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Analysts: Spotify, YouTube face tough competition, low ARPU in India

Music streaming giants Spotify Technology SA and YouTube LLC have entered a heavily entrenched market in India, where increasing average revenues per user will be tough, analysts say.

Sweden-headquartered Spotify launched in India on Feb. 27, followed shortly by YouTube's entrance through audio-streaming services YouTube Music and YouTube Premium.

India's boom in smartphone sales and affordable mobile data plans has boosted local players and attracted a raft of Silicon Valley players, including Google LLC, Facebook Inc., Inc. and Netflix Inc.

Spotify and YouTube Music face "entrenched competition" in addition to low internet penetration and diverse languages and tastes, Yugal Joshi, vice president from Everest Group said in an interview.

Several players have made deep inroads in the Indian music streaming market. The most recent entrant, Hungama Digital Media Entertainment Pvt. Ltd., introduced in August 2018 and backed by Xiaomi Corp., Bessemer Venture Partners and Intel Capital, has 55 million average monthly users, according to data compiled by S&P Global Market Intelligence. Happy Gaana Entertainment Pvt Ltd, which entered the market in April 2010 and has Chinese tech giant Tencent Holdings Ltd. as an investor, has 80 million average monthly users.

Indian telcos Reliance Jio Infocomm Ltd. and Bharti Airtel Ltd. also have their own streaming apps called JioSaavn and Wynk Music, respectively. In December, Reliance Jio closed its purchase of Indian music streaming service Saavn LLC, which was founded in 2007.

Wynk Music already has a library of more than 1.7 billion music tracks on its app.

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While YouTube is already in India as an ad-supported service, Spotify is entering the market with relatively low brand recognition, analysts say.

"Spotify does have a big name for itself given it is the biggest audio subscription service in the world, but that can only go so far. It will need to bring something different to the table if it wants Indian users to go international rather than local," said Simon Dyson, Ovum music practice leader and editor of industry newsletter, Music & Copyright.

Joshi agreed, adding that while Spotify's rival multinationals in India did not have to worry about brand strength, the Swedish company will if it "wants to scale beyond the urban market" where the name is not that familiar.

Spotify amassed 1 million users in its first week in India, after postponing its launch twice due to a court battle with Warner Music Group Corp.

Spotify reportedly accused the company of "abusive behavior" after the record label filed an injunction to prevent the audio streaming service from accessing Warner/Chappell Music Inc.'s catalog in India. The Swedish company said Warner Music Group, which sold its remaining stake in Spotify in August 2018, revoked a previously agreed publishing license for reasons unrelated to its launch in India.

YouTube Music and Spotify will also find raising ARPUs to a meaningful value in India difficult, experts said.

In a Feb. 28 blog post, Mark Mulligan, an analyst at Midia Research, pointed to India being a "problematic" market for players like Spotify largely because the market "heavily underperforms." Despite robust supply in India's music streaming sector, Mulligan said it registered 1.7 million subscribers in 2018 with a monthly label ARPU of 71 U.S. cents. The number of subscribers accounted for only 0.1% of the total Indian population, he added.

According to Spotify's latest results, ARPU was US$6.47 in the fourth quarter of 2018. In its fourth-quarter letter to shareholders, the company said downward pressure on ARPU was increasingly driven by growth in relatively lower ARPU markets outpacing geographies with higher ARPU.

Joshi said increasing ARPU is unlikely in India as it is a market to scale in order to test solutions for large consumption, and take these lessons to other markets.

Mulligan adds that music streaming players that want to succeed in India's market will have to experiment to achieve scale, as music subscriptions are seen by many as a luxury, and due to "catastrophically low ad-supported ARPU rates." India's 270 million free streamers generated a monthly ad-supported ARPU of 0.6 cent in 2018, according to Midia Research.

"The scale opportunity is telco bundles. Reliance Communications's prioritization of Jio Music makes it the most likely player to capitalize on this in the mid-term," Mulligan said.