Spotify Isn’t Netflix—For Better Or Worse

Shares of both streaming giants have tumbled in the past month following negative Netflix news. Wall Street doesn’t seem to get that they're different.

May 18, 2022

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I’ll admit it: I spent years mooching a Netflix subscription from a significant other’s ex-boyfriend’s parents. Don’t judge, you’ve done something equally ignominious, and so have millions upon millions of others. So when Netflix recently “announced” that password sharing eats into profits, I was surprised to see the stock plummet 35% in a single day.

To be fair, Netflix shared some additional gloomy news at the same time: it lost over 200,000 subscribers in the first quarter of 2022. Stingy Millennials weren’t the only culprit, as increased competition from the likes of Hulu and Disney+ took a toll, too. Netflix’s stock has continued to tumble to a range not seen since 2017, with nearly $80 billion in shareholder value evaporating this past month alone.

Spotify’s stock has followed suit, shedding a quarter of its value over the past four weeks as it flirts with all-time lows—and, to me, that’s a little harder to explain. Though both companies are streaming giants, their models are vastly different. Just as that reality made it hard for Spotify to fully emulate Netflix when the latter was flying high, it should serve as a silver lining in the current climate.

One might suggest the biggest difference between the two services is Spotify’s ad-supported free tier, but that’s rather simplistic. On a more fundamental level, the Scandinavian service is successful because it offers users an unlimited buffet of content. Sure, the company has had its issues with artists leaving on occasion, and sometimes you can’t find new albums immediately. But you can generally count on having access to just about any sort of music you desire, unless you have deeply esoteric tastes.

Netflix, on the other hand, doesn’t even pretend to have an infinite selection. It dominates by paying tons of money to acquire and/or produce blockbuster hits. Last year the company poured $17 billion into content, casting a wide net of bets. And when they pay off, they pay big: Netflix shelled out just $2.4 million per episode to produce Squid Game, which generated nearly $1 billion in value.

That sort of math means Netflix has a higher ceiling than Spotify, but also a lower floor: Netflix is much more vulnerable to challengers, as any streaming service with a hit show can steal subscribers, and Netflix has to keep spending in order to keep funding hits. Spotify is evergreen, and increasingly so. Nearly 70% of music consumption last year came from catalog tracks, up from 65% in 2020.

Netflix, Spotify and friends (Photo by Silas Stein/picture alliance via Getty Images)

Of course, there’s a reason Spotify has access to all this music. As Editor Nick and I wrote in our old Forbes story “Revenge of the Record Labels,” the majors renewed their grip on the business by demanding billions of dollars in equity from Spotify and other startups as a cost of doing business, and profited handsomely from the IPOs of the late 2010s.

That strategy grew out of the music industry’s realization that it missed an opportunity with Napster, which conditioned consumers to expect an unlimited buffet of free music.

Instead of taking control of the upstart service, big labels and artists sued it into oblivion and then had to deal with an army of clones. But consumers never really got used to an unlimited buffet of film or TV, limited in large part by video files too massive to download quickly.

These days, Spotify has been trying to emulate Netflix by going all-in on the podcast business, shelling out huge sums like the centimillion-dollar total it took to bring on Joe Rogan (and the accompanying headaches). Now the roles are reversed, as Netflix has announced plans for an ad-supported tier.

In the long run, both Netflix and Spotify are still in good positions: they’re the leaders in their respective fields, and their brand recognition still goes a long way (have you ever heard anyone say they want to Paramount+ and chill?). That sort of goodwill is especially important in a crowded field.

While Spotify has its own challenges—constantly renegotiating with record labels, navigating the relatively new podcast business, and facing a growing backlash from musicians and the public at large—it still has the advantage of offering nearly infinite choice. There’s little incentive for users to switch, plus there’s the backstop of a music business increasingly reliant on Spotify and its ilk.

That’s why the idea that investors are fleeing Spotify’s stock because of Netflix’s struggles just doesn’t make much sense. But in a market facing broader selling pressure, logic isn’t always front and center.

I suppose it wasn’t during my Netflix password-borrowing days, either. For the record, though, I’ve never mooched anybody’s Spotify credentials.

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ZOGBLOG by Zack O'Malley Greenburg

Spotify Isn’t Netflix—For Better Or Worse

Shares of both streaming giants have tumbled in the past month following negative Netflix news. Wall Street doesn’t seem to get that they're different.