Music streaming – The fault lines

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Spotify and Apple are the only two with a bright future.

• Spotify has the smarts, Apple the default while Deezer manages to scrape together some cash.
• Spotify has acquired two companies that when integrated into its service will continue to allow it to remain one step ahead of Apple when it comes to the user experience.
• This is crucial because Apple Music has improved its user experience and is seeing meaningful traction in the market putting pressure on Spotify to stay ahead.
• The two companies acquired are Soundwave, an app that beings in a social element to listening music, and Cord Project which is a voice messaging service.
• These will be integrated into the Spotify which outside of finding and listening to music, comes up a little short when it comes to sharing and communicating with friends.
• This builds on top of the developments that it has made in music discovery and deep learning that are aimed at ensuring that users are kept up to date with the latest tunes that are of interest to them.
• Spotify has also been good at adding in services such as Running Mode where the music played adjusts to the user’s running cadence.
• This kind of differentiation is crucial to keep Spotify ahead of its much larger and more powerful rival Apple.
• The problem is that Spotify needs to spend more on marketing to tell non-users how great it is and of this there has been little sign.
• At the same time, Apple has reached 10m subscribers and has done so in a tiny fraction of the time that it took Spotify to get there.
• This is due to the power of Apple’s brand but mostly due to the fact that Apple Music is now installed on the devices of over 400m users.
• This allows users to subscribe to the service with a touch of a button and nothing more.
• By controlling the device, Apple makes its service the default option which historically has a massive impact on adoption.
• The good news is that Spotify has so far been unaffected by Apple Music and remains the number 2 grossing app in the Apple App. Store.
• This is despite the fact that Spotify is trying to get users to purchase their subscriptions elsewhere as the purchase on the Apple App. Store is 30% more expensive due to Apple’s revenue share.
• The third player in this space is Deezer which has finally managed to raise some money following its failed IPO.
• Deezer has raised $109m from a group of investors led by Len Blavatnik’s Access Industries which led a previous round of $100m in 2012.
• I suspect that Deezer was about to run out of money and in return for this investment it has probably had to part with far more equity than was desirable.
• The net result is that in music streaming there are two main players where I suspect that the market is big enough for both.
• However, for everyone else the outlook looks very difficult and I see consolidation in this space before too long.