Spotify (SPOT -4.79%) must be paying attention to Apple's (AAPL -2.71%) sudden aggressive pursuit of TV shows to release via the Apple Music app, because the former company just announced a new bundle that gives users access to both Hulu and Spotify.
This is a smart move for Spotify, which had its initial public offering on April 3, because it still isn't profitable. In other words, it doesn't have millions of dollars to throw at a single episode of a TV show, as Apple and Netflix (NFLX -4.32%) have been known to do. Spotify may be the largest music-streaming service right now, but it knows that a solid content lineup on Apple Music in the near future could be a severe blow to its own subscriber base.
Spotify is defending itself against its main competitor, Apple Music, by announcing a new Hulu partnership. Image source: Hulu.
How close is Apple to catching up to Spotify?
Spotify, the world's largest music streaming service, hit 71 million paying subscribers (157 million total) in December. That's about 11 million paying subscribers added in the six months since the end of July 2017, when the company had more than 60 million paid subscribers. That translates to about 2.2 million paying subs added per month for the period.
Meanwhile, Apple Music hit 40 million paying subscribers in April, but the music service is still growing at a slower rate than Spotify. Apple was consistently adding about one million paying subs per month in 2017. However, in early 2018, Apple Music's growth has mushroomed to about two million additions each month, taking Apple Music from 36 million paid subs in February to 40 million in April.
Is Apple's content strategy scaring Spotify?
Not only is Apple's subscriber growth rate increasing, but it's also gearing up to release some expensive original content on its Apple Music app. Talk about this developing aggressive content strategy from Apple seems to have made Spotify nervous, because it's made a 180-degree turn on its own content strategy.
At the end of 2017, Spotify canceled upcoming episodes of its existing programs that failed to really take off and cancelled other projects that hadn't yet launched. In January, it launched a new, less aggressive content platform called Spotlight, which gives a visual element to podcasts and other audio experiences. Contributors to Spotlight include BuzzFeed News, Cheddar, Gimlet Media, and various artists.
Apple is also leaning into becoming a multimedia company. On April 13, model and reality star Kendall Jenner helped launch a new show called Pizza Boys on Apple's Beats 1 radio station. More importantly, Apple has some hot TV shows in the works, including a highly coveted drama series about people who produce a daily morning TV show, starring Reese Witherspoon and Jennifer Aniston. Apple will also revive the Steven Spielberg anthology series Amazing Stories for 10 episodes, with a reported $5 million budget per episode.
Unfortunately for Spotify, it doesn't have the deep pockets Apple has to develop TV shows and movies worthy of competing with Netflix, which is set to spend up to $8 billion on content this year. That's more than the revenue of $4.9 billion to $6.8 billion that Spotify is expecting for this year. The guidance represents 20% to 30% growth over the previous year's revenue, a drop from the 39% revenue growth Spotify saw last year.
But Spotify seems to have found a shortcut to address this growing content gap between itself and Apple with the new Hulu partnership. Users can now pay $12.99 per month for access to Hulu's video-on-demand service (with some ad breaks) and to Spotify Premium (with no ads). That's only $3 more than the regular $9.99 Spotify Premium subscription. This is another smart move by Spotify: It knows it can't seriously compete with Apple and Netflix in the content space.
As Disney and Apple lean more into the original content game in the next year, high-quality scripts and talented producers will only get more expensive. Spotify needes Hulu to make up for an area where it was lacking; Hulu needs Spotify because that's 157 million potential viewers and subscribers for its own site, which is also having to compete with Netflix and Apple Music. Last quarter, Netflix reported a stunning 118 million subscribers worldwide.
Spotify investors should be happy to see the company making aggressive moves to work out a viable content strategy before Apple starts to launch its own big TV shows. This demonstrates that the company isn't getting too comfy in its spot as the top music streamer, and is aware of the growing importance of original content.
