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Comment by bgilroy26 | Hacker News Reader

I was surprised that Spotify had such a low profit margin -- 26% -- and I found an article[1] that explains that royalties are the biggest factor. They go on to explain that Netflix's solution to the royalties squeeze has been to launch original content.

I wonder why Spotify and Tidal don't have recording studios launching new music? Do they figure the library of existing music is so massive that they can't ever get ahead of it with original content? It can't be that existing music studios have been running so efficiently that they can't be successfully undercut by one or two companies who have a grip on most music listening behavior.

[1] https://www.statista.com/chart/13406/gross-margin-of-spotify...

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Once Spotify starts launching their own content, I'd expect the music studios to react how TV studios reacted to Netflix originals - jumping ship to their own services, draining Spotify's catalogue and USP.

I'm sure balkanisation will come to the music space eventually, as we've seen happen to Netflix and is in the process of happening to Steam (against the wishes of consumers, but publishers want their own subscription revenue streams), but given that space was unified with iTunes previously, there's more inertia with the one stop shop model.

I vaguely agree with you and to add to your point:

I think the dynamics of selection are a bit different for Spotify vs Netflix, i.e. my personal assumption is that customers are more elastic to selection for music than tv.

You can consume a unit of music much faster than tv, and you repeat consumption of music more often than tv so things like playlists suffer more from absent music and albums than TV may do.

I think it is vaguely easier to train TV watchers that there will be some rotating backcatalogue than you can music listeners...

Steam isn't subscription revenue AFAIK, mostly just direct sales of games. So they want their own cut of the retail sales commission in effect.

I think the difference is that when you open Spotify, you expect a complete or almost complete catalogue. People have existing artists that they really want to hear. That puts Spotify in a tough negotiating position as they have to license more or less everything.

When you open Netflix, you just want to watch something interesting within some category. That opens the door to Netflix creating its own content and puts them in a much better negotiating position vis-a-vis Hollywood. They don't need to license everything.

>When you open Netflix, you just want to watch something interesting within some category.

No no no, I want Netflix to take the Spotify approach. I'm just not sure the media industry is willing to let that happen.

So you want to watch the same shows and movies over and over?

When I listen to music I usually want a large percentage of that music to be stuff I already know. Of course I like discovering new music but, at least for me, probably > 50% of the time, maybe 90% of the time I'm playing music I know.

Conversely with Netflix I always want somehting I have never seen. Less than 2% of the stuff I watch on Netflix (or any other similar service) is stuff I've viewed before, maybe even less. Off the top of my head the only thing I've ever viewed more than once on Netflix is Rick and Morty.

No, they want Netflix to offer all the content that has been produced so they can watch anything that exists, more like Spotify/Apple Music/Google Music/etc.

My hunch is that it is a combination of things.

Looking at netflix, their move to original offerings has essentially transformed them into their own channel + some extra outside junk just to keep the line blurred.

To me, the endgame there is that netflix will cease to have any outside content eventually.

If spotify/tidal follows that path they become a label with their own streaming service. Maybe they don't want to go that route.

Also, I imagine the technology is getting to the point where it wouldn't be unreasonable for labels to start up their own streaming services. If spotify/tidal decides they're going to be their own label, and the current labels decide they're going to start up streaming services, spotify/tidal is at a disadvantage without the back catalogs.

Honestly, I'm amazed spotify is doing as well as they are considering apple, google, and amazon's offerings in the space.

Many labels own equity in Spotify. Those royalties just go back to them. Those equity deals are controversial among artists big and small. [1]

Most labels that invested in Spotify cashed out and sold in the IPO. It was hugely lucrative! In retrospect it looks like the right choice but what does it all mean? [2]

There is no certainty about Spotify's performance in public markets.

Netflix's original content push was fundamentally vanity-driven. If you're going to permit hindsight and say "That was a good idea," House of Cards's lead actor was a well-known predator even then, just not yet disgraced. So the success of original content, which literally everyone at Netflix is incentivized to make you believe occurred due to the sheer brilliance of blowing $100 million on a TV show, is undoubtedly as much attributable to exquisitely good timing as anything else.

All the other comments don't really know what they're talking about.

[1] https://www.theguardian.com/business/2018/nov/24/taylor-swif...

[2] http://copyright.nova.edu/spotify-stock/

The problem is that listening habits are different than viewing habits. People generally don't rewatch TV shows (with a few notable exceptions), whereas people regularly re-listen to music. This means that a back catalog is very important in music, but not as important in TV. And since the music back catalog is owned by a collection of different record labels, music services are beholden to those labels. You can create all the new music you want, but if you don't have something approaching 100% of the music from the past, then you're going to be non-viable as a product offering.

It seems from your description that it would be possible to capture the teenage market with artists who are independent from any existing label and own the music rights and thus run a streaming service with greater than 26% gross margin.

Yeah, but other labels are going to make music that teens want, so you gotta deal with them. Exclusive content would help with customer retention and acquisition, but probably not much with margins.

Online distribution systems like Spotify, Netflix and Steam are doomed to a minimal profit margin IMO, as it is a race to the bottom. If they make too much profit, a competitor willing to make less will take some market share. It might take a while though, due to lock in and first-to-market entrenched positions. But in the long term the middlemen will have razor thin margins and profit from scale. Even lock-in like see with Steam, where you can't take your games with you if you switch distribution platforms, gets defeated by old age when your locked-in customers die of old age.

> I wonder why Spotify and Tidal don't have recording studios launching new music?

End of the day it seems to be up to the artists. The numbers are in Spotify's favor - 75% of music revenues last year came from digital music, and of those paid subscriptions were the overwhelming contributor

http://www.riaa.com/wp-content/uploads/2019/02/RIAA-2018-Yea...

I wonder though how an artist that's signed with a Spotify label would get a different treatment than an independent just uploading their music to Spotify (et al.)

Studios don't define royalties in music, unlike video. The royalties for music are well defined on a global? or at least country wide scale and performers don't really get to choose whether or not they participate. Writers get a chunk and owners get a chunk. Owners can be the performer, but many songs are classified as "work for hire" and the IP is owned by someone other then the performer.

https://www.ascap.com/help/royalties-and-payment/payment/roy...

Thank you for the link, it's very helpful in understanding the business side of these things.

It seems like ASCAP and RIAA are the power players in the arena rather than BMG/Universal and all of them?

Anyone can upload to Spotify. There's no shortage of music.

I suspect the chicken and egg problem is worse there - in order for it to be valuable it would have to be a Spotify exclusive, but that implies not being on Youtube and therefore not getting critical mass.

Also the production values / return calculation looks more predictable for Netflix, while for music the costs are lower and the variance much, much higher.

And for Netflix people tend to watch shows once, whereas music is more likely to be listened to repeatedly.

Then there's a risk that if they do that the labels retaliate by pulling content.

There have been allegations that they (secretly) do; see e.g. https://www.theguardian.com/technology/2017/jul/13/are-spoti...

>can't be successfully undercut by one or two companies who have a grip on most music listening behavior.

Well, that was the great claim for Netflix, wasn't it? That the availability of mass amounts of data would allow them to create shows attuned to viewer desires.

How has that worked out? Netflix has some good shows but also at least the usual percentage of stinkers and cookie cutter riffs on a popular concept.

See also targeted advertising and lots of other areas where data is pitched as a magic elixir.

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