According to two sources briefed on the company's plans, Spotify intends to become an on-demand music and video service – one that would invest in original content and compete heads-on with Netflix.
Ultimately, Spotify's metamorphosis would also put it into competition with content creators and providers such as HBO.
Our sources said that Spotify is looking for partners that can help it fund and create exclusive content. It is unclear if these talks would lead to a new round of investment in Spotify itself.
Spotify is already worth billions of dollars on paper thanks to several huge rounds of investment – the last of which we started hearing about this time last year and later closed in the fall. The $100 million investment from Coca-Cola and Goldman Sachs valued Spotify at $3 billion.
Spotify has become a very popular service with consumers, but its business remains challenged. The reason: extremely thin margins. Spotify does not own the music its customers listen to. Music labels do, and Spotify has to pay the labels every time a customer listens to one of their songs. As Spotify gets more popular, the labels charge more and more.
The original plan for Spotify was that it would grow so popular with music listeners that Spotify would be able to dictate negotiations with the labels.
This hasn't happened. This is in part because there are several Spotify competitors all bidding for the same rights to the same music. Even though it has become a significant source of revenue for the labels, Spotify still depends on the labels more than they depend on it.
How does becoming a video on-demand service like Netflix help solve this problem?
A year ago, Netflix was dealing with a similar challenge – just in video instead of music.
Netflix did not own any of the content it streamed, and the Hollywood studios that did own the content were able to charge Netflix huge, margin-thinning amounts of money.
Then, in February, Netflix did something different.
It made video content available through its service that it had not acquired from elsewhere – an original series called House Of Cards.
The series was not cheap to produce. It costs ~$5 million per episode, and that doesn't include marketing expenses that put House Of Cards posters all over the country.
Netflix's gamble was that House Of Cards would attract new subscribers to the service and that these people would remain subscribers even after viewing all 13 episodes.
It hopes the multi-year revenues generated by those new long-term subscribers will more than pay for House Of Cards' substantial upfront cost.
It's entirely unclear as of yet whether or not Netflix's gamble will pay off.
But … we have seen a similar plan work before.
HBO used to be a cable channel best known for showing movies after they'd already been in the theater.
Then it started producing original content like The Sopranos and Sex And The City.
Today, people pay $15-$20/month to subscribe to HBO for original programming like Girls and Game Of Thrones.
Shows like those cost huge sums of money to create, but they attract subscribers who stay subscribers. Now HBO is the premier property in Time Warner's most profitable division.
Netflix and Spotify are betting that they can pull off a similar trick as the distinction between Internet-based video and cable TV blurs thanks to the rise of smartphones, tablets and Internet-connected TVs and set-top boxes.
Briefed on the details of this story, Spotify declined to comment.
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