Spotify is planning to compete with Netflix, Inc. (NASDAQ:NFLX) and HBO in providing online video streaming services, according to a report from Business Insider citing two sources familiar with the matter.
The unnamed sources in the report said that Spotify wants to become on-demand music and video service providers and to compete directly against Netflix, Inc. (NASDAQ:NFLX). The sources added that the company is currently looking for partners to create exclusive content and fund its new business endeavor.
Spotify is now valued around $3 billion. Last year, Business Insider reported that Spotify raised funds and asked multiple investors in Silicon Valley to provide a high valuation to the company at around $3.5 billion. At the time, sources said the firms were reluctant in providing a high valuation citing because the company does not own the music its users are paying for to access.
The company previously received $100 million investment from The Coca-Cola Company (NYSE:KO) and Goldman Sachs Group, Inc.(NYSE:GS).
Last year, Deutsche Telekom AG (FRA:DTE) (PINK:DTEGY) (ETR:DTE) partnered with Spotify to provide unlimited music streaming to its consumers. The German telecommunications company said it would offer the Spotify premium subscription bundle with its tariffs as an add-on option. Deutsche Telekom described its partnership with Spotify as an innovative strategy.
Spotify emerged as one of the most popular online music streaming service provider, but the company faces strong competition. The company generates weak margins because it does not own the contents offered to customers.
The company pays rights to music label owners and as the company becomes more popular, music labels increase their fees. The company failed to negotiate the fees with music label owners because its competitors are bidding for the same rights on the same music.
Netflix, Inc. (NASDAQ:NFLX) experienced the same problem with its business. The company does not own the video contents its users are accessing and the producers of the movies or television series charge huge amount of fees. Last February, Netflix introduced the House of Cards, its own original show starring Kevin Spacey.
According to the survey conducted by Cowen and Company, the show was a success. Ten percent of Netflix, Inc. (NASDAQ:NFLX) subscribers watched the House of Cards and 80 percent of the respondents rated it as good or exceptional.
Spotify plans to use the same strategy to increase its profitability. However, producing an original content is not cheap. The online music streaming company declined to comment on the issue.