How to Beat Spotify: A Blueprint for Music & Audio Streaming Services

How to Beat Spotify: A Blueprint for Apple, Google YouTube, Amazon Audible, SiriusXM & Pandora ... (complete with benchmarking & scoring)

Music streaming executives must wake up every morning with this increasingly thorny question near the top of mind: “How can we beat Spotify?”. Below is a blueprint.

Executive Summary and Benchmarking Scores:

• "Music" streaming services need to expand their mission and become "Audio" Streaming Services. Music is essentially a zero-margin business for streaming platforms (and is likely to be a loss-leader in the future given the leverage that the music publishing oligopoly enjoys)
• Therefore, streaming services need to think of audio consumption as a "bundle" of content to drive differentiation, margin enhancements, and increased consumer engagement and time spent.
• Five areas to "bundle" audio and the relative scores of the current music streaming services are as follows:

1. Audiobooks (Highest Score: Audible - click to see Audiobooks scoring)
2. Kids Content (Highest Score: Youtube - click to see Kids Content scoring)
3. Podcasts (Highest Score: Spotify - click to see Podcasts scoring)
4. Meditation & Mindfulness (Highest Score: Youtube - click to see scoring)
5. Fitness & Sleep (Highest Score: Youtube - click to see Fitness & Sleep scoring)

• There is an opportunity to "Own The Ear" given the explosion in content, listenership and distribution (audio hardware devices). The art is in the execution and in weaving together these elements through curation, distribution, pricing, and marketing strategies.
• It makes tremendous strategic sense for Netflix to acquire a service like Spotify. We believe that in the future we will see Video + Audio bundles as one natural service, which is where Amazon Prime and Apple One are headed.

Music vs. Audio

Music is essentially a zero-margin business for streamers. As Jeff Bezos once said, “your margin is my opportunity”, and every few years the major music labels avail themselves of their overwhelming bargaining power to extract increasing pounds of marginal flesh from music streaming services.

It was surprising how long it took for Spotify to declare that they were an “audio” company, finally doing so a mere year ago in early 2019. One can assume that they viewed themselves as solely a “music company” for the first 12 years of their existence, notwithstanding their brief, unsuccessful foray into original video at the height of Netflix’s successful original content execution ramp.

Even more surprising is that in the many months since that Q1 2019 Spotify declaration, accompanied by three acquisitions in the podcast space, none of the other demand-side music streaming platforms made any significant responses of note. This strong initial move into podcasting, accompanied by Spotify’s other under the radar moves (e.g. launch of a kids focused product, Spotify Daily Drive integration of music & non-music content) also did nothing to inject urgency into the actions of Apple Music, Amazon Music, Audible, YouTube, Google Podcasts, Sirius XM and Pandora.

Playing catchup around catalog and marketing in music streaming itself was occupying their time, while Spotify was plotting moves beyond the current offering. As is becoming evident, just establishing feature & content parity in a long term zero-margin business is not a formula for success in the audio space.

Wakeup Call

Spotify’s recent 2020 moves are finally impossible to ignore, including the acquisition of Bill Simmons’ The Ringer, the exclusive tie-up with Joe Rogan, and the introduction of a video format to rival YouTube’s audio-video consumption mode. We believe competitor platforms now have finally elevated the internal need to formulate an “audio” strategy (as witnessed by the recent $325m Sirius acquisition of Stitcher) to find a way to outflank the seemingly inevitable global (ex-China) Spotify takeover. Spotify has also been recently linked to potentially poaching Howard Stern from Sirius XM.

Given Spotify’s vast geographic footprint and steady execution, it will take a concerted effort for any competitive platform to first establish, then maintain a recognizable competitive advantage with consumers. Vaulting ahead and staying ahead, while also generating positive economic gains will require vision and deft execution.

The Audio Bundle Blueprint

The key is to think of an audio streaming service as a bundle, where content cadence, curation and technology (“the algorithm”) can be employed in the mission to “Own the Ear.” The correct combination of evergreen library and newly added content (via licensing or originals) can create an enticing, delightful bundled user experience of audio content. Utilizing other business levers such as paywalls, subscriptions, ad-supported models, personalization, hardware integrations and distribution can maximize the desired business metrics.

Here is a 5 pronged blueprint on how to beat Spotify:

1. Audiobooks

2. Kids Content

3. Podcasts

4. Mindfulness, Meditation, & Human Performance

5. Fitness & Sleep

These five elements may initially seem either obvious or frivolous, but they form meaningful strategic pillars in an audio strategy counteroffensive. Over the past 4+ years, our team at Powerhouse has discussed these five bundle proposals to music streaming insiders and were met mostly with various reactions of doubt, amusement, and even ridicule.

We parlayed this outline to guide our investment strategy in the intervening years (N.B. all company names marked with a * are ones we are invested in) and believe this blueprint still contains the seeds for meaningful strategic initiatives for companies in the space. The above categories can overlap, but for ease of comparison, potential acquisitions, licensing and content creation, we have grouped them as such, and in this order of importance.

I will quickly delve into these five elements for additional detail and will also highlight some companies that could be bolted on or bundled into a platform via partnership. Finally, I will also provide grades for the current music streaming platforms for each of the areas. As a side note, the grades are less about ranking, and more about competitive benchmarking and intelligence meant to serve as the start of a productive comparison. Let’s begin.

1. Audiobooks

Audiobooks were written off as dead, a niche branch of audio for Malcolm Gladwell acolytes. Sure there was a market, but critics would say, “(yawn) who listens to Audible anyway? And hasn’t that company been around for decades?”

Yes, Audible is 25 years old, and audiobooks were considered one of the least thrilling areas of the audio space. So much so that all book publishers (until recently) did not even try to lock up audiobook rights and have barely made any attempts to “audiotize” their back catalog. There are obvious parallels to music companies who were slow to digitize their music libraries in the age of Napster and file sharing. With the high margin of hardcover books still the industry’s cash cow (albeit dwindling), book publishers have been slow to cannibalize themselves, falling prey to the Innovator’s Dilemma. The failure to adapt will prove costly in the same way that media companies slowly ceded dominance to upstarts by continuing to cling to the physical CD and home entertainment DVD cash cow revenues until it was too late.

Despite Daniel Ek mentioning the surprising popularity of content owners uploading books to Spotify in Germany, and the popularity of books on YouTube, what doesn’t fit the narrative, doesn’t fit the (music) narrative. Music is cool. Music festivals are cooler. Books are not sexy, so none of “music” streaming platforms have embraced the content medium (as can be witnessed by the scores below).

The window may be closing, but there is still an opportunity for music (audio) streaming platforms to aggregate and offer books on their respective platforms. Traditional fare, business books, sci-fi, and even romance novels can be wonderful ways to aggregate passionate, niche communities with global scale.

Companies such as Recorded Books, Blinkist, Scribd, Dipsea Stories*, Meet Cute, The Great Courses, and others have been for the most part under the radar and are worth consideration as part of the bundle.

Here are my unscientific scores for each of the platforms based on their current offerings of Audiobooks (Scoring from 0–10, with 10 being the best score):

2. Kids Content

Kids content may be one of the most critical areas for a variety of reasons. The first reason, and most compelling, is the opportunity to establish customer loyalty with parents (and children) at a formative juncture. Something that is well-known now by Amazon and Diapers.com/Quidsi, as well as by data-driven retailers such as CVS, is that having a child creates a window to permanently influence behavior and change buying decisions in a household. Diapers, formula, clothing, and yes, even media and educational spend decisions are now all open to forge a lifelong relationship (Disney & Pixar are beneficiaries of this, and at one point so was Nickelodeon).

Pandora was a service many households used for baby & kids songs, but they have yet to create additional use case of age scaffolding channels (sleep music, learning audio channels, kids books, kids bedtime stories, age-specific content graduation, etc). Either the opportunity is not compelling enough as determined by Pandora, or data could be better utilized to inform content decisions.

Equally, the kids music experience on Spotify leaves room for improvement. Lack of catalog, poor UI, lack of household profiles, shallow content for various age brackets, unsafe and easy to access to explicit lyrics and poor search functionality clearly exhibit a lack of strategic focus and investment in this category. The recent launch of a kids-only app is a great start, but as YouTube can attest with their YT Kids app, a separate app requires more than double the effort. A “Family Plan” for the main service could provide a more seamless and personalized experience, but we have yet to see this from any audio streaming service.

The second reason why kids content is so powerful is the potential for churn reduction. The more family members use a service, the greater the overall engagement and lower likelihood of paid subscriber churn. Netflix has this figured out way ahead of any other media companies, many of whom are waiting for the ability to bring home their kids properties (Comcast NBC Universal’s Dreamworks Animation to come from Netflix onto Peacock, e.g.). Prior to the launch of HBO Max, HBO proper only had three pieces of children’s content, demonstrating the lack of priority for this demographic in many services which are now seeking to become household utilities.

A third reason is the wide range of kids content from educational to entertainment, and the persistence scaffold-able content from birth (mostly music and white noise sleep sounds), all the way through to high school. Pre-K, K, and elementary school-aged kids will consume the same book, episode or movie multiples of times, which leads to engagement that can be off the charts. Audio streaming services should design their platform to cater to the audio needs of one of the most influential parts of a household.

Companies such as Epic! Kids*, Homer — Speakaboos, and even ABC Mouse have the type of content that can drive tremendous bundle value for the audio side. Given that some of these kids platforms may be visual first (books, drawings, etc), content licensing partnerships can naturally extend from audio to video as audio hardware (Echos, FB portals, and iPads) integrate screens, also naturally extending the audio bundle into video. Audio lends itself well into a more interactive experience, and we believe that this two-way interactive engagement will drive audio & video engagement consumption.

As Spotify has shown with their recent video strategy around podcasts, providing a natural visual consumption option can be a longer-term source of differentiation and value provision. In the long term, we will all wonder why Netflix & Spotify were separate platforms (As a side note, Ted Sarandos is a Board Member at Spotify), and will instead see a media subscription as all-encompassing across Sight & Sound, much like how Amazon’s Prime subscription is a “super bundle”, and how Apple One is currently being teased in the marketplace. I am sure there are good reasons why Netflix did not purchase a pre-public Spotify, but we at Powerhouse have always contended that the strategic rationale (global content super bundle, ad-supported tier, etc) made tremendous sense, especially at the earlier valuations.

Here are the platform scores for Kids Content (Scoring from 0–10, with 10 being the highest score):

3. Podcasts (Fiction, Nonfiction, Sports, Tech, Business, News, Comedy)

The term “podcasts” is so broad and generic, but it still has some meaning given the nascency of the medium and the business. The entire value chain is still evolving across content creation, distribution, monetization, data & analytics, and even formats. Does it make sense to own the content? Make it exclusive? Take a successful format and blow it out internationally and in other languages? Hint, this is an unexploited growth vector.

These issues need to be explored to find the optimal solution for each of the platforms. Each platform will need to employ a great deal of data-driven experimentation to tweak the levers as the space unfolds. Given the lack of interest in podcasting from all major music platforms until just recently (mid-2019), we are at the very beginning.

I recall a recent conversation with a global music executive who stated that in his country, podcasts were only consumed by and for the “elite”. His wife listens, but no way would the masses consume podcasts. In debating this point, I did point out how yes, even in the US podcasts started with the likes of NYTimes and NPR dominating (and still capturing massive share). But this is quickly changing. On-demand audio will eat linear radio, much like we are seeing the same unfold with amazing rapidity in OTT vs linear broadcast TV. Buckle up — the transition from linear to streaming will play out in the same way in audio, and on globally in every market.

Platforms such as Wondery*, QCode*, The Athletic*, Outkick, and even Masterclass* will play a massive role in how this part of the audio strategy plays out. Content is King; Distribution is the Kingmaker.

Here are the Podcasts Scores (Scoring is from 0–10, with 10 being the highest):

4. Mindfulness, Meditation, Religion, Self-Improvement, & Human Performance

“Human performance” is a massively underserved area within audio platforms. Conversations just two+ years ago with most of the major audio platforms about this category resulted in responses ranging from amusement to disbelief at the thought of incorporating this esoteric content into their music service. Their stance has changed. Dramatically.

Meditation, mindfulness, and self-improvement trends have come into the mainstream thanks to two leading digital meditation companies (specifically Calm and Headspace). Religious content has always been strong on YouTube, and anecdotally is dominant in many countries on Spotify, yet does not get much cultivation or investment. Binaural beats, ASMR (autonomous sensory meridian response), relaxation, mental performance, and even self-help are glossed over as well. The scores below, as well as the prominence of pure-play services in this space, demonstrates the white space.

Companies such as Calm*, Headspace, Pray.com, Journey Meditation*, Happy Not Perfect*, Synctuition, Mindvalley, and others should be getting calls from the audio platforms to be added to audio bundles.

Below are the scores for “Mindfulness” Content (0–10, with 10 being the highest):

5. Fitness & Sleep

In discussing the Fitness category with streaming platforms, there was a hesitancy on whether audio was a viable format for fitness (especially given the success of video offerings such as Beachbody, purveyors of P90-X, and other video-based offerings). Consumers listen to music when they work out, so a natural extension could be to incorporate audio fitness, workouts, and motivation. Audio plays a powerful role in both working up a sweat, regulating heartbeat, motivation, and winding down. The various music platforms have done a commendable job creating music-based workout playlists but can now leverage that starting point to also cultivate audio workouts and other fitness routines.

Sleep is a massive issue for a great number of the global population, which creates another opportunity that can be addressed by incorporating sleep-based content into the audio bundle.

Companies such as Endel*, Aaptiv, Beachbody, Weav Run, and Calm* (mentioning it here a second time given the success Calm have had in Sleep stories) are worthwhile explorations for the major audio & music streaming platforms.

Here are the scores for Fitness & Sleep content on the audio platforms (Scoring from 0–10 with 10 being the highest):

Conclusion

There is an opportunity to “Own the Ear” by increasing the market share of media hours consumers dedicate to audio consumption. Music is not only becoming commoditized across services but is also a zero-margin business for streaming services. Spotify’s and YouTube’s algorithms do provide meaningful advantages, but a natural content extension and bundling to the 5 areas ((i) Audiobooks, (ii) Kids Content, (iii) Podcasts, (iv) Mindfulness, (v) Fitness & Sleep can drive deeper engagement with each platform’s current loyal user base while attracting new audiences globally.

Audio is an exciting area with significant value creation to come on a global scale as users spend more time on platforms that feature a wide variety of compelling, personalized content. It will be exciting to watch the audio bundle come together for these major platforms. The bundling may occur on the service itself, or at the hardware layer (e.g. we may see Amazon use Echo and Alexa as the point of connection)

The art is in the execution and in weaving together these 5 elements of content programming through curation, distribution, pricing, and marketing strategies. These are the raw materials management teams can employ in crafting a unique & winning strategy tailored to their user base, with the ultimate goal being: “How to Beat Spotify”.

(fin)

Salim Mitha is the Co-Founder and Managing Partner of Powerhouse Capital, a highly focused media technology venture capital firm based in Los Angeles, investing in:

The Four Pillars of Global Consumer Media & Technology: Sight (Visual Content), Sound (Audio, Music, Podcasting), Play (Gaming, Sports, Interactive and Betting) & Live (Experience Economy and Livestreaming).

Core portfolio companies include: Masterclass (SIGHT), The Athletic (SIGHT, SOUND & PLAY), Calm (SOUND), Wondery (SOUND). Full portfolio is on website.