Spotify, the UK based competitor as an internet radio station or music streaming service to Pandora, has just launched in the US as they said they would.
Spotify launched its US presence on Thursday, as it said it would just last week.The multi-million-song streaming-music service comes in three flavors: Free, Unlimited, at $4.99 per month; and Premium, at $9.99 per month.
Which brings us back to the point I made about Pandora when this launch was first mooted.
With standard terrestrial radio there is a natural limit to the number of stations there can be in any one market. On the internet, anyone with the nous to set up a server to stream music and who can sign the contracts with the record companies can launch one or many such stations.There’s just no limit to the number of people who can enter this space. So what actually, in a world of potentially unlimited competition, is the value of any of the competitors?
It's a fairly basic thing about any business: what is it that you do that cannot be copied by someone else? What is there that you can do to stop someone else copying what you do? The technical jargon for this is barriers to entry.
There are all sorts of things which can act as such barriers to entry: patents, copyrights, trademarks, geographical location, first mover advantage. But here we've a business which is simply the distribution of someone else's product, the music over the internet. Switching between distributors is a matter of moments, so there's no real technological lock in. And the speed with which Spotify was able to raise the money (only as month ago recall) to enter the US market shows that there's no real financial barrier to market entrance.
And there's another fairly basic thing about any business: where there are no or low barriers to entry then it's very difficult indeed to make a profit. In the long term, when equilibrium is reached (which of course it never is but the trend is generally towards it) the profit made by each competitor will be, on average, just enough to keep the capital employed which each competitor is using. The general return to capital in that economy and that's most certainly not why any of us invests in equities.
It's just extremely difficult to see where either Spotify or Pandora, or any other of their possible competitors, can make above average profits.
Please note, I have no interest in these or any other similar companies. This is also not investment advice: just a bit of public headscratching about where their value proposition is or is not.
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