Here's why you can't really compare Spotify and Netflix

BRYAN R. SMITH/AFP/Getty ImagesTraders work on the floor during the Spotify IPO at the Dow Industrial Average at the New York Stock Exchange on April 3, 2018 in New York.

Netflix and Spotify both offer all-you-can binge content consumption for a flat monthly rate, but one analyst says investors shouldn’t compare the two at face value.

“On-demand music services have many distinct differences from streaming video services like Netflix,” Stifel analyst John Egbert said in a note to clients initiating coverage on Spotify Thursday.

“Streaming music is effectively a zero-sum game between competitors due to lack of differentiation in catalogues, with relatively little or no proprietary original content, whereas Netflix primarily differentiates through its original content offering and can peacefully co-exist with streaming video competitors because many households subscribe to multiple services.”

Netflix is spending exorbitant amounts of money on new shows and top Hollywood talent. CFO David Wells said in February the company expects to spend more than $US8 billion on about 700 new original series in 2018. These are helping the company to widen its “global moat,” an analyst said in March.

Spotify, on the other hand, doesn’t need to build a a similar moat thanks to structural differences in how the music and entertainment industries function.

“The music industry is an oligopoly that enforces rigid deal parameters across all on-demand services, sometimes through arguably anticompetitive means like most favoured nations clauses,” said Egbert. “In contrast, the balance of power in Hollywood is spread out among a number of movie studios, with no single studio being a must-have partner for a streaming video service.”

Instead, Spotify has doubled down on its technology and innovation as a way to stay ahead of competition like Apple Music, Pandora, and others.

“Spotify is able to curate and personalise content for its users based on their preferences and more than 40 parameters the company tracks,” RBC Capital Markets said in a note to clients also initiating coverage on the stock. “The company’s algorithms anticipate user preferences based on things such as demographics and past behaviour. The company can also add in situational context, such as time of day and location, to improve the recommendations.”

Both RBC and Stifel are bullish on newly public Spotify, with price targets of $US220 and $US180 respectively. The Wall Street consensus is $US166 – 11% above where the stock was trading Thursday morning.

Shares of Spotify have slumped 12%, to $US149, from their initial trading price Tuesday. However they got a slight bump Thursday, up 3.6%, as sell-side firms, Stifel and RBC included, initiate coverage with bullish ratings.

“While operating in a highly competitive segment, we expect Spotify to maintain its competitive edge due to technology-driven personalisation and scale,” Stifel said.

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