When will the market learn?
Spotify is working on a streaming video service, sources tell Business Insider. The popular music-streaming website will also reportedly be considering original content in a move that will challenge Netflix (NASDAQ:NFLX) and Time Warner's (NYSE:TWX.DL) HBO.
Now, Netflix and HBO are singled out in the headline of the story, but Spotify would have an uphill battle if it actually went that route.
Bigger and more seasoned companies have tried to take on Netflix. Why should Spotify succeed?
Video killed the radio star
If the Swedish dot-com darling wanted to take on VEVO or Google's (NASDAQ:GOOGL) YouTube with a platform for music videos, that would make some sense. Spotify's 24 million active users clearly love music, and serving up eye candy along with the tunes makes sense strategically. It's a logical evolutionary step for a global online sensation.
The rub there is that VEVO and YouTube are free, and it's not as if the ads are all that intrusive. It's a fair trade, and Spotify has no business taking on YouTube and its billion unique monthly visitors.
YouTube isn't broken. It doesn't need disrupting.
It also helps YouTube -- and its partnership with VEVO -- that its parent company is the top dog in selling online advertising. Spotify is going to struggle there, as most of the ads on Spotify these days are from musical artists on the site who want to drum up listeners. Spotify lacks the brand advertising chops -- much less the video advertising chops -- to make a free site work.
It would probably turn to Google at first to monetize a free video website, and it would be dead in the water if it actually decides to charge customers for something that is readily available for free on YouTube.
Besides, does Spotify really want to remind users that they can create a YouTube play list of music videos and play it on their mobile devices for free as an audio alternative to Spotify itself?
You'll pay for this
Spotify would naturally prefer to roll out a premium video website. Getting consumers so enamored with a service that they're willing to pay for it is what sets Spotify apart from Pandora (NYSE:P). Pandora may have a much larger base of 67.7 million active users, but only a handful of those earbud-donning music buffs are willing to pay for an ad-free experience.
However, even in the premium space, just 6 million -- or 25% of Spotify's users -- are willing to pay.
It's an entirely different world with Netflix and its 33.2 million streaming customers worldwide. Outside of Spotify's home turf of Scandinavia, HBO isn't even available unless you're paying up for a costly cable plan first.
How does one raise the bar to justify a premium? How does one up the ante to justify a new service over what's working elsewhere?
Proprietary content, depth of content, and access across devices are the keys to success at Netflix. Is Spotify ready for that?
Let's tackle original content. Spotify doesn't have the premium audience for it to justify the $5 million per episode that Netflix and HBO are paying out for their top proprietary content. It can't justify a magnetic House of Cards or Game of Thrones unless there are tens of millions of paying customers paying a little or millions of customers paying a lot.
Forget the latter. Netflix has set the bar at $7.99 a month. Analysts have pressured the company to bump its rate higher, but CEO Reed Hastings knows what he's doing. Any potential competitor has to be cheaper unless it's offering more -- and it's impossible to offer more than a company that has spent six years signing streaming deals to its digital smorgasbord while everyone else figured it would be a passing craze.
Spotify can argue that its differentiator would be music. It could bundle both services. It's a fair strategy, but if that were the case why wouldn't Pandora, with a larger audience, beat it to the punch?
Perhaps more important, Pandora's mobile music subscriptions are already more expensive than Netflix. How do you bundle that without sacrificing margins on the music end? Amazon.com offers free two-day shipping and monthly e-book rentals, charging less per month for Amazon Prime than Netflix. It's still far less popular than Netflix. Redbox Instant offers four nightly DVD rentals a month in addition to its new digital service that matches Netflix on price. It doesn't stand much of a chance.
Maybe Spotify doesn't feel as if it has much of a choice. Amazon and Google are just two companies that will surely enter the premium music subscription market later this year. It doesn't want to be the one-trick pony. Then again, being a one-trick pony has worked for Netflix. It has been reluctant to joins smaller rivals in offering video games, a la carte rentals, and other forms of media.
What Spotify wants and what it will be able to achieve if it turns on the camera are two entirely different things.
Longtime Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends Amazon.com, Google, and Netflix. The Motley Fool owns shares of Amazon.com, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.