Why is Netflix more profitable than Spotify?

Three Shorts — April 2nd, 2020

Hey! This is something new — a space for short-form Divinations! 

I’m calling it “three shorts,” because it’s just three short ideas. They’re all about strategy, but I employ a somewhat liberal interpretation of what that means.

If y’all like this, I’d love to turn it into a recurring bit! I was surprised by how much I loved writing shorter stuff, and I imagine it might be a bit more consumable via email than my usual 2-3k word essays.

Enjoy :)

1

Why is Netflix more profitable than Spotify?

On the surface, it's because Netflix pays a fixed fee to its suppliers for content, while Spotify has to pay music labels a percentage of their total revenue. This means as Netflix grows their subscriber base, they grow their profit margins, but as Spotify grows they just have to keep paying the record labels more and more.

This fact is well known. But it made me wonder: why is Netflix's deal so much better than Spotify's is? What gave them the negotiating leverage?

This is also fairly well known. Netflix, when they first started, didn't have to cut any special deal with movie studios in order to exist. They could basically just buy DVDs and rent them to consumers over the internet. This gave them the ability to grow a user base and gain power before negotiating any special streaming deals. Spotify, on the other hand, had to cut deals before launching, which is a weak position!

But why wasn't there some Netflix-esque CD rental company? Why wasn't there a Blockbuster of music?

My first thought was that maybe CD rentals never took off, because music is the kind of thing people want to consume repeatedly, unlike movies, so it makes less sense to rent. But then I learned that there was actually a booming CD rental business in Japan throughout the 80's and 90's!

So why didn't CD rental take off in the US? Because, at least in part, of this testimony before Congress:

"Let us turn for a moment to consider a dramatic demonstration of the consequences of record rentals: the Japanese experience. More than 1,600 record rental shops have opened in Japan since their first appearance there 3 years ago. Surveys indicate that in areas where rental shops appear, record sales by retail record stores have declined by 30 percent."

This is a quote from a guy named Leonard Feist, who was president of the National Music Publishers Association. He said this while speaking to Congress in 1983 and advocating for a law banning the practice of music rentals. It worked! The law passed, and so no “blockbuster for music” was allowed to exist.

(CD rentals were never banned in Japan. Their powerful electronics industry — profiting from blank CDs, which people used to rip and burn their rented albums — squashed any complaints from the local record labels.)

Surprisingly, in the same hearing that banned CD rentals in America, movie studio execs were also present. They were there to lobby for another bill that would ban VHS rentals. But their bill failed. Unlike the music rental industry, which was tiny, VHS rentals were a huge business by 1983. It was too late to stop it.

Why? New vinyl records cost $8-12 dollars at the time, while VHS tapes cost $70-80. So the VHS rental market exploded, while the record rental market got off to a slower start.

Fast forward to 2020, and now, because of all this, the record labels extract way more profit from Spotify than movie studios do from Netflix. The result?  While Spotify is trying to figure out how to escape the grip of record labels by moving into podcasts, and Netflix has become a competitor to the very studios it used to buy DVDs from.

All (or at least partially) because VHS tapes were so damn expensive in the 80’s.

The weight of the past is surprisingly heavy!

2

Free startup idea: reinvent the listserv.

I thought of this the other day when my wife was trying to set up a community for one of her clients. What are the best options? Facebook groups? Google groups? Set up some forum software, like maybe Discourse? A Slack?

Email seems like a much better solution.

Groups of people will always want to communicate with each other, and email is never going to die. But it feels like it’s been at least two decades since anyone has built a fresh approach to group communication via email. 

The time is ripe. The newsletter boom has changed our relationship with our inboxes. It’s not just about work and drudgery. We actually look forward to consuming content in our email. Maybe we could also look forward to communicating with each other, in trusted groups?

To start, I’d focus on people who are extremely online and have a lot of thoughts. I don’t think you’d go after casual friends and family banter, because messaging apps do the job just fine. You want something that can scale better, and support longer form thinking, and perhaps have a slightly more professional (or at least intellectual) vibe.

The closest thing to this that I know of is Letter.wiki, which is a platform for open letters. It’s cool to read longform conversation on there, but I’m thinking of something a bit more utilitarian and private.

Anyway, I think this could be a cool thing. If you’re experimenting with an idea here, or know someone who is, I’d love to try it!

3

Why is coughing such a common symptom of infectious disease?

At one level, it’s sort of obvious: when a virus or bacteria gets in your lungs, it causes inflammation, which makes you cough.

But there’s a deeper reason that dawned on me for the first time a few nights ago, as I was listening to The Daily’s excellent episode explaining the science of Covid-19 to kids. It’s sort of obvious in retrospect, but for some reason it had never occured to me.

The reason why we so often associate viral infections with symptoms like coughing is simple: survivorship bias.

There’s nothing inherent to viruses or bacteria that makes them specifically attack the lungs. A virus is just a tiny thing that’s evolved to invade cells and use them to make more copies of itself, killing the cell in the process. Bacteria are simpler — they just use your body as food and grow through cell division. Nothing here has anything to do with lungs or even humans.

This is where natural selection comes in.

Most new disease-causing viruses and bacteria die pretty quickly, because they fail to make the leap to any new hosts. In order to multiply, they need a way to travel. But how?

Our brains come with a built-in “cough reflex” because it helps us clear junk out of our lungs, like foriegn objects or excess mucus. This is normally helpful, but infectious diseases have evolved to hijack this reflex and turn it into a distribution channel, so they can multiply exponentially throughout the population.

So, infectious diseases tend to cause coughing because coughing is the best way for diseases to actually become infectious.

If you think about it, the same logic governs business. We see the companies that evolved to take advantage of some distribution channel. But there are many possible businesses that we don’t see because their model doesn’t fit neatly with avenues for growth.

In other words: the distribution channel is the message.


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