cover article on the company (“Spotify Stock Is Risky Because the Music Industry Isn’t Changing Fast Enough,” April 19). Short interest on the stock, which was below 3% for much of the year, is now above 5%.
Yet two formerly bearish analysts have recently shifted to a more neutral stance, on the theory that the bad news is already in the stock’s price.
Spotify is the global leader in streaming music, and it passed 100 million paying users this year. Still, doubts have grown on Wall Street about the company’s ability to sustain subscriber growth.
In August, Spotify started giving new premium users three free months of service, up from one month, which “has supported fears of negative subscriber trends,” writes Credit Suisse analyst Brian Russo, one of the analysts who has become incrementally more positive about the shares. The company has launched other offers, too, including six free months of Spotify for people who buy an Xbox Game Pass.
Investors will have to wait until Oct. 28, when Spotify reports third-quarter earnings, to find out whether the generous offers are cutting into its margins. For now, the stock still seems stretched. Its market cap is $21 billion, more than the $19.1 billion that the music industry took in worldwide in 2018—and most of that money goes to labels and artists.
Spotify, meanwhile, is expected to lose $1.92 a share this year; in April, the loss had been projected to be $1.48. Kevin Rippey, an Evercore ISI analyst, calls Spotify a “pure play on a loss-leader category.”
Spotify is looking at new revenue opportunities. The company has branched out into podcasting, with plans to spend as much as $500 million this year on acquisitions in the space. But there is no obvious payoff from those purchases; the podcast ad market in the U.S. is still below $1 billion. Spotify didn’t respond to requests to hear the company’s case from top executives.
Spotify leads rivals like Amazon.com (AMZN) and Apple (AAPL) among young customers, but it will probably need to find older fans in developed markets to hit Wall Street targets, Russo argues. That could be tough. Amazon’s smart speakers have helped it sell music packages to older customers and will make it difficult for Spotify to expand in that market, Russo says.
And Spotify’s rivals are increasing their offerings. Google-owned YouTube Music is promoting personalized playlists to help users find new music, an area that has been one of Spotify’s biggest strengths. Amazon has released a high-quality music service that costs $12.99 for Prime users—a small premium to Spotify’s $9.99—offering listeners CD-quality sound, or better. Unlike Spotify, those companies don’t depend on music to make money.
Because of the competition, Russo expects Spotify to grow disproportionately in emerging markets, “where disposable income is lower and monetization, both in terms of subscription and advertising, is more challenging.”
Spotify stock may well rise when the company reports third-quarter numbers, given the bearish setup in the market. But for it to become an attractive longer-term investment, it needs a clearer path to profitability.
Unfortunately, this is what digital media has delivered so far.
The inherent weaknesses of data-driven analytics and algorithms. Especially when it comes to aesthetic content.
As we can read from this article and Facebook’s internal management debates, Web 2.0 (of which the GAFA companies are the archetypes) is built on a data land grab. It’s rather similar to the actual land grab that the European powers battled over for the New World, then with the colonization of Africa and Asia.
Data is now a valuable resource that has been priced up there with land and capital. Naturally, the tech oligopolies and their startup wannabes all want to grab as much as possible. And who are they grabbing it from? The network users of course.
Web 3.0 is all about democratizing the value and monetization of personal networked data. It’s about decentralized ownership and control, much like the desire to own and control the fruits of one’s labor that ended slavery. Web 3.0 is the future, because Web 2.0 is unsustainable.
Good, thorough, and l-o-o-o-o-ng article on data privacy issues, legislation, and network value. From the NYT Magazine. Read about what’s being done to you behind closed doors…
Almost by accident, though, Mactaggart had thrust himself into the greatest resource grab of the 21st century. To Silicon Valley, personal information had become a kind of limitless natural deposit, formed in the digital ether by ordinary people as they browsed, used apps and messaged their friends. Like the oil barons before them, they had collected and refined that resource to build some of the most valuable companies in the world, including Facebook and Google, an emerging duopoly that today controls more than half of the worldwide market in online advertising. But the entire business model — what the philosopher and business theorist Shoshana Zuboff calls “surveillance capitalism” — rests on untrammeled access to your personal data. The tech industry didn’t want to give up its powers of surveillance. It wanted to entrench them. And as Mactaggart would soon learn, Silicon Valley almost always got what it wanted.
Through the Obama years, the tech industry enjoyed extraordinary cachet in Washington, not only among Republicans but also among Democrats. Partnering with Silicon Valley allowed Democrats to position themselves as pro-business and forward-thinking. The tech industry was both an American economic success story and a political ally to Democrats on issues like immigration. Google enjoyed particularly close ties to the Obama administration: Dozens of Google alumni would serve in the White House or elsewhere in the administration, and by one estimate Google representatives visited the White House an average of about once a week.
Mactaggart … faced an American political establishment that saw the key to its future in companies like Google and Facebook — not because of whom they supported but because of what they did. The surveillance capitalists didn’t just sell more deodorant; they had built one of the most powerful tools ever invented for winning elections. Roughly the same suite of technologies helped elect Obama, a pragmatic liberal who promised racial progress and a benevolent globalism, and Trump, a strident nationalist who adeptly employs social media to stoke racial panic and has set out to demolish the American-led world order.
In the end, not a single lawmaker in either chamber voted against the compromise.
Political power is a malleable thing, … an elaborate calculation of artifice and argument, votes and money. People and institutions — in politics, in Silicon Valley — can seem all-powerful right up to the moment they are not. And sometimes, … a thing that can’t possibly happen suddenly becomes a thing that cannot be stopped.
The promise of blockchain is to disrupt this Monopoly game.
Nice article on Medium:
I would add that the major problems for artists in the digital age stem from the explosion of new supply of content. This drives the price down and the search costs of discovery up. The failure then becomes that artists can’t find their audiences and consumers can’t find the content they desire. For poets this means finding an audience not necessarily to sell poetry; rather more important is to find readers and appreciators of their poetry.
Large centralized network servers based on algorithms can’t solve this problem without commoditizing content and delivering the most popular but mundane content churned out by those metrics.
We need to empower the human by connecting the creative.
Is It Time to Break-Up Big Tech?
Uber comes along and ends the rainy days and nights of waving fruitlessly at cabs with flashing “off duty” signs, and governments respond to pressures from threatened incumbents by making life difficult or impossible for the welfare-enhancing newcomer.
Amazon spares consumers the chore of driving to malls, picking through racks, and perhaps finding a tolerable substitute for what they really, really want, and the tax man and the regulator come sniffing around.
Google puts the world’s intellectual output at everyone’s disposal, Apple puts enormous communicating power in citizens’ pockets, and Facebook links far-flung people with similar interests, only to find that the power their successes convey prompts governments to search for new constraints. And a cut of the revenues.
Unfortunately for the tax collectors, they are forced to play whack-a-mole with the Internet giants who can always find another way of moving profits from the greediest of their pursuers. Until the tax men accept the fact that they will always be one step behind the lawyers and accountants who shield their clients’ well-gotten gains from the pursuers, the profit-mole will never get whacked.
The obvious solution is to tax revenues in the country in which they are earned—it is a lot easier to total up sales receipts, and tax them, than to try to estimate the reasonableness of fees an international company charges itself for use of its own intellectual property, lodged in the sunny Caribbean or rainy Ireland.
But the taxation problem is the least of the worries of what we might call this era’s Fab Four—Amazon, Apple, Google, and Facebook. (The New York Times’ Farhad Manjoo includes Microsoft in what he calls The Frightful Five). They are now seen by critics as simply too big and, with the exception of Apple (which faces stiff competition) possessing market power that exceeds that of companies that competition authorities in days past dismembered—Rockefeller’s Standard Oil being the most notable of the old giants cut down to size by regulators.
The solution being mooted in academic seminars and the halls of Congress (when its members are not busy dodging presidential tweets) is utility-style regulation of the prices and the soaring profits of these companies. That solution is still a gleam in the eye of some politicians, right and left: they are reluctant to take steps that might curb the activities of businesses enormously popular with the public. But it is now a policy goal of companies who compete with the Internet giants on what they deem an unlevel playing field. At minimum, they are turning to the courts for relief: Yelp, the site on which you can express your pleasure with, or hurl brickbats at, businesses you patronize, has filed an antitrust action against Google, making much the same claims as produced the search-engine’s creator whopping fine in Europe.
Regulation is a tempting goal for policy makers here and in the European Union who feel it essential that they gain control over how people will use the internet to shop, travel, date, learn, and interact in the future. This is especially compelling for E.U. regulators, who feel that unless they somehow control the business practices of leading Internet companies the (ugh) Americans will have too much power in Europe.
I have been involved in regulation for enough decades to know the slowing-to-deadening effect regulation can have on innovation and customer service—not as bad as unregulated monopoly, but nowhere near as good for consumers as competition. Try hard to remember when the pre-break-up AT&T would not allow you even to attach a shoulder cradle to your phone—it being classified as a “foreign attachment”—and compare that with the range of communications devices available since the monopoly’s break-up. Or consider the quality of service you get from your quasi-monopoly cable company, at bundled prices bordering on the absurd, which is why, given the chance, millions are cutting the cord as competition rears its lovely head in the entertainment business.
Better to nourish competition in these new markets than to call in the regulators. Which is what the European Commission says it is trying to do. It has decided that Google has a dominant position in search—a finding with which the company, which I once served as a consultant, disagrees—and fined it $2.7 billion for favoring its own services when consumers search for maps, or shopping sites.
That’s a rather standard application of competition policy to the activities of companies found to be using their power in one market to disadvantage competitors in others. The EC decision raised hackles at Google’s Mountain View, California headquarters, and raised eyebrows in America because of the size of the fine and because once again the Brussels crowd has targeted an American company. Whether the newly installed Trump antitrust team will agree with the EC that Google possesses sufficient market power to warrant similar action is uncertain.
Amazon presents a different problem. It is big and getting bigger. The new $5 billion ancillary headquarters for which it is site-searching will employ a staff of 50,000 workers, supplemented at Christmas by some of the 120,000 Amazon recruits to cope with the Christmas rush. Some 238 cities and regions are offering gifts of taxpayer cash in the hope of persuading Jeff Bezos that his company will live happily ever after in their domain. Amazon now controls half of all internet retail business. But only 8 percent of all retail sales are transacted over the Internet, meaning that Bezos’ half represents only 4 percent of all retail sales. As Manjoo puts it, “Amazon . . . is still a minor satellite compared with Walmart’s sun.” So what’s the problem?
For one thing, that 4 percent share of the total retail market can mask Amazon’s devastating effect on specific market segments: think what has happened to bookstores faced with Amazon’s huge inventory and low prices. More worrying, Amazon has the power to strangle a potential rival in their cradles. Shortly after Blue Apron took its food-kit service public, Amazon filed to trademark a copycat service. Blue Apron shares immediately plunged 12 percent on investor fears that Amazon would eat Blue Apron’s lunch. A possible remedy would be to consider an established antitrust interdiction that, in certain circumstances, prohibits pre-announcements that contribute to the maintenance of market power.
Better that than having a utility-style regulatory commission deciding whether Prime service is fairly priced, or whether plans to provide customers with a special lock and Amazon employees with a camera-monitored key so they can deliver packages when the customer is not home is a good idea, rather than leaving it to customers to decide.
For now, I leave it to the political class to cope with the power these companies seem to have over the nature and reliability of the news they purvey. And to the sociologists to take on Facebook, and the cultural effects of all those friendships formed without even so much as a face-to-face hello, air kiss, or man hug.