ORANGE MIGHT BE THE NEW BLACK, BUT SPOTIFY IS UNDOUBTEDLY DIFFERENT FROM NETFLIX

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October

2018

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The recent news about the growth of Netflix subscribers reveals a strong and sound business model. Executives prediction of 5m net new users was far below the actual number of subscribers who joined the platform in the past three months (around 7m). Furthermore, more than 6m of them are international clients, meaning that the business is steadily expanding outside the US.

Because both companies are massive, rapidly expanding and active in the media and entertainment industry, Netflix and Spotify are often compared and considered alike enterprises. In reality, there are some important and structural differences that cannot be disregarded.

Although the two offer an all-you-can-stream service in exchange of a monthly fee, Spotify also provides customers with a free of charge subscription, while Netflix does not, having user subscriptions as the main source of revenues. This implies that as thousands of active users of the music stream app are not paying for the service, accepting the limitations that this entails, the Swedish company also relies on revenues from advertisement.

Furthermore, the two industries they are engaged in, are indeed very dissimilar. First, in terms of production expenses: while almost anybody can produce and broadcast a song, films and series are extremely more costly. This is translated into different incentives for producers: on the one hand, artists and songwriters are likely to rely on as many platforms as possible to increase the diffusion of their pieces to extrapolate most value out of them. On the other, to start the process, filmmakers need sponsors who spread the risk they face by investing in more than one production.

With respect to this, it can be highlighted that Netflix is also involved in the creation of content, while Spotify is not. The former therefore is both a producer and a distributor, while the latter merely offers a product that can be easily found on other platforms.

Spotify is in a weak position when setting prices. In particular, its costs rise as more people subscribe to the platform and stream the song because labels, that still play a major role in the industry, generally pay artists per user who listens to their songs. For this reason, scalability constitutes an issue for the company. Instead, Netflix enjoys a reduction in its per unit costs as more users subscribe to the platform, becoming over time a crucial partner that enables studios to enlarge their reach.

Only the following years will tell us whether Spotify succeeds in the difficult task of transforming its business model into a more sustainable one or whether, after having changed the way people listen and pay for music, it will be replaced by some other company.

Sources:
https://www.barrons.com/articles/spotify-why-it-is-and-isnt-like-netflix-1522939226
https://www.bloomberg.com/news/articles/2018-03-23/why-spotify-can-t-scale-like-netflix
https://www.ft.com/content/f6512c08-d163-11e8-a9f2-7574db66bcd5
https://markets.businessinsider.com/news/stocks/spotify-stock-price-netflix-cant-compare-2018-4-1020586061
https://www.valuechampion.sg/5-reasons-why-spotify-not-netflix-music

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CANNIBALIZE YOUR OWN BUSINESS

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October

2018

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When it comes to business strategy, it is essential to learn from past examples and great strategists. For example, we all know that business cannibalization is a hard task that entails obstacles of many types. Not only it means giving up on known success in exchange of unknown future, but it also creates competition within a company, as it entails winners and losers. And yet, successful masters embraced it and brought it to the next level, accelerating the process.

Steve Jobs once said: “If you don’t cannibalize yourself, someone else will”.

This simple and powerful sentence well explains his approach to a subject matter that he overemphasized by thinking, developing and selling Apple’s new products as substitutes of the old ones, without being afraid of the risks that this entailed.

For example, in 2005, even though sales of the iPod were satisfactory and steady, Steve Jobs started fearing that such a product could soon be cannibalized. In fact, smartphones at the time were presenting more and more features. If the iPod was to be replaced by a phone, Steve Jobs wanted to guide the company in charge of creating and commercializing such a device.

This became his priority and, only two years and a half later, he presented the “the best iPod ever made”. The iPhone was the combination of three different things:

  • A widescreen iPod with touch controls
  • A revolutionary mobile phone
  • A breakthrough communication device

and it was priced accordingly, as it was sold for the sum of the prices of the bestselling iPod and of an average smartphone. It was, of course, a revolutionary product. One of those unique products that change the entire industry they belong to.

As we know, it was an innovation miracle. The revenues boomed and, although the sales of the iPod were shrinking, the company was surfing the wave of success.

In 2010, with the launch of the first iPad, the story repeated itself. When asked what effect it had over Macintosh sales, Tim Cook simply replied: “Some customers chose to purchase an iPad instead of a Mac. Even more decided to buy an iPad over a Windows PC.”

As exemplified, cannibalizing your own business is never easy but can deliver unexpected and incredible results, therefore, it is undoubtedly worth the risk.

 

References:

Yoffie, David B., and Cusumano, Michael A. Strategy Rules: Five Timeless Lessons from Bill Gates, Andy Grove, and Steve Jobs. New York: HarperBusiness, 2015.

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