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US bank upbeat about Spotify, lumping it in with Netflix is an “overgeneralisation”

By Chris Cooke | Published on Wednesday 8 June 2022

An analyst from US investment bank Raymond James has said that music streaming services like Spotify are in a better position than video streaming platforms like Netflix, and therefore investors shouldn’t assume all the challenges faced by the latter automatically apply to the former. Those comments came as the bank upgraded its classification of Spotify’s shares from ‘market perform’ to ‘outperform’.

Spotify’s share price has been mainly in decline ever since a February 2021 peak, with investors increasingly nervous about the subscription streaming business at large, partly because a COVID-caused surge in home entertainment consumption has inevitably come to an end, and partly because an increasing number of platforms are competing for consumer attention, including the ad-funded free platforms like YouTube and TikTok.

In April, after Spotify confirmed it had signed up two million more premium subscribers in the first quarter of 2022 – despite the backlash over its exclusive Joe Rogan podcast and the war in Ukraine resulting in the closure of its Russian service – the streaming firm’s share price dropped below $100 for the first time. That decline, despite the positive stats, was partly because Spotify’s growth was below expectations, but partly because of the wider sector concerns.

Indeed, Netflix’s first quarter financial results were arguably impacting on Spotify’s share price as much as its own figures. The video service saw its subscriber numbers decline in the first quarter, seeming to confirm that investors were right to be nervous about the future of the subscription streaming business.

At the time, Spotify boss Daniel Ek was, unsurprisingly, keen to distinguish audio streaming from video streaming when talking to his investors. He said: “I think a lot of people are grouping us and Netflix together. Despite both being media companies and primarily subscription revenue companies, that’s kind of where the similarities end for me … [we are] vastly different businesses”.

There are, of course, a number of ways in which audio streaming and video streaming differ. In particular, in video, streaming services compete on catalogue. Which has created challenges for Netflix as the traditional TV and film studios have launched their own services. Yes, Netflix makes its own shows too, but it also licenses in programmes from those other studios. Meaning it is now competing with its suppliers.

Whereas in music, all the services have more or less the same catalogue, which is controlled by the record companies and music distributors, who – in the main – are not in the business of launching their own streaming services. Which means Spotify isn’t going to suddenly find itself in competition with Universal Music, and therefore lose access to the major’s most popular content.

Now, that’s not to say that Spotify isn’t facing any of the challenges of the wider subscription streaming business. It clearly is. But, Ek would argue, it is nevertheless in a stronger position. And the market analysts at Raymond James agree.

Grouping together music streaming and video streaming is an “overgeneralisation”, the bank’s Andrew Marok told Yahoo Finance Live yesterday. “What we see in the competitive environment for streaming music is a lot more stable … than you see, for instance, in streaming video, where content owners are increasingly taking ownership of their content, walling it off, going directly to consumers”.

“On the [music] side, the dynamic where the major labels own a significant majority of the content, and are also basically dependent on the streaming platforms such as Spotify and Apple Music to power industry growth, makes that a much more stable contingent”.

That also means that music streaming services are less likely to end up in a price war with rivals, with services competing on “product differentiation and network effects”.

Marok added that service-led curation and recommendations are more important in music, which makes it less simple for consumers to move around services month to month, because those recommendations are going to be better the longer you stay with a platform and the more data its algorithm has to crunch. Whereas with video, consumers might move around the platforms on a regular basis based on where the latest buzzy content is available.

With a platform like Spotify, Marok said, “you build your playlist, the service will tune its algorithms to provide good music recommendations – and once you have all that set up, it’s relatively more difficult to switch services to an Apple Music or an Amazon Music. Whereas, with streaming video, it really is a content differentiation story, where you could watch ‘Stranger Things’ on Netflix one month and then [‘Obi-Wan Kenobi’] on Disney+ the next month, and you could cycle between those services in a way that we really don’t see with streaming music”.

By upgrading Spotify’s shares from ‘market perform’ – where you expect the shares to perform inline with the wider market – to ‘outperform’ – where you expect shares to, well, outperform the market – Raymond James is basically encouraging its clients to think about buying Spotify stock.

“At these trading levels we believe that the bad news is priced in with relatively limited downside”, Marok said when upgrading the music service’s classification on Monday. “Spotify remains a best-in-class streaming audio platform with a lot of subscriber runway and low churn – a potentially recession-resistant name in streaming entertainment”.

So, if you want to be upbeat about music streaming – which is, after all, by far the biggest revenue generator for the record industry today – then take all that on board to justify your optimism. If you prefer doom and gloom, there’ll no doubt be some new stats to help justify your position anytime now!