Who doesn’t know how annoying it can be when you want to read an article, but you first have to pay for access to it or advertisements that appear while you are in the middle of watching a YouTube video. This does also apply for music, movies, apps, and so forth, and has been becoming increasingly widespread throughout the last years.
With the increasing globalization, everyone with internet access can sell his/her merchandise globally, which leads to incredibly high specializations in whatever one can imagine. This, in itself, is a very good thing because it leads to higher quality, economies of scale, and higher expertise, however, it also comes with a big disadvantage. With no barriers to entry, the supply of goods and services is literally unlimited, which translates the value of everything to zero.
The problem that arises from this is that no one wants to pay for any kind of service anymore, be it music, newspapers, apps, etc. Nevertheless, all of these people have to get paid somehow, which is why we see today many companies like Spotify, Netflix, Apple Music, The New York Times who are trying to solve this in one or the other way. And now, if we look at these companies individually, we see that some are doing great while others are losing.
Let’s have a quick look at the music industry to give an example. If we look at the Figure below, we see the music revenues in billions of U.S. Dollars during the last 40 years. As we can see that there was a great peak in the year 1999, but since then it had steadily been declining until the year 2015. This great decrease, however, did not result because people stopped listening to music, they simply stopped paying for it. Companies like iTunes had tried to tackle this privacy problem, but as we can see only after the year 2015, for the first time this millennium, sales have started to increase again. This increase is mainly due to streaming platforms like Spotify, which did not try to defeat these privacy problems through laws and regulations, but with being better than it. This means instead of having to bother yourself with viruses and so forth, you could now conveniently, for just $10 a month, have access to every song ever played, on one single platform.
As a comparison, most of us can see how Netflix has been built upon the same system. Both companies offer $10 subscriptions for unlimited access to their services, as an answer to privacy. Think about it, before Netflix the idea that one can watch every movie, at any time, from any given device was insane, and as a reply to critics saying that people can easily just share one password with each other, Netflix even facilitated this by allowing users to have multiple profiles on a single account.
Even though Spotify and Netflix essentially offer the same thing, as a company they could not be more different. While Netflix generated more than $558.9 million dollars in profits, Spotify reported almost the same numbers, $581.4 million – loss.
But how can it be that one is winning while the other one is losing, even though they basically offer the same thing, just in different industries? The answer: scalability.
The reason for this is because Spotify only earns a small share of every subscription. No matter how many new users pay for the software, Spotify will always only make this proportion of money, while the other parts go to the songs you listen to. As such this means more users result in higher cost, not necessarily in higher profits.
Netflix, on the other hand, buys licenses to have the right to stream certain movies and shows for a limited amount of time. Once this license has been paid off, every additional Netflix user generates pure profits for the company.
One could now say that Spotify should simple improve their prices, but due to competition, this is not as easy. The reason is that even though there are many music streaming software companies like Amazon, Apple, and so forth, as well as there are many movie streaming services such as HBO, Amazon Prime, Sky, etc. typically consumers are willing to pay for multiple movie streaming platforms at the same time, while in the music industry, one winner takes it all. We expect that every streaming service offers all the songs available.
Having a look in the future suggests that movie streaming platforms like Netflix will focus on building uniqueness by offering famous shows and series exclusively through their service, which means that in this industry many potential winners can life simultaneously. For the music industry, however, the future doesn’t that promising. If nothing drastic happens it seems like there will only be one winner in the end, while the others will be trying to survive through investors as they do now.
This doesn’t mean that in the future there won’t be any app developers, musicians, or journalists anymore, the question is, however, which one will? Basically, there are three kinds of companies in the way they earn money. Those that earn money honestly, dishonesty, or don’t make money at all. If no one is willing to pay for music or newspaper anymore, good musicians or journalists might indeed dye which means that only the “bad” ones survive. Some people would say that this is already happening.
If we look at the example of Spotify and Netflix, we can derive three main lessons. Firstly, people will pay for content, it’s the companies’ problem to make a living out of it though. Secondly, a company has to offer unique services and thirdly, a service does not only have to benefit the customers, but also the producers of it, like the artists, journalists, and app developers, to give an example. The extent to which service providers consider these lessons will determine which industries will drive, and which ones will just survive.