Spotify is hemorrhaging money and it needs to become Netflix to stop the bleeding
- Spotify's public filings revealed the company is spending most of its money on fees for licensed content and music royalties.
- Duncan Davidson, a general partner at venture capital firm Bullpen Capital, believes the company could stem the bleeding by becoming its own music label.
- Davidson says Netflix could be a prime example of what steps Spotify needs to follow.
Spotify's direct public offering confirmed potential Spotify investors' biggest fear - that music rights and licensing fees were a huge cost of doing business. But one industry expert believes there's one way for Spotify to break out of the music industry's chain: become a music label themselves.
Spotify's filings turned heads by revealing the streaming-music company generated $4.99 billion in revenue, but still posted a $1.5 billion in loss in 2017. The company is bleeding money, spending more than €8 billion, or $9.76 billion, on music royalties since its inception. Its expenses related to music rights grew by 27% from the previous year.
Yet much the same way that Netflix became its own "movie studio"and production company with the release of its first original content series, "House of Cards." Spotify could do the same with musical artists.
"Netflix is now creating more content than all of Hollywood," said Duncan Davidson, a general partner at Bullpen Capital, a venture capital firm that has backed such companies as Marketo, TubeMogul and Zynga from the early stages through their successful IPOs. "So if Spotify can end up finding more artists than the whole of the music industry, that would be quite amazing," he said.
Should such an idea become reality, a Spotify music label would reduce the company's dependence on paying hefty fees for the biggest names in town, and instead focus on finding and cultivating a whole new wave of big acts and artists.
Netflix is a case study in how this could be done, Davidson says. Despite big media companies like Disney dumping the platform, Netflix has performed well on its own, blowing past subscriber growth targets both domestically and internationally in the fourth-quarter.
With a spending plan of $8 billion on 700 new and original content this year, Netflix is the hottest of the so-called FAANG stocks (comprised of Facebook, Apple, Amazon, Netflix, and Alphabet's Google). Netflix's stock has skyrocketed to $320 per share, and is up 59.52% so far this year.
By cutting out the middle men and creating its own ecosystem of top talent that will keep attracting new subscribers and developing loyal fans, Spotify could make a similar bet as Netflix - and reap the benefits, Davidson says.
"It's like a new way of doing what a music label does," he said. "If they can figure that out, they would be an extremely powerful company."