Spotify for video? It just might work

March 26, 2013: 9:37 AM ET

The streaming startup may be preparing a radical new service. Here's why it makes sense.

daniel_ek_spotify

Should Spotify offer a video streaming, too? Analysts like Forrester's James McQuivey say 'yes.'

FORTUNE -- Can Spotify do for video what it is trying to do for music?

According to a Business Insider report this week, the popular music streaming service is working on an on-demand video business intended to tackle Netflix (NFLX) head-on, with plans to invest in original content much in the same way the streaming pioneer invested at least $4.5 million per episode in the popular show House of Cards, with actor Kevin Spacey. Spotify is reportedly seeking partners to help finance the effort, as well as create new content.

Since Spotify rolled out in 2008, the simple and legal "all-you-can-eat" music service has made waves in the U.S. and abroad. An ad-supported "freemium" product lets its 24 million active users—6 million of whom pay to forgo ads—listen to over 20 million tracks for free. Its user base eclipses the competition, which includes newer entrants like Rdio and MOG, as well as long-time streaming service Rhapsody. Spotify wants to push even further mainstream, starting with a series of TV commercials like this one, airing during NBC's sing-off show, The Voice. (All of this has created some pressure on the dominant iTunes.)

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But does a video service make sense? According to Forrester (FORR) analyst James McQuivey, digital businesses are not about music or video or any other specific vertical—they're about digital customer relationships. And once those relationships are built, they can be expanded. "Just as iTunes is no longer just a music store, and the Xbox is no longer just about gaming, Spotify has apparently learned something that Netflix hasn't—that its digital customer relationship can expand far beyond its original promise," explains McQuivey referring to Apple (AAPL) and Microsoft's (MSFT) entertainment products. In other words, loyal Spotify users who already pay may find a video service a value add to what they see as an already compelling experience.

Gartner analyst Mike Maguire sees the potential but remains skeptical about the execution. With Netflix, Amazon (AMZN) Instant Video, and Hulu, Spotify would be entering an already-crowded space. Not only will it be trying to attract new users, but it will also be trying to poach some away from seriously entrenched competition. That's why, if Spotify wants to differentiate itself, it may be considering a big play in the original content space. Netflix has its critically acclaimed House of Cards, followed by the resuscitated cult hit Arrested Development debuting in May. Hulu continues to invest in shows like The Awesomes, an animated series from Saturday Night Live head writer Seth Meyers and Emmy-winning producer (and SNL alum) Michael Shoemaker. Google's (GOOG) YouTube has also invested hundreds of millions in new content channels.

"I guess when you have funding, anything is possible," Maguire muses. He envisions Spotify's video push less as a direct Netflix competitor and more of an add-on that would offer music videos and live performances. Maguire sees Spotify playing a special aggregation role where users can say pick and choose streams and say, tune into a live or prerecorded Lumineers concert at a particular venue. Already, Spotify offers the Songkick app, which lets users easily track their favorite artists on tour and purchase tickets. A music-oriented video service? That would bolster the Spotify experience even further.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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