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Bernstein Says the Spotify-Netflix Analogy Is Wrong

By Evan Niu, CFA – Jul 8, 2020 at 10:00AM

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Netflix doesn't offer a free tier while Spotify does.

It's tempting to compare Spotify's (SPOT 6.33%) recent push into original podcast content to Netflix's (NFLX 0.71%) wildly successful expansion into original video content. The Swedish music streaming leader has even directly encouraged such comparisons. Former CFO Barry McCarthy, who had previously served as Netflix CFO and retired earlier this year, put it bluntly last October: "So streaming was to Netflix as podcasting is to Spotify."

However, one Wall Street analyst threw cold water on that analogy this week.

Daniel Ek speaking on stage

Spotify CEO Daniel Ek. Image source: Spotify.

There is no free version of Netflix

Bernstein downgraded Spotify on Monday from "market perform" to "underperform," while analyst Todd Juenger tweaked his price target from $134 to $172, mostly to accommodate recent market action. Investors have sent the stock to all-time highs over the past few months on hopes that the ongoing push into podcasts could pave the way to profitability.

Spotify's market cap has increased by approximately $20 billion since the company announced its exclusivity deal with Joe Rogan in May, which was reportedly worth an estimated $100 million. That valuation gain may not be warranted, in Juenger's view, as the analyst is skeptical that the streaming tech company will be able to monetize podcasts well.

"We continue to believe it's unlikely Spotify will generate much earnings from podcasts," Juenger wrote in a research note to analysts this week. "What we failed to previously appreciate is the logic that, if Spotify succeeds in securing exclusivity on popular podcasts, it may naturally lead to increased share of paid music streaming, if consumers choose to consolidate their listening into one app."

Bernstein acknowledges that Spotify may be able to grow its share in paid music streaming but questionsthe magnitude of those potential gains. The analyst points to a major hole in the Spotify-Netflix analogy: Spotify offers a free ad-supported tier while Netflix famously eschews all advertising. All podcasts are available for free and even paid subscribers have to listen to podcast ads, which Bernstein argues undermines the incentive to upgrade to a paid subscription.

For example, The Joe Rogan Experience will debut on Spotify on Sept. 1 and be free to all users. Spotify has high hopes to monetize podcast engagement with ads, introducing dynamic Streaming Ad Insertion for podcasts earlier this year. The company also maintains that podcasts are driving higher conversion rates from free users to paid subscribers.

Juenger compares Spotify's current strategy to a hypothetical scenario where Netflix makes its most prominent exclusives freely available in an effort to convince consumers to subscribe for non-exclusive content, since music streaming platforms are somewhat commoditized and most high-profile artists are available on all services.

"We expect the market would have heavily punished Netflix for that tenuous strategy," the analyst wrote. "But that is essentially what Spotify is doing, and the market has responded by adding $20 billion of value."

Evan Niu, CFA owns shares of Netflix and Spotify Technology. The Motley Fool owns shares of and recommends Netflix and Spotify Technology. The Motley Fool has a disclosure policy.

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