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Spotify's Strategy Sounds Familiar

By Stephen Lovely - Updated Apr 11, 2019 at 10:25AM

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Spotify is getting into the original content game.

Spotify's (SPOT 4.71%) plan to acquire two podcast companies, Gimlet Media and Anchor, puts it in a position to not only host podcast content on its massively popular streaming platform, but to actually produce that content itself. That should sound familiar to observers who have been watching Netflix (NFLX 5.03%), Amazon (NASDAQ: AMZN), and other streaming giants invest heavily in original content in recent years.

When it comes to streaming original content, no company has been more aggressive than Netflix, whose original content strategy has become a near-obsession. Netflix produces an incredible amount of original content, including some critically acclaimed hits and more than a few stinkers.

Original content is appealing to Netflix for a few reasons. Differentiation is certainly one: Netflix is the only place to watch Stranger Things, for instance, and that's a good thing for Netflix. But money looms large in this strategy. Netflix is investing so much up front in original content because, in the long term, original content is the most cost-effective content to have. Netflix doesn't have to bid against anyone to get the shows it created.

For proof of just how intense Netflix is about cost efficiencies, just look at what apparently happened to American Vandal -- a popular Netflix original that was produced by an outside studio and, rumor has it, was cut down in its prime by Netflix's cold cost-benefit calculations.

A woman wears headphones and looks at her smartphone.

Image source: Getty Images

Similarities and differences between Netflix and Spotify

Of course, Spotify's original content strategy is unlikely to look exactly like Netflix's anytime soon. While Netflix can hope that its original content makes up for its not landing the rights to shows like Seinfeld (available only on Hulu), exclusive deals are not the standard in music streaming and Spotify's appeal is rooted in its comprehensive catalog. No amount of podcasts would make it OK for Spotify to let, say, The Beatles leave the service.

It's also true that costs should be lower in audio than they are in video. Apple is reportedly investing $1 billion in streaming video content, but it's hard to imagine the company spending that much on audio originals for Apple Music. And Spotify reportedly is spending $230 million Gimlet -- not exactly in the same ballpark. (Spotify did not release terms of the Gimlet and Anchor deals, but said they are expected to close in the next several weeks.)

But there are similarities, too. One obvious one is that both types of originals make financial sense, if for slightly different reasons. Spotify's contracts with musicians and publishers include per-stream payments. So while reducing licensed content might not be a good choice for the service in the same way that bowing out of the Seinfeld bidding (arguably) was for Netflix, Spotify execs can certainly hope that their original content grows in popularity and accounts for more and more of its users' streaming hours. Every second that users spend listening to a Spotify original is potentially a second that they don't spend listening to tracks that Spotify would have to pay royalties for.

Original podcasts can also be a means to differentiation. While Spotify, like Netflix, is probably more interested in the dollars and cents, it can't hurt to have exclusive podcasts that users of Apple Music can't have. It will also be easier, in most cases, for Spotify to buy podcasts or sign podcast stars to exclusive deals than it would be to compete with record labels in an effort to sign bands. While Spotify's music exclusives have been extremely limited, its podcast exclusives are poised to be much more extensive.

Spotify founder and CEO Daniel Ek wrote in a recent blog post that it's safe to assume that, eventually, more than 20% of listening done on Spotify would involve non-music content. "This means the potential to grow much faster with more original programming -- and to differentiate Spotify by playing to what makes us unique -- all with the goal of becoming the world's number one audio platform," he wrote.

Check out the latest Spotify earnings call transcript.

Who will be next?

Spotify is the first music streaming service (or perhaps we should say "audio streaming service") to move into original podcasts at this scale. But, if Netflix's experience is to be any guide, Spotify won't be alone for long. In an industry where differentiation is hard to come by (thanks to non-exclusive licensing deals) and royalty expenses are hard to avoid, podcast originals could become a very contentious front.

It remains to be seen just how much competitors like Apple will pay to battle Spotify on this front, and production costs should be lower than those on the video front. But it's easy to imagine a future for music streaming services in which originals play a huge role. Given the financial incentives, such a future might even be inevitable.

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