Spotify and the threat of Big Tech
By: Krhs Regulus
Tags: Regulation, Spotify, Music, Economics, Technology

Is regulation the right answer?

Bundling of products is the problem, not monopoly power.

Spotify’s business has a fundamental problem. How can it be fixed?

In my previous blog, I discussed how the bundling of products can be monopolistic. I argued that the tech industry has matured enough and that the larger players in the industry are here to stay. This industry has become more like the railway industry or the telecom industry with its large companies that are able to control access and create very high barriers to entry for any new player. However, the reality is that the tech industry is very different from the railway industry, and technology is still improving at an incredible speed and new companies with new ideas are still able to disrupt the industry.

Is regulation the right answer?

The problem with a monopoly-like company is that it can exert pressure on a smaller player and try to push it out of the market, and this can hurt innovation and harm the consumer in the long run. However, many of the tech industry’s big players today are champions that made irrelevant an incumbent juggernaut. A Big Tech company may try vigorously to defend its space in the market but fail to see that it is slowly becoming irrelevant. Mobile phones and tablets did it to the PC, Android and iOS did it to Windows, Whatsapp has done that to email and SMS, and this pattern doesn’t stop when we look at other industries. In transportation, airline travel has made irrelevant the long ocean journey of a century ago. So it could be argued that the markets are self-correcting and the monopoly of the big players is nothing but a mirage which is often a distraction for them.

But at the same time, it is not hard to see that Big Tech companies do have the power to hurt many of the smaller players and the government should ensure that the playing field is fair enough for the new entrants to at least have a chance, since the question of whether or not the Big Tech companies will become irrelevant is a long run question, and as Keynes famously said, we are all dead in the long run. Rules around data privacy, product bundling, app store policy around fairness should be taken a closer look at and regulators should work with these companies more closely to understand the need for the industry.

Bundling is the problem, not monopoly power.

For Spotify, the headache is Amazon Prime and Apple One bundles that are offered as a monthly paid membership for which you get access to multiple services like video streaming, cloud storage, and music. The bigger players have the power to reduce their prices and hurt Spotify, which may only hurt their profits, but which for Spotify will create an existential crisis. For a company like Spotify, that is not a good position to be in. A company cannot be great if it exists at the mercy of its competitors. Note that the Amazon Prime bundle competes with Apple One bundle, and Google and Microsoft could also build on their existing subscription service, Google One and Office 365, that could offer products to compete with Spotify. And these bundles will keep growing larger and offer more and more products that we use daily, keeping the consumer locked into an ecosystem switching from which will be incredibly hard. The case that a monopoly exists against Spotify is weak as all these bundles are competing with each other. Spotify is simply hurt by their bundling practice which offers customers things other than just music, and to an extent forces customers to use the products in the bundle.

Regulation to curb bundling practices will help. It will make Netflix more competitive with Apple TV+, will make Spotify more competitive with Apple Music, and will encourage other app developers to come forward with better ideas and give them the power to monetize it more easily, which will accelerate innovation in this space. It will decrease the power of the Big Tech companies as it will increase competition which will ultimately benefit the consumer. But, it could also harm the consumer as the products in these bundles will now cost more individually. And the advantages associated with being in one ecosystem and having compatibility and synchronization capability will be potentially lost.

The nightmare doesn’t end there.

But the problems of Spotify don’t end there. In the space of media content, Spotify is unlike Netflix. Spotify’s product, music, is a commodity like product that you can get on other services too. And this makes those bundles even more of an attractive choice. Netflix, which successfully competes with Prime Video and Apple TV+ has an advantage only because it’s original content is only available on its own service. Netflix is fundamentally offering something that the competition does not; a movie you love, a TV show you crave.

What could Spotify do in an environment where it is competing against larger players.

A moat around Spotify, if one exists, is a narrow one. Spotify has to aim to provide a more differentiated product. How can it do that?

Build an excellent user interface. But that is only a start, and it’s insufficient.

Can Spotify sign exclusive deals with artists? Spotify has no control over third-party providers of their content. The music industry has a high level of concentration, which means that one or a small number of entities may, on their own, take actions that can adversely affect Spotify’s business. As of December 2019, 82% of Spotify’s streams are licensed from just four companies, Universal Music Group, Sony Music Entertainment, Warner Music Group, and Merlin.¹

Can Spotify offer bonus tracks from my favorite artists that I cannot find on other platforms?

Sign exclusive deals with popular podcasts. Many more deals like the Joe Rogan deal will help a lot.

An AI technology that offers better recommendations of music based on user taste is also a differentiator and something people will be willing to pay extra for.

Encourage users to create music and share it with friends.

The ability to share dance moves for popular music, in short-form video format, something like TikTok.

Karaoke.

Possible merger or acquisitions that would allow it to offer other services in a bundle.

Bundle agreements with Walmart, Netflix?

How can switching costs be increased? Spotify’s family plan has helped increase switching costs. Personal playlists also have that same effect. End of the year stats and playlist of most listened to songs also encourages music enthusiasts to stick with the service. More could be done.

It is one thing to have a lot of new users signup. Will Spotify be able to keep those users year after year? Can it leverage network effect to build a wider moat around its business? I fear that Spotify will become like Dropbox, a cloud storage service that was exciting to use when it was first launched, but that excitement fizzled when Google Drive was launched.