Netflix vs. Spotify - Who's More Profitable? | Ep 176

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Netflix and Spotify may look similar on the surface—massive platforms, global audiences, subscription models—but dig into the numbers, and the differences are hard to ignore. In this episode, Steve breaks down both companies’ financials in plain English and reveals why Netflix generates 3X more profit than Spotify despite having a similar number of paying users. 

From gross margin to free cash flow, and strategy to scale, you'll get a behind-the-scenes look at how these businesses actually operate—and why some strategic choices have a bigger financial payoff than others. If you like real-world company breakdowns that connect strategy with numbers, this one’s for you. 

Disclaimer:   
BYFIQ, LLC is a wholly owned entity of Coltivar Group, LLC. The views expressed here are those of the individual Coltivar Group, LLC (“Coltivar”) personnel quoted and are not the views of Coltivar or its affiliates. Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Coltivar has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. 

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendations. The Company is not affiliated with, nor does it receive compensation from, any specific security. Please see https://www.byfiq.com/terms-and-privacy-policy for additional important information. 

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Transcript

I'm going to break down two different companies. You're probably familiar with both, and most likely you use one of their services. I'm going to do it in the same way that I did Starbucks just a few episodes back, because I got a lot of positive feedback that you like this type of format.

Now I'm going to keep it really simple and high level with the numbers, because if you're driving, I don't want you to drive off the road, I don't want you to fall off the treadmill if you're running, and I definitely don't want you to write all these numbers on your arm to try to follow along, especially if you're going to go out tonight, because you'll probably look like a total weirdo. Okay, nonetheless, let's go ahead and jump in. I'm talking about Netflix and Spotify.

Both of these companies are publicly traded, and therefore their financials are available, and if you look up ticker symbol NFLX for Netflix, and for Spotify SPOT on Yahoo Finance, Google Finance on Bloomberg, or wherever you look, you can get the same numbers, and if you want the full financial statements, you can always get those through EDGAR. That's the SEC reporting website. All right, let's go ahead and explore these two companies, because there are some major differences with their numbers, but more importantly, there's some major differences with the strategies they're pursuing.

Okay, so that's what I want to get into. Let's talk about revenue first. This is top line. This comes off the income statement, and it represents the amount of money that they earn from selling their services. Now, if you're not familiar, Netflix is a streaming service, so you can sign up for a subscription and get access to a ton of videos and shows. In Spotify, they're doing a lot of innovative things, but primarily, it's a platform where you can access music.

Now, they're starting to incorporate a lot more video onto their platform as well, but totally different services compared to each other, because Netflix is more about movies and shows, and I think of Spotify primarily audio, music, podcasts, books, etc. Okay, so Netflix, which one do you think is bigger, just in your mind? You can say it out loud if you want. I just can't hear you, but who do you think is bigger, Netflix or Spotify from a revenue perspective? Okay, and cast your vote here, and if you said Netflix, you're right.

Netflix does $41.7 billion a year in revenue, whereas Spotify does $16.2 billion in revenue, so quite a difference. Netflix, in fact, is what, like two and a half or a little over two and a half times bigger than Spotify. Now, let's look at their income, operating income.

If you remember, operating income is gross profit, so it's the amount of profit that the company earns from selling its products and services, and then delivering those products and services, in other words, incurring material costs, labor costs, direct and indirect costs. In this scenario, they probably pay some royalty fees, etc., so after all those costs are accounted for, the company ends up with gross profit. So let me say that again, because I might have confused you.

Revenue minus cost of goods sold, or cost of delivery, or cost of revenue equals gross profit, but gross profit isn't what we're talking about here. I want to get down to operating profit, so we have to subtract out all of their general and administrative costs, sales and marketing costs, and research and development costs, also known as operating expenses. So once we take gross profit minus operating expenses, we arrive at operating income.

Okay, are you still running? Did you stop the treadmill? Because you're like, I got to pay attention to this. Okay, hopefully I'm keeping things high level. I know I'm throwing out a lot of numbers here, but we have to understand the financial side of these two companies before I get into the reasons why Netflix is more valuable than Spotify.

See, I just gave you a hint there. So who do you think is more profitable, Netflix or Spotify? We know Netflix does more revenue, $41.7 billion versus $16.2 billion. From an operating income standpoint, here's what's interesting.

Netflix does $12.3 billion. That's nice, huh? That's a big, fat bottom line. Spotify, on the other hand, does $1.7 billion.

So just a fraction of what Netflix does. Now let's look at operating income as a percentage of revenue. So whenever you're looking at a company's financial statements, you always want to express their line items as a percentage of revenue, because then you can compare things on a relative basis.

Because if I tell you Netflix earns $12.3 billion in operating income, you may be like, all right, that's great from a dollar standpoint, but how does that compare as a percentage of revenue? So that's what I did. And here's what I found. Netflix earns 29.5% on its revenue.

In other words, operating income divided by revenue is 29.5% for Netflix. That's pretty healthy. Now Spotify, on the other hand, earns 10.5%. So it's like one third of what Netflix earns.

So Netflix is so much more profitable. In fact, three times more profitable than Spotify. And we're going to get into those reasons here in a minute.

But before we do, let me ask you this. What's a good operating income percentage of revenue for just a standard company, whether it's a landscape company, a plumbing company, a beauty salon, an advertising agency, I'm just lumping all businesses overall together. What's a good operating income margin? Any guesses? And you could always leave this stuff in the comments too of the episode.

If you're listening on Spotify, ironically, I love Spotify. Spotify is really good for our show, but there's a spot down below you could leave comments throughout this episode. So you could put your answer in there, or you could say, Steve, this is great, or I hate it, or do this or add this or do an episode on this company.

I'd love to hear your comments. And by the way, you could always DM me on LinkedIn as well. Okay.

So operating income, what's a good operating income for an average company? I always like to say a rule of thumb is 10%. So when I go into a business, I like to see their operating income at least 10%, if not higher. A company that's performing well is above 20%.

So Netflix being at 29.5 for the nerds, or just 30%, if we want to round it up, that's good. So they're healthy from an operating income standpoint. But the next question that we need to get to is how much are they earning from a free cashflow standpoint? Because that's really what it comes down to.

Okay. We'll get there in just a second. Okay.

So operating income, 30% and Spotify has operating income at 10.5%. Let's go back to their gross profit. Remember gross profit is revenue. So for Netflix, revenue is when I sign up for the subscription and they charge my credit card, whatever it is. I don't even know what it is nowadays, like 15 bucks a month. That's revenue to them. But then remember they have to pay fees in order to deliver that content into my home so I could stream it. And all those costs of delivery are included in what's known as cost of goods sold or cost of revenue. So if we take revenue minus cost of goods sold, we end up with gross margin. That's what I'm talking about.

So I'm backstepping here, kind of going in reverse order, but it's fine because I want to distinguish between operating income and gross margin, also known as gross profit. So Netflix has a gross margin of 48.4% and Spotify has a gross margin of 31%. So I'll just say it in another way. I'll just round up. Netflix is operating roughly at a gross margin of 50%. So every dollar that comes into Netflix, 50 cents goes to the cost of delivery. 50% they keep to pay for their overhead and to have profit left over. Whereas Spotify operates at a 31% margin or 30%. So every dollar that goes into Spotify, they only keep 30 cents.

So compare that to Netflix, 50 cents versus 30 cents. So that tells me that Spotify either has price sensitive customers and therefore they can't raise their prices or their cost of delivery is higher than Netflix. And perhaps that's due to scale or perhaps that's due to licensing or royalty agreements that they have with their artists from a music perspective.

You also have to remember that Netflix is starting to create its own films and its own shows. So that may contribute as well to its high gross margin. And I'm going to get into the reasons why Netflix is more valuable than Spotify here in just a minute, but I want you to start thinking about why is their gross margin higher? And then what are the levers to impact gross margin?

So there's three levers to pull. So if you ever look at a company, whether it's your company, somebody else's company, or a publicly traded company, there are three levers you could pull to improve gross margin. That's it. Three levers. You could totally remember this. You got this. Number one is volume. Just go do more volume. Get more subscribers to come onto the platform. Get more customers to come into your store or into your business. Get more clients to use your products or services. All right. So that's the first thing you could do. Drive more volume.

Number two is increase your pricing. So if you increase your pricing, you can increase your gross margin. Now here's a little caveat. Sometimes you can lower your pricing. I wouldn't recommend it, but you may lower your pricing and increase your volume, but pricing is typically the number one lever in business. So therefore you would have to make up a lot of volume if you're going to drop your pricing. So just be aware of that. So those are two levers, volume and pricing.

And number three is your cost of delivery. So you can renegotiate your licensing fees or your royalties that you're paying to these artists in the example of Netflix or Spotify. And it's all the other labor, direct labor associated with getting the streaming services into the hands of customers, any material costs, any subcontractor costs, if they use it or any direct or indirect costs, all those costs. If you can reduce them, be more efficient with them, then you're going to increase your gross margin.

In other businesses, the cost of delivery can be improved by technology or by eliminating just processes and friction, right? In the system of delivery, you may invest in better equipment, which automates things, streamlines things, and increases productivity. There are a variety of things you could do to reduce the cost of delivery. And also, like I mentioned, you can negotiate with suppliers. You could train your workforce. There are a ton of things you could do, but those are the three levers, volume, pricing, and cost of delivery.

Okay. So that's gross margin. Netflix is crushing Spotify. That's why they have a fatter bottom line.

From a free cashflow standpoint, this is what's interesting though. Free cashflow is what's left over at the end of the day. And it's the cash available to do three things, pay down debt, to distribute to equity holders. So if you're a business owner, you can take a distribution or pay a dividend, right? With your cashflow, or you can reinvest this cashflow in your business. Those are the three uses of free cashflow. And like I said, it's what's left over at the end of the day.

So you can have profit, but remember what's not included in profit is working capital and capital expenditures, which includes investments in trucks and trailers and tractors and machinery and factories and buildings, all the assets to run business. So working capital and CapEx, those are the primary things. Remember you have to add back non-cash items like depreciation and amortization, which I won't nerd out with you on right now, but just know that's the big difference between profit and cashflow, working capital and CapEx.

Netflix has $8.5 billion in annual free cashflow. That's 20% of their revenue is cash available to do those three things that I mentioned. Spotify, on the other hand, generates $2.6 billion in free cashflow or 16% of their revenue.

Isn't that interesting? Spotify is only 4% off from where Netflix is as a percentage revenue because Netflix has free cashflow of 20% of its revenue and Spotify catches up with 16%. But remember Netflix has three times the profit, which tells me that Netflix has money tied up in working capital or they have money tied up in investments in capital items. Like I said, equipment, trucks, trailers, buildings, etc.

Okay. So let's keep going. Let's look at subscribers. Who has more subscribers? This is really interesting to me too.

Did you know that Netflix has 301.6 million subscribers as of their last financial report? And Spotify, on the other hand, has 268 million subscribers, premium members, I should say, people who are paying for the service. So Netflix and Spotify, they're pretty dang close. And I think Spotify in fact has like 600 million people on their platform, but about half are premium. But the people who are paying for both platforms, it's relatively close. 300 million for Netflix, 270 million roughly for Spotify. So about a 30 million person difference. So pretty close there.

Return on invested capital. When I look at a business, I always like to look at what is the return on the capital that's tied up in the business. So return on invested capital, ROIC, can be computed by taking NOPAT, net operating profit after tax, and then dividing it by their invested capital, the amount of working capital and net property, plant and equipment in the business. In other words, it's the amount of money that's in the business to make it run.

This is where things get a little more interesting because Netflix earns a 25% return on invested capital, where Spotify earns a 26% return on invested capital. So Spotify can actually generate returns slightly higher than Netflix, just by 1%. But still, they're in parity right there, pretty close in their effectiveness in turning their capital into operating profit.

Okay. Just some other things I'll go through really quickly. Netflix has about 9.6 billion in cash. That's a lot of cash. Spotify has 7.4 billion. So they're both pretty well capitalized.

Netflix though has a lot of debt. They have $15.6 billion in debt, which is about seven and a half times Spotify because Spotify has $2 billion in debt. But nonetheless, Netflix is worth about $501 billion and Spotify is worth about a third of that, $142 billion.

Still both great companies. I mean, heck, I'd love to own either of these companies. So they both perform really well. Netflix just has Spotify beat on scale. They do about two and a half times their revenue. Netflix's operating profit is about six times in dollars and relative dollars. And it's about three times that as a percentage of revenue.

So Netflix has a really good operating model. They have more debt. They have about the same amount of cash, but their market cap, like I said, is a lot bigger.

So let's dive into these reasons here. What are the five reasons why Netflix is more valuable than Spotify? So the first thing I want to point out is larger revenue and profitability. So that's going to drive value because Netflix, like I said, generates higher revenue, $41.7 billion compared to $16 billion for Spotify. And this scale makes Netflix more attractive. They're just larger. They have more resources. They have more reach in. Therefore it makes them more valuable.

But remember, revenue is just revenue. Revenue isn't profit. And sure, at first you could have a lot of revenue and not profit, and you can hang on for a little bit if you have cash. But over time, profitability is really what's going to win. But Netflix has both. They have the scale and they have the profit. So that's the other thing I want to point out. Netflix has a much higher profit margin, and that's what allows it to be more superior than Spotify from a financial perspective.

Okay. Number two is superior operating margins. So Netflix has higher operating margins and higher gross margins. Remember Netflix generates $0.50 for every dollar that comes into the business in gross profit, whereas Spotify they're at $0.30 roughly. So this margin advantage points to greater efficiency and pricing power in Netflix's business model compared to Spotify. So that's reason number two why Netflix is more valuable than Spotify. It doesn't mean Spotify is not valuable, but they have high gross profit, which is going to enable them to scale much faster than Spotify.

And when you're looking at a business, gross profit does matter. And sometimes it matters a little bit more than the bottom line, which sounds a little weird, but check this out. When I was a CFO of a FinTech company, we were burning through money from an operating income standpoint, right? We had negative operating income because our overhead was so high because we had a lot of expensive people on our team, developers, executives, et cetera, right? As we were scaling out this FinTech company, but our gross margin revenue minus the cost of the revenue was expanding. So that gave investors hope and optimism in our business that the operating model could work because the more subscribers we brought onto our platform, the more users, in other words, the more gross profit we generate from a dollar perspective. And then eventually we would reach profitability.

But if a company's gross profit is flat or it's shrinking or it's below industry average and the company's losing money, that's a problem because it tells you that the company doesn't have pricing power. It doesn't have the volume when it comes to selling his products and services and the cost of delivery is too high. Huge red flags.

So Netflix kills Spotify here because they capture 50 cents in gross profit. Spotify only captures 30 cents.

The next thing is reason number three is there's greater subscriber monetization with Netflix. Netflix has over 300 million paid subscribers, all of whom are monetized directly through subscriptions with limited pricing pressures. Whereas Spotify has more users, 678 million to be exact, but only 268 million are paying subscribers and its ad-supported users generate much less revenue per user compared to Netflix's all-paid model.

So as you can see, two totally different strategies when it comes to offer and pricing. With Netflix, I think they might have a free trial for like a week or two. I'm not sure, but eventually you have to pay up or get off the platform. Whereas with Spotify, you can be a free member, right? So you can use the platform for free. You have to go through the pain of listening to ads. So eventually you'll upgrade, but nonetheless, Netflix has a stronger ability or a stronger position, which allows them to monetize their subscriber base. So that's a big strategic advantage and something to pay attention to in your business. Your pricing power, your offer, how you package things up and how you sell it to customers will have a major impact.

Okay. Stronger free cashflow. When it comes to free cashflow, remember Netflix is generating $8.5 billion a year in free cashflow. And Spotify is generating about $2.6 billion in free cashflow, which allows Netflix to take that cash and reinvest it back in the business. So Netflix can fund growth internally. They can make content investments and they can provide shareholder returns, which makes them more valuable because they have more cash at their disposal.

And number five comes down to brand scale and global dominance. Netflix has established itself as a dominant global video streaming brand. I mean, most people in the world know what Netflix is and a lot of people binge Netflix. So they have this vast and growing content library and their industry leading original productions and a premium position in most major international streaming markets gives them a huge leg up on Spotify. So this global scale and leadership is a major driver of its higher market capitalization. Remember they're worth about $500 billion versus $142 billion for Spotify.

So those are the five main things. I'll go over them again. Number one is revenue and profitability. Number two is superior operating margins. Number three is greater subscriber monetization. Number four is stronger free cashflow. And number five, brand scale and global dominance.

Now let's dive deeper into some strategy. Netflix employs several strategies to increase its value that Spotify does not or they cannot replicate at the same scale or impact.

So here are the most notable differences that I want to point out here real quick. Number one, there's massive investment in original exclusive content with Netflix. In fact, Netflix spends over $17 billion annually on original movies, series, and documentaries. And they're producing highly popular franchises like Stranger Things, The Crown, etc., and they're building a vast library of intellectual property the company owns outright. So this exclusive member-only content boosts subscriber loyalty, it creates brand buzz, and is exceptionally difficult for competitors to copy.

Now let's compare that to Spotify. Spotify primarily relies on third-party music licenses. And while it's launched some original podcasts, it has minimal original music content and limited exclusive rights. So that strategy, in other words, that decision for Netflix to pursue creating its own content and investing about $17 billion a year in creating it shows up in its numbers.

And so when you hear me talking on the podcast about strategy and finance and how they combine together to create value, Netflix has made the strategic decision in the business to produce its own content, whereas Spotify plays in a different space and they just rely on licensing material out there. So two totally different strategic decisions, two completely different operating models, and you see it showing up in the financial results. That's why I love this stuff.

Let’s talk about full control of content distribution and licensing. Netflix produces and distributes its own content worldwide. They control terms and timelines for release. This vertical integration reduces royalty outlays, it improves margins over time, and it allows Netflix to maximize value from its unique content.

Spotify, on the other hand, has to pay royalties for nearly all its audio content and is more vulnerable to changes in licensing costs or disputes with rights holders. So think about it: Netflix, since they create their own content, they’re in control. They have the upper hand when it comes to pricing and usage of their content. Spotify is at the mercy of the artists who hold the rights, so that can create downward pressure on profitability. If the cost of licensing the content goes up, Spotify’s going to get squeezed.

There’s also a strategy when it comes to global expansion and localized content. Netflix tailors content specifically for local markets by investing in local-language originals, working with local creators, and forging partnerships with regional production companies. This strategy allows Netflix to win subscribers in large international markets that have distinct tastes. So think about it — across cultures, we find entertainment different, and there are nuances in our humor, etc., and Netflix has realized that. So therefore, they’ve pursued this localization strategy.

Spotify has global reach too, but they cannot use localized exclusive music content at the same scale due to some limitations with their music rights.

Netflix is expanding beyond video streaming. Recently, they entered the mobile gaming market with downloadable games exclusive to subscribers. This new segment boosts engagement, reduces churn, and opens up new monetization opportunities. Spotify, while branching into podcasts and audiobooks, hasn’t moved into adjacent markets like gaming in a meaningful way. So Netflix’s diversification strategy adds more value, and makes the business more resilient.

Another major differentiator is how Netflix uses data. Their analytics don’t just power recommendations — they inform major content decisions. They forecast viewership, right-size spending, and optimize return on investment. This ensures that their $17B+ annual content investment drives margin-enhancing results. It's like Costco testing a product on the endcap — if it moves fast, they double down. If not, it disappears. Same idea with Netflix shows. They’re tracking everything, and they can scale what works.

Spotify personalizes playlists, sure, but it doesn’t own most of its content — so even with good data, it can’t create content based on those insights the same way. That limits their ability to leverage data for deeper value creation.

So when you step back, you can see how Netflix’s strategy and financials are deeply aligned. Their decisions — to invest in original content, control distribution, localize internationally, diversify into gaming, and optimize content through data — all reinforce each other. That’s why they’re not just profitable, but scalable and resilient. And that’s what makes them more valuable than Spotify.

Spotify’s still a strong business. They generate real cash flow and have an impressive subscriber base. But Netflix’s cohesive strategy, stronger margins, and reinvestment engine set them apart.

The takeaway for your business? Don’t just chase revenue. Think about how your strategy drives margin, how your offers create pricing power, and how your systems reinforce each other. That’s how you create real value.

Cheers — see you in the next one.