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Spotify CEO Daniel Ek.
- Spotify is vulnerable to competition from its better-funded rivals.
- The company is reportedly about to be overtaken by Apple Music in the US.
- Spotify can't compete with Apple's cash pile, so it's trying some cool experiments instead.
Music streaming service Spotify is preparing to go public in a direct listing of its stock in the first quarter of 2018. It's an unusual decision to forego the traditional public offering and instead list shares directly on the stock exchange, but it lets Spotify cut out the middle man.
However, there are underlying issues with Spotify's business - it's losing money every quarter and it faces looming competition from tech giants such as Amazon and Apple.
But don't just take my word for it, here's Apple Music executive Jimmy Iovine speaking in an interview in November.
"The streaming services have a bad situation, there's no margins, they're not making any money. Amazon sells Prime; Apple sells telephones and iPads; Spotify, they're going to have to figure out a way to get that audience to buy something else. If tomorrow morning Jeff Bezos wakes up and says, 'You know what? I heard the word "$7.99" I don't know what it means, and someone says, 'Why don't we try $7.99 for music?' Woah, guess what happens?"
Apple doesn't normally let its executives pontificate about the industry and the competition as freely as that, but Iovine is a music industry legend who has worked with people like John Lennon, Bruce Springsteen, and Stevie Nicks, so he pretty much does what he likes.
And Iovine has hit upon a key issue for Spotify - even after its direct listing, it's still going to be the niche, European competitor to giant US technology companies Amazon and Apple.
Charley Gallay/Getty
Music executive Jimmy Iovine attends the LACMA 50th Anniversary Gala sponsored by Christie's at LACMA on April 18, 2015 in Los Angeles, California. (Photo by Charley Gallay/Getty Images for LACMA)
Just look at how the competition is shaping up in the US: Apple Music is about to overtake Spotify as the dominant music streaming service there.
The Wall Street Journal reported that Apple Music has managed to increase its monthly subscribers at a faster pace than Spotify - increasing them by 5% per month compared to Spotify's 2% - which will soon put it in first place.
Sure, the US is Apple Music's home turf. But Spotify losing ground there is a worrying vision of how its fate could play out on a global scale.
Rivals could put the squeeze on Spotify
Spotify simply doesn't have the massive cash reserves that its competitors do. That's a key part of Iovine's point - Amazon could very easily squeeze Spotify on price by hooking in subscribers to its own Amazon Prime Music service for a low price.
Amazon can afford to make a loss on those customers for years to squeeze Spotify out of the market, before upping the prices and starting to make some money in the space itself.
Why pay £9.99 per month for Spotify Premium when Amazon could choose to sell a comparable service for £4.99? The lack of differentiation in streaming leaves Spotify particularly vulnerable.
But surely Amazon wouldn't be so mean? Well, yes, it would. For years Amazon has been in what Recode calls "a high-stakes race to the bottom" with US retail chain Walmart. The companies are slashing prices to try to win over customers - putting pressure on suppliers.
And Amazon seems to be winning that price war. Analysis carried out in October by Retail Dive showed that Amazon beat the daily online prices of its top competitors, Walmart, Target, and Jet, in 12 out of 13 categories.
Apple isn't about to start a price war of its own
Beck Diefenbach/Reuters
Apple Music show Carpool Karaoke, with Tim Cook, Pharrell, and James Corden.
Apple is unlikely to engage in a price war - it's really not its style. The closest it has come is dropping the price from $9.99 (£7.16) a month to $8.25 (£5.91) in a yearly offer that was buried inside the Apple Music app.
But what Apple can do is invest heavily in streaming video and exclusive content to squeeze Spotify on exclusive content rather than price.
Apple had $163 billion (£116 billion) in cash to spend at the end of December, and its CFO Luca Maestri told The Financial Times that "our target over time is to take that $163 billion down to approximately zero."
One way for Apple to reduce its cash pile is to invest in original content that could win over subscribers to its music streaming service. It already has shows on its Beats 1 internet radio station from stars including Elton John and Drake, but it could ramp up its spending to include more exclusive content.
Right now, Apple includes streaming television in its Apple Music subscription. It has shows including "Carpool Karaoke" and "Planet of the Apps," but plans to release more. In fact, the company reportedly has a $1 billion (£738 million) budget for shows and movies that it will bring to its streaming service.
And with that budget comes new, high-profile hires from the entertainment world. It brought in Jamie Erlicht and Zack Van Amburg from Sony and has tasked them with bringing in original content.
Video could be the ideal way for Apple to compete with Spotify's streaming offering. If Apple can offer a lineup of streaming music, radio shows, and TV and movies, that's going to be a strong offer.
Spotify knows it can't compete with the giants - so it's going for the 'cool' factor instead
So what is Spotify doing to compete with its bigger, better-funded competitors? Well, it's sticking to what it knows best: Cool, interesting products which don't cost giant amounts of money.
Take Spotify's "2017 Wrapped" campaign which saw people share their listening habits with their friends. It's cool, cheap, and shareable.
Then there's Spotify's latest app, Stations. The free app is essentially a minimalist version of Spotify that lets people navigate through playlists and listen to songs from them on shuffle. Again, it's cool and cheap.
Let's be real: None of these cool stunts are going to overthrow Apple Music and convince people around the world to switch to Spotify en masse. But the company is throwing stuff at the wall and seeing what sticks, and that's exactly the kind of approach it should be taking.
Apple and Amazon can pontificate about the future of the industry all they like - Spotify has the "elusive" cool factor and is trying to break new ground in tech. It could face uncertain times ahead, but for now it's doing what it can to stay ahead of the pack.