When asked about his relationship with major media conglomerates, Netflix CEO Reed Hastings often says that competition is good for the industry. And CBS (CBS) CEO Leslie Moonves often agrees, proclaiming that his network can profitably compete and license to Netflix at the same time.
Yet while Spotify may want to reach profitability, it first has to reach a position of strength relative to its largest rivals, argues Santosh Rao, who heads up research at Manhattan Venture Partners, the venture capital firm. For the moment, getting bigger is just as important as being profitable, he said, given that Apple (AAPL) Music, Alphabet's (GOOGL) YouTube and Google Play Music, and Amazon (AMZN) Music Unlimited are owned by companies for which music streaming is a fraction of their overall revenues.
"Spotify could be profitable even now, even with this structure, but they are spending a lot on marketing and other services to try to expand their offerings," Rao said in an interview. "Fifty million users is a big number. If they're going to compete with the big guys, they have to keep growing."
Even Netflix runs a business that generates small yet consistent profits. The video streaming company's profit margin has been under 3% for the past eight quarters.
For the moment, Spotify is focused on talks that might lead to lower rates. Rao says that even if the company can't get its revenue share down to a 65-35 split from the current 70-30 division, Spotify's growth trajectory combined with new revenue sharing agreements and increased advertising should put the company into the black sometime in 2018. At present, advertising accounts for just 10% of Spotify's revenue, Rao added.
That way, it wouldn't need to act like Netflix.
"At this point, they don't want to rock the boat," Rao said. "I don't think they want to compete with the labels. They might find things to do on the fringes without upsetting them but they aren't likely to go all-in like Netflix."