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I'm Dan Runcy. Welcome to Trapital. Today we're going to talk about one of the more intriguing outcomes of the last 20 years in streaming that people still don't give enough credit to. The category defining winners have not been the biggest tech companies in the world. In music it's been Spotify and in premium video it's been Netflix. That's not to say the big tech companies aren't major players in these categories. Apple Music, Amazon Music, Apple tv, Prime Video, all of it matters. But when it comes to building the default paid subscription product, the habit forming services that people actually stick with, it's Spotify and Netflix. They are the ones that forced everyone else to play catch up. So today let's break down why that happened. And even though big tech had plenty of advantages on paper like distribution, bundling devices, loss leader opportunities, balance sheets and more, it still wasn't enough to beat Spotify and Netflix. So let's break down the main reasons why this happened, some of the caveats, and also why Netflix and Spotify specifically able to survive given all of the pure plays that try to do the same exact thing. This episode of Trapital is brought to you by Symphonic, where you can build your career on your terms. Symphonic empowers independent artists and labels to stay in control while building sustainable global careers. Symphonic provides the tools, technology and support needed to distribute music worldwide, manage catalogs, collect royalties and grow with clarity and confidence. From global distribution and marketing to data, insights and label services, Symphonic meets you where you are whether you're releasing your first track or scaling an established catalog. As a proudly independent minority owned company, Symphonic combines powerful tech with human relationships helping you understand options, protect your rights and and make decisions that serve your long term goals. Learn more about Symphonic by going to symphonic.com or click the link in our show notes. Netflix now has 325 million paid subscribers worldwide. Its annual revenue in 2025 was $45.1 billion. And on the Spotify side, Spotify now has right around 290 million paid subscribers around the world, 740 million monthly active users and its annual reven right around 20 billion euros for subscription streaming. They are the category definers in their industries. Netflix has enormous influence over their premium video commissioning, release strategies, production economics and that'll only increase once the Warner Bros. Acquisition goes through. Spotify has the same in music discovery, playlisting and increasingly spoken word ecosystem. Netflix and Spotify of course have similar business models. You pay a subscription to access their content, but their cost structures are night and day Spotify's cost structure has a marginal cost for every subscriber on that platform. Anytime that you listen to music, there is a percentage of that revenue that goes to the rights holders for that music. In music, specifically in Spotify, as well as the other streaming services, it's right around 70%. For Netflix, though, the model is flipped. They're either buying or acquiring the content upfront or licensing it. So they're paying an upfront cost for the content that you access on the platform, but there is no marginal cost for each additional subscriber. It creates different challenges but different opportunities for each company. But despite the differences with their cost structure, the reasons for why Spotify and Netflix have continued to succeed are quite similar. Reason number one is existential focus. For Spotify and Netflix, streaming is not a feature. Streaming is not a loss leader. It is the whole company. If streaming doesn't work, the company does not exist. Now, if you compare that to Apple or Amazon, Apple can be successful whether or not Apple Music is number one. Number two, number three in terms of its popularity, because Apple's core engine is selling iPhones, selling AirPods. Apple makes more in revenue from AirPods than it likely does from Apple Music. And that goes with a broader portfolio of services as well, like the MacBooks, the iPads, and more. That is Apple's bread and butter. And don't even get me started on the App Store where they make a ton of money. Amazon similarly can be successful whether Prime Video is best in class or good enough. We all remember the classic Jeff Bezos quote. Every Golden Globe we win, we sell another pair of shoes. It is ultimately a service of the retail and it's part of that membership flywheel. That difference may be subtle, but it changes everything. It changes the urgency, the risk tolerance, the willingness to make some tough trade offs, and the speed at which you're willing to iterate. Because you may not be incentivized to iterate the same way that a company like Spotify or Netflix may have to to survive. Spotify and Netflix are fighting for one crown. Meanwhile, these big tech companies are running an entire kingdom. And when you're running an entire kingdom, there are fights that you just aren't naturally going to get into in the same type of way. So subscription streaming has to compete with 10 other priorities in those big companies. But again, with Spotify, Netflix, that is the game that they're in. They needed to win to figure that out. Which brings us to reason number two, the pure play streaming companies do not have that cannibalization Tax. If they launch a successful product, they don't have to worry about how it may hurt an existing successful product. If we take a step back, subscription streaming isn't just a new product that exists in a vacuum. It is a new business model that can threaten the existing ones, like digital downloads, DVD sales, cable bundles, even certain forms of advertising or distribution. So the pure play companies like Spotify, Netflix can feel more willing to cannibalize because there's less to protect. Netflix knew that DVDs were going to have to go at some point to go all in on streaming, and they were willing to do that. Spotify was starting from scratch. They knew that they needed to reshape how music discovery works in many ways. They looked at what Napster was doing and they said, okay, let's put a business model around that and see what happens. But these big tech companies, they don't have that type of freedom. They operate inside of these companies with established revenue streams, politics, and a way of measuring success. Look at Apple, specifically in music. The success of streaming and pushing that would hurt their digital download sales. Apple was the home for digital download sales. Remember how much money they were making from itunes? That was a serious business. And Steve Jobs himself had talked several times about why he did not believe that subscription streaming, particularly a subscription product for music, was the way to go. Part of that could have been to push his own book, but it also was a fundamental belief that he had. And when you're a new product in a kingdom like these big tech companies and it can threaten an existing product, even that internal conflict, every decision becomes a negotiation. It can create conflict between the teams in your organization, which can further slow down the progress. So the pure plays can be more likely to take that painful step, rip off the band aid and see where things go. And at the big tech companies, there's a bit more domain to protect. So they may be more likely to play it politically safe and watch what happens the next quarter. Which brings us to our third reason, the scoreboard. Spotify and Netflix are optimizing for their scoreboard in subscription streaming. It's simple. Habit, retention, lifetime value, your classic LTV over customer acquisition cost. That is the game that they were in. In their respective ways. Netflix can ask, what increases watch time? What increases satisfaction? What increases retention? How do you design the product to do that with the user interface? How do you think about the content that you want to have? How does the pricing strategy in certain regions compare to others? Different promotions, partnerships, all of that can focus and hone in on that KPI Spotify is similar. What increases listening time? What about the algorithm? How do we tweak it this way? Are there certain cultural shifts to have the algorithm move in this way? Region versus others? What about personalization, retention? And how do we ultimately try to convert the free users to paid? All of that still stems back to that habit retention piece. But big tech is completely different. The streaming products often have multiple scoreboards at once. They're not only judged on is this streaming product great? Again, back to that Jeff Bezos example. Does this Golden Globe help us sell more shoes? Does this Apple Music subscription help us sell more AirPods? Does it improve our Apple One bundle? Does it improve our prime bundle? Does it reduce churn across the ecosystem? Does it support our broader brand narrative? Are there any type of risks that we want to avoid? And because we're a big company, are there any antitrust risk that we're going to get more scrutiny for than a smaller company would? None of those are irrational goals. In fact, they are very real goals that the smaller pure play companies don't necessarily have to worry about, at least at this stage. So if you're a Spotify or you're a Netflix, you can obsess over that customer subscription loop. You can get that customer acquisition cost to be as low as possible, gather as much market share as you can. But big tech often had to make that subscription loop serve something else. The next reason. Reason number four, speed and ownership. Sure, you may call it founder mode, but it's bigger than just a viral blog post from Paul Graham. This is a mechanism about decision velocity. Subscription streaming again is a habit product. And habit products are won over years through thousands of small improvements. Those 1% increments every day that just compound and compound. The recommendation systems, the onboarding, the UI tweaks, pricing tests, a, B testing, content, strategy adjustments, algorithm tweaks, distribution, partnerships, packaging. That is the game. And if you move just 3% faster than your competition, and you do that day after day after day, that compounds into a massive lead that you can have. And because these pure plays, especially in the early days, they tend to have fewer approvals. There's a clear ownership of who does what. There are tighter feedback loops, there are less considerations about other organizations or teams within the company and a culture that treats shipping that product as oxygen, which is very different from, say, a company like Apple that is used to launching products like the iPhone, where everything is kept in secret and most of the people inside of that company may not know what's going on. So when you play that out to the broader ecosystem, like streaming, which is very iterative. It's not a surprise that the dynamic has played itself out in the way that it has. These large, diverse companies, to be clear, can ship quickly too, but their streaming product can often sit inside that larger governance that we're talking about. Like I just used the example with Apple. More coordination stakeholders. There's brand risk, there's internal prioritization battles. There can be rifts between teams as certain priorities become bigger than others. And in a market where compounding matters, decision speed truly matters is a structural advantage. If you love listening to Trap Ital, I want to put you onto another podcast that I think you'll really enjoy. It's called One Song. It's hosted by Diallo, Riddle and Luxury. Each episode unpacks one iconic track. They break down the original musical stems so you can hear how the song was built, while also diving into the creative choices and cultural forces that shape the song. If you're into how music, media and culture intersect, this show is very much in that lane. You'll hear songs you already love in a completely new way. Check out One Song wherever you get your podcasts. Let's take a break for our chart metric Stat of the week. I have had the Fugees killing me softly with his song stuck in my head since the Grammys where Lauryn Hill and Wyclef performed the song as part of their tribute. During the In Memoriam part of the show for Roberta Flapp, I was surprised to see that the song hadn't hit the 1 billion club yet. On Spotify, it currently sits at 935 million streams or on YouTube where it sits at 763 million views for the music video. But for a 30 year old song, it does stand strong. It is currently the fourth most viewed hip hop 90s music video on YouTube and the tenth most streamed 90s hip hop song on Spotify. Love this song, love this track. And the album itself is coming up on its 30th year anniversary as well. Let's get back to the episode and our last reason. Reason number five, which is connected to four, is the data and the impact that data can have on that compounding benefit for the pure play companies in subscription streaming, those early compounding leads matter because that's more usage that generates for more data. There's more data that can improve the recommendations that deepens the habit. The habit improves the retention and the better the retention that gives you more clarity into what it takes to sustain and grow your revenue that lets you invest more into content, product and expansion. And the loop continues to repeat. So catching up to the existing players isn't a matter of just building features. If it was that easy, then everyone would do it. That's why catching up isn't just about building features or a UI that is presented a certain way. If you go on your average music streaming service right now, the UI probably looks pretty similar if you try to listen to the same exact song. The same may be true in video, but the difference are these compounding impacts that we talk about. And that's how these companies have become the default. The competitors aren't just trying to win you, they're trying to break your routine to get you out of using those other services. And that's where this gets really hard. And once that flywheel starts to spin, even the massive companies have to overpay through spending, bundling and acquisition to change behavior. Our friend Will Page has talked about this a lot. He talked about how music streaming, especially growth in the most established markets, is no longer the herbivore market where everyone's grabbing the available land share of existing subscribers. It's the carnivore market, where they need to grab subscribers from the other services. That's a lot more expensive and a lot harder, especially given how valuable those subscribers can be. So those are five key reasons why the Pure Play companies have won. But we have to acknowledge the survivorship bias here, because there are a lot of Pure Play companies in music and in premium video that are not named Spotify Netflix that have tried to do the exact thing but haven't reached the same scale. Let's look at music. One of the companies that tried to compete with Spotify pretty heavily in the early days was more focused on creators and the community, which is a great thing to be focused on, but they didn't have that same edge that Spotify did in terms of the customer retention and truly focusing on the subscriber. There's another music streaming service that focused more on exclusives and high audio quality. Again, those are things that may have gotten certain subscribers in the door, but how many people out there were truly buying a music subscription for higher quality audio? And could exclusives truly retain an audience over the long run? And there are other platforms that focus more on streaming radio and truly being Internet radio in that type of way. And while that was a cool feature, it didn't quite land the plane on what consumers really wanted, which was on demand music streaming. And that Internet radio was a nice feature to have, but it wasn't the core product. Especially when you think back to the Napster use cases of why Napster was so disruptive to the initial model. But again, Spotify was different. It had the compounding advantages more than anyone. First, it had a lead on a lot of these companies launching in the US in 2011 and launching elsewhere in Europe in 2008. So there was a massive funnel, especially with freemium and with its global expansion, it had an understanding for where users were. And that freemium tier, especially the free tier, meant that if a subscriber unsubscribed from Spotify, they weren't gone from the ecosystem overall. They could still live in and eventually subscribe back, which is harder to do for some of the other platforms that were purely paid subscription music streaming services. It's hard to understate how important that is. This is about leverage and it's about habits. If I unsubscribe from Spotify for a few months and go back in, the fact that I'm still using it means that I'm more likely to join in as opposed to unsubscribing from some of the other services. The peer companies that I mentioned, they had their strengths, but it didn't quite compound in the same kind of way, especially as it did for Spotify. Another small but important point, Spotify in the early Another small but important point. Spotify was willing to take some of those less favorable deals early on from the major record labels, and they wanted to have their music on the platform, get the product right, and then hope that the economics would work out in the end, which they eventually have. But some other companies weren't willing to do that. They spent a lot more time on lawyer fees and resources trying to fight legal battles, and that energy could have been put into making their product as strong as possible. That's music. Now let's get into video. Because Netflix was not the only company besides the big tech firms that had high streaming aspirations. Many of the bigger video plays, especially for premium subscription video, are tied to legacy studios. And they had their own linear economics bundles and their own conglomerate goals in their own kingdoms. That meant that they also had their own incentive conflicts, no different than the big tech firms that we just talked about. Cannibalization, multiple scoreboards, slower decision process, internal politics, and more. It's not that those companies can't be huge. Disney has a ton of subscribers and a very committed subscriber base. But Netflix defined that model first, and everyone else has been fighting catch up to do what Netflix has done, despite the higher constraints they had that Netflix hasn't quite had. Now let's talk about YouTube. This conversation may be focused on subscription paid on demand video. YouTube may be more known as a free ad supported product, but YouTube does have over 125 million paid subscribers worldwide that are paying for that product. So it needs to be discussed. But the one key difference I would make about YouTube as opposed to Spotify, Netflix or this category we're talking about is this. YouTube is primarily a platform built on user generated content creators. The revenue is primarily from ads and the network effect of their product is based off both the creators and the users. The subscriptions are a part of the business. They clearly want to grow YouTube Premium, YouTube Music, YouTube TV, YouTube Light. But they're layered on top of an ecosystem that already had a massive habit. And that massive habit of how YouTube was able to get there was thanks to the benefit that it already had from being part of Google. YouTube is the second largest search engine in the world because it sits under the largest search engine in the world, which is Google. The strength that the underlying product had was able to directly benefit from the core company's product. And that just wasn't the case with some of these other big tech companies. Apple Music is a very different product from Apple's flagship product, which is the iPhone. Amazon Music is a very different product from what Amazon's flagship product is. Some may say it's aws, others may say it's the retail business. Either way, it's a very different product, but that's not the type of business that Netflix is in. This is a curated premium subscription product. There isn't a UGC flywheel. There's no creator platform supply at the same scale. The subscription is the engine. So YouTube again, it doesn't negate the Spotify Netflix story. Spotify and Netflix are clearly teaming up to compete with YouTube on podcasts. It's not that YouTube isn't a threat, it clearly is, but it clarifies the boundary. Big tech tends to dominate when the product is a horizontal platform where distribution, ad tech, user generated network effects, those are the core advantages. And that's exactly why YouTube was able to benefit from being under Google. The pure plays can dominate. Meanwhile, when the product is more focused on that subscription loop where retention and curation are the core advantage and truly required all eyes and all focus on deck to make it work. To put it differently, Big tech wins on platforms, but pure play can win on the products. Now you may be listening to this and have a few objections yourself. You may say Spotify really hasn't won because the margins are thin at Spotify, and that may be a fair argument. Value creation, though, and value capture are different because Spotify is clearly one category. Leadership in subscription music streaming. Whether it generates enough profit long term is a separate debate. Objection 2. Big Tech can handle their bundle and bundle their product in a number of different ways at any time. And that's also true. Bundles can buy subscribers, but they don't automatically create this default habit. Look at Apple one's bundle and the various tiers that are there. Look at YouTube's various bundles or the skinny bundles it's trying to launch. Look at Amazon prime and the various bundles that include Prime Video, Music and others. They don't automatically create that same habit we're talking about because they're slightly different products altogether. And in the habit business, that default behavior truly is the most. Another objection. Even though we qualified the survivorship bias piece, you may still look at this and say, well, Spotify and Netflix are the survivors, and that isn't focused on enough. While I understand that the real claim here isn't that pure play always wins. It's that when the market rewards speed learning, retention, and the incumbents can face cannibalization or multiple opportunities, the pure plays do have advantages that allow them to have the compounding benefits that are very hard to reverse, or they're very hard to copy. And they're hard to copy with pure money alone. And that's why the big tech companies haven't quite been able to just throw money at the problem and succeed in the same types of way. So if we take a step back as we close things out, the biggest shift here isn't who won, it's what winning means. In the old era, the gatekeepers were your radio programmers and music, or the cable bundlers and video, or the retail shelves and who had placement where. But in subscription streaming, the gatekeepers are different. It's the algorithms, the recommendation systems, that homepage real estate, and those default habits, especially when it comes to consumers and the screens that they stare at. Spotify, Netflix didn't just build these big companies. They won by being able to control that gate that we're talking about. So the question I'll leave you with is this. What's the next category where Focus Pure Play Company can build the next default product before the platform companies, the big tech companies, or the existing players can decide that it's existential? And that is a wrap for our breakdown on why Netflix and Spotify, the Pureplay subscription streaming companies were able to beat out the biggest tech companies in the world. I hope you enjoyed this one as much as we did. Thank you to our audio and video producers Eric and G for everything that you do to help make trapital possible. 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