April 3, 2018

Smart Speaker Race About to Get Noisy

The smart speaker race is about to get noisy in the coming months, and with today’s direct listing of Spotify on the NYSE, 2018 could be a milestone year.

At this year’s Consumer Electronics Show, Samsung indicated that you’ll be hearing a lot more of Bixby’s voice in products beyond its smartphone line — primarily integrated in appliances like TVs and refrigerators. LG now wants in the game as well, with its ThinQ Speaker and a clear focus on music.
And now there is speculation that Spotify may get into the smart speaker game after journalists spotted a job posting on the company’s recruitment site last spring for an Operations Manager: Hardware Product. Additional jobs have since been posted, yet Spotify is keeping mum on the matter.

With Spotify’s direct NYSE listing today, we found it timely to ask: Is the world ready for another smart speaker? And if Spotify has a smart speaker on its roadmap, what are the differentiators?

A Bit of Background
It’s hard to believe that smart speakers have been around since the introduction of Amazon’s Echo three years ago. Predictably, Amazon and Google are setting the pace with their Echo and Home devices, followed by the most recent arrival, Apple’s HomePod. Today, speakers do everything from play music, automate homes, perform web inquiries, check the weather, set reminders, and even play games.

It’s clear that smart speakers will be a permanent part of the connected home. Unlike the promise of 3D TV or wearables, smart speakers have quickly become a home fixture with higher adoption rates than both and much higher stickiness factor. And unlike wearables that suffer from short lifespans, with smart speakers affinity will grow over time as new use cases are developed. Little wonder Spotify is seriously eying the space.

Spotify May Need A Hardware Play Not Only To Stimulate Revenue, But To Remain Relevant
As Apple’s Jimmy Iovine once stated about Apple Music, the music streaming business is “not a great business” to be in, with super slim margins. Spotify is no different, and that’s exactly what we learned when it filed paperwork with the SEC for its direct listing, including operating losses of $1.5 billion in 2017 alone.

What we also learned is that Spotify reported 71 million paid subscribers to Apple Music’s 36 million. But that market lead could decline if consumers have barriers to listening as these new ecosystems are established.

In fact, some smart speakers are blocking Spotify. While Google Home allows both free and paid Spotify as its default music service, Amazon only allows paid subscriptions. HomePod disallows Spotify integration, keeping you exclusively in the walled-off garden of Apple Music.

Yes, Spotify has Spotify Connect, allowing it to be set as the music service of choice in select third-party hardware devices, but voice activation is missing — consumers still need to use their apps to control the service.

With streaming music services increasingly tying themselves to dedicated smart speakers, now is the perfect time for Spotify to enter the smart speaker market — both for customer acquisition and as a retention tool to combat further erosion of its market share.

Can Spotify Offer A Competitively Priced Smart Speaker?
Apple entered the smart speaker race in February with its HomePod. The speaker is earning mostly positive reviews from fans and critics, but at $349, it’s the most expensive speaker on the market. Meanwhile, Amazon Echo Plus sells at $149, with a basic model at $99 and its miniature Echo Dot at $49. Google Home retails at $129 with a smaller $49 mini model. Pundits are suggesting that a Spotify speaker could either (1) occupy a comfortable middle ground in terms of list price, or (2) with the right hardware, give Apple HomePod a serious run for its money.

Unlike Google and Amazon smart speakers, Apple’s HomePod was designed as a music-first device — bringing the highest fidelity sound to a smart speaker and a tight integration to Apple Music ecosystem. HomePod has no direct integration to Spotify, and for some Spotify fans that’s a deal killer.
Yet there is another obstacle Spotify may face in pursuing a smart speaker strategy: skills infrastructure. Amazon recently announced it has more than 25,000 skills (applications that give the speaker functionality), while Google Home has less than 2,000.

Spotify may have a lot of catching up to do, but even if its speaker has no other smart capabilities other than just music, it can comfortably compete and provide a better value than so-called “dumb” bluetooth speakers similar to the Sony SRS line that range in price from $49 to $199.

For hardware manufacturers who may be panicking about the encroachment of smart speakers, a collaboration with Spotify could certainly be a win-win proposition.

Spotify May Need A Smart Speaker To Recapture Important Demographics
Recent reports indicate that Apple Music, though trailing in overall subscribers, is surpassing Spotify in key demographics. Generation Z and millennials are far more likely to pay for music subscriptions; and Apple Music is edging out Spotify as the preferred premium platform in this key demographic, according to published reports. A report from Fluent claims that Apple Music is used by 19% of Gen Z streaming music subscribers, compared to 17% for Spotify (a dead heat). For millennials, however, the gap is wider: 14% of Apple Music subscribers are millennials vs. 9% of Spotify users. The predominance of speaker ownership by these younger generations, combined with the demographic lead that Apple already has in paid subscribers, should have Spotify more than a little concerned.

According to a report by CapTech Research, 53% of smart speaker owners are millennials or younger, while 32% are Gen X, with just 12% baby boomers. The report went on to indicate that this is an audience who are not only digital native but “voice native” — they grew up and are comfortable with the likes of Apple’s Siri.

Both Apple and Amazon have further catered to this demographic by offering student deals at half the price of a standard subscription ($4.99/month). Spotify countered with a $5/month bundle with Hulu.

A free standing smart speaker would open up the opportunity for both bundling deals and extended free trials. Apple already offers a three month free trial, and early adopters of the Google Pixel smartphone were offered three free months to Google Play Music. Spotify only offers a 30-day trial. Such offers go a long way in building consumer habits. With a hardware option, Spotify can offer a different level of incentives and bundles that are untenable.

Final Thoughts
In an era of AI, natural language and smart speakers being a normal day-to-day part of our lives, some are wondering why Spotify hasn’t taken the plunge yet. In any event, as the market matures, fans will have big expectations – a smart speaker from Spotify, or any new player for that matter, needs solid quality, a better price, and innovative ways to emerge from the pack.

Patrick Perez is a digital professional and multi-platform specialist with a stellar track record generating multi-million dollar returns within the digital ecosystem: SVOD, OTT, mobile, authentication, digital Pay-Per-View, and other digital platforms. He lives in Los Angeles.

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