There have been a number of recent reports lately that Spotify is looking to launch its own series of branded streaming hardware products. This is supported by its search for an “Operations Manager – Hardware Product” as well as several listings for hardware related positions on its website. Let’s look at the pros and cons of the company entering into a part of the business that can be both lucrative and full of landmines at the same time.
The margins – Margins in streaming are razor thin thanks to the licensing deals driven by the the major labels, who supply the product needed to power the service in the first place. Hardware products provide a means to raise the margins without worrying about restrictive licensing deals that eat up 70+ percent of the gross revenue. Apple is the example here, as it’s become a tech powerhouse because of its high-margin hardware, with its software and services supporting it.
The ecosystem – What has made Apple successful is that it has a controlled ecosystem that makes its products easy to work (at least most of the time) with few glitches caused by outside unknowns. Even though Spotify hasn’t had too much of a problem with interfacing with other playback devices, owning the ecosystem would make it a more seamless experience without having to re-register accounts like you do now on some devices.
A hedge against the future – For now Spotify is the king of the hill in terms of market share, so most companies with streaming hardware are forced to allow a user to access it. That access could come crashing down with exclusive deals in the future, especially if other streaming services become more popular. Having its own walled garden of software/hardware products is a way to ensure that it’s never completely isolated from its customers.
The revenue boost – In order to keep future shareholders happy, Spotify needs to increase its revenue and become profitable. One way to do that in one giant leap is to introduce a hardware product, then follow that up with other products. It’s not inconceivable that at some point after launch the hardware revenue can rival that of the streaming service under the right circumstances.
The gear must be great – Even in today’s world of easy and fairly inexpensive Asian manufacturing, that doesn’t guarantee that the product will be something that people want. Apple has shown time and again that consumers will pay a premium for sleek product design, but only if it’s easy to work. That’s why the actual hardware is only a portion of the equation, and the user interface is of utmost importance. For Spotify to score in this realm, the product has to look good, provide the right features, be easy to use, and meet a price point that consumers are comfortable with.
That price is a moving target – Again, Apple can get away with a premium price because it has completed the groundwork of both branding and ecosystem. For Spotify, the perception is more utilitarian than premium, which means that the price of any hardware device has to reflect that. Price it too high, and people will just purchase up to Apple or refuse to switch from their favorite current device. Price it too low and the margin is destroyed, which is one of the main reasons for getting into branded hardware in the first place.
The politics of the marketplace – Right now Spotify enjoys market neutrality in that it’s just a feature that Apple, Google or Amazon hardware (as well as all the other stand alone audio manufacturers) provide. In other words their attitude is, “We don’t really care what service you use as long as it’s on one of our products.” That all changes when Spotify becomes a gear manufacturer and that’s when we’ll start to see things get nasty, especially if the company’s market leadership begins to erode. You’ll start to see other hardware manufacturers make exclusive deals with other streaming networks, and you’ll see the big 3 (Apple, Amazon and Google) shut out Spotify from their own ecosystems. It’s one thing to be the king of the hill in a market sector that doesn’t make much money relative to those tech giant’s overall revenue, but being a hardware competitor changes the game.
Given that the smart speaker sector is so hot at the moment, you can’t blame Spotify for seeing it for its profit potential. Still, it’s not as easy as just launching a product, as we’ve seen even experienced consumer electronics manufacturing companies get it all wrong in the past and suffer as a result. Done well it can be a major win for the company, but that’s easier said than done.