Spotify | Online Music Platform

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Spotify is a successful online music streaming service that offers both free and premium paid subscriptions. In this article we will look at 1) what is Spotify?, 2) products, 3) business model and key components, 4) learning from Spotify, and 5) criticism of Spotify.

WHAT IS SPOTIFY?

The Company

spotify on facts

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Spotify is a music streaming service, where users can search for music by artist, album, genre, playlist or record label. The commercial website offers restricted content with digital rights management from different record labels. These labels include Sony, EMI, Universal and Warner Music.

The service allows users access to millions of songs from all around the world. Users can create playlists, subscribe to playlists created by other users, share favorite sings via social media, offer song suggestions to others and even form a sort of radio station based on any song, album or playlist. The website can also be used to share and play music already saved on a user’s playlist.

There is free streaming available as well as a paid option. The paid option allows the user to remove advertisement and download music to listen to at a later time offline. Launched in 2008, the website had close to 10 million users with 2.5 million having a paid subscription within two years or operations. In another two years, the website had 20 million users with 5 million of these being paid subscribers. By 2014, this figure had doubled to 40 million users with 10 million opting for paid subscriptions.

The website and related apps are available across a variety of platforms. By 2013 the service was available for Android, BlackBerry, Boxee, iOS, Linux, Openpandora, Microsoft Windows, OSX, MeeGo, S60 (Symbian), Roku, Samsung Smart TV, Squeezebox, TiVo, WD TC, Windows Moble and Phone and many others.

In 2010, the company was named as a Technology Pioneer by the World Economic Forum.

History and Development

The service was launched in the latter half of 2008 by Spotify AB, a Swedish startup. Since it launched the company has grown considerably with Spotify Ltd established as a parent company in London and Spotify AB as the research and development arm in Stockholm.

The service was created by Daniel Ek and Martin Lorentzon. Ek was the former CTO of Stardoll, a browser game as well as CEO for utorrent, the most popular bitTorrent client in the world. Lorentzon had previously cofounded TradeDoubler, an internet marketing company.

The service was launched to the public in October 2008. In the beginning, free accounts were available by invitation while paid ones were open to all. Licensing deals were made with major record labels and this information as also shared with the public at launch. During the first year of operation, the company suffered losses close to US$ 4.4 million. By 2009, the invite only caveat was removed and free accounts were also made available to everyone in the United Kingdom.

The service launched in the United States in 2011, after years of negotiations with four significant record companies.

Changes to Access Levels

The company paid close to 45 million Euros to its licensors in 2010. To keep up with the expense, the company announced in 2011 that there would be a significant change in the music available to free account holders. Audio streaming of only 10 hours a month would be available and users would be able to listen to a particular song only as much as 5 times in total. These changes exempted all paid subscribers.

PRODUCTS

Spotify

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The products, or in this case features, offered by Spotify include:

  • Catalogue: The catalogue is the entire collection of music on offer via the streaming service. By 2012, this catalogue had as many as 20 million songs available for streaming. These songs are from both major record labels and independent ones. Not all artists chose to be featured on Spotify while others are not available in certain regions because of copyright and licensing restrictions by the record labels. Users in certain areas of the world such as the United Kingdom, France, Spain, Norway, Sweden, Finland and the Netherlands can also make song purchases if they are available.
  • Playlists: Apart from individual songs, users have the option of making playlists on the website. These can be shared with other users and there is also an option for multiple users to edit a playlist. Other websites often support Spotify playlist sharing and users can then rate and discuss these.
  • Integration with Last.fm: Preference based playlists are not available on Spotify but are made available through a Last.fm integration. Users can send songs from Spotify to Last.fm. A service known as scrobbling is also available which identify most heard songs for users. An official application called ‘Last.fm for Spotify’ offers song recommendations based on listening history among other things.
  • Radio: There is also a Radio feature available in both free and premium or paid Spotify accounts. This feature creates a random playlist of songs that are based on chosen genres, artists or years. Another version of this creates lists based on related artists.
  • Integrations with Social Media: Users have the option of linking their Facebook or Twitter accounts with their Spotify account. This allows them to access favorite music and playlists created by their friends. Songs and playlists can be sent and accessed through Facebook messaging and Spotify related stories can be posted to Facebook newsfeeds.
  • Applications: The service allows third party software developers to create applications that offer related features such as live sharing concerts, lyrics, music reviews and playlists. These are integrated within the desktop client and written in HTML5. Some embedded apps include Billboard, Fuse, The Guardian, Rolling Stone, Soundrop and Tunewiki.

BUSINESS MODEL & KEY COMPONENTS

The Spotify USP

Spotify manages to attract both customers as well as investors and advertisers. The website’s ability to increase users at a steady rate may be its most enduring characteristic.

From the consumer’s point of view, there is a legal way to enjoy the music of their choice. This can be done through a database of over 20 million songs that is expanding every day with music from all over the world. Through one account, music can be accessed through multiple devices.

For advertisers, this popularity with users means that they can reach all these people. Advertisements are visible to free account users and these make up a major chunk of all Spotify subscribers. Spotify also offers seven different advertising options

Revenue Model

The Spotify revenue model is a combination of different elements. Basic services are free with several limitations while full access and additional services are available to premium users who pay a monthly subscription fee. The various revenue streams for the website include the following:

  • Paid Subscriptions: The company aims to bring the older, pre-internet model of music sales back by encouraging users to pay for the music they want to listen to. Because of this, paid subscriptions remain the primary source of revenue for the company. At present, the website offers a Spotify Premium subscription for $9.99 per month. Other offers include student discounts and discounts for users of Sprint. These special offers mean a reduced subscription either long term or for a temporary period of time. For paid subscribers, there are no advertisements or limits on streaming. In some cases, the streaming speed also increases. The subscription also lets users access the service on other platforms such as different mobile devices. There is also offline access to music available.
  • Advertisements: Another mode of revenue for the website is advertisements. The website offers seven kinds of ads to interested advertisers. These include audio ads. Display ads, billboard ads, homepage takeovers, branded playlists, lightbox and advertiser pages. All categories of ads differ in their size, format and user engagement. For example, the audio ads are higher impact and unavoidable because they run between songs while streaming. Display ads however can engage a user during active and inactive times on the website.
  • Downloads: The website also has songs available for purchase and download in certain regions of the world. This download happens through 7digital, a music stores that partners with Spotify.

Royalty Payments

The service pays about 70% of its revenue to labels as rights holder royalties, while 30% goes to the company itself. According to a supporting website formed by the company, there is no fixed rate per play for any artist. The payment is calculated based on a formula that takes into account varied elements such as country of stream, artist’s royalty rate etc.

Issues with Business Model

Many similar businesses and websites strive to achieve scale in order to balance rising expenses and remain profitable. In the case of Spotify, this is not the case. Since most of the contracts with record labels are based on a fixed portion of all revenue paid to them as royalties, a rise in revenue will just mean a rise in payment amounts. This makes it appear as if the company will never move past its expenses to put up profits. This business model for streaming music services was deemed “inherently unprofitable” by a report published by Generator Research. The main author, Andrew Sheehy concludes that no current music subscription service can ever be profitable even with perfect execution.

Spotify, despite its growth in terms of subscribers, has yet to put up a profit. The company could hypothetically manage to raise subscribers to a level where the 30% it keeps for itself covers expenses and allows the company to post profit. Daniel Ek believes that the relationship with record labels will get better and smoother when the company achieves more scale.

LEARNING FROM SPOTIFY

Lessons for Startups

Though Spotify’s particular business model may not seem familiar to many startups, there is much to be learned from how the company has managed to strategically launch itself.

  • Find the Gap in the Market: For most startups, the key to success is to find that one unfulfilled gap in the market of their choice. This gap is between what is currently on offer and what the customer wants. Spotify did this by entering a market which already had strong competitors but they were unable to give the customer what they actually wanted in full. One competitor Pandora wouldn’t let users pick the song to play while another Rhapsody charged a subscription just to begin listening to any music. Spotify managed to create a social, cloud-based service that allowed even free users lots of options to access music when they wanted.
  • Make a Strong Launch: Before a splashy launch with press releases, interviews and media involvement, there needs to be buy-in from early adopters and those with influence over others. These people become super users of a product or service and can then act as advocates of the product to their peers. Spotify managed to create this through an invite only access when it launched operations back in 2008. The quest for invitations creates a buzz and helps create a demand naturally.
  • Use Freebies to Leverage Paid Purchases: A great service or innovative product will attract users. Even a small percentage of these users converting to paying customers can help create a sustainable business model. Though a heavy percentage of Spotify users do not pay for the service, the business has managed to grow revenues over the years because enough users are opting for paid subscriptions. Though most users will never buy subscriptions, Spotify has managed to make money from them as well through advertising options as well as mine data from them on an opt-in basis. This data can either be sold or used to improve technology through a study of user preferences and trends.

The Future of Spotify with CEO Daniel Ek and Shawn Parker

Building Successful ‘Freemium’ Businesses

A freemium business model is one where a product or service (usually a digital item) is provided free of any charges but a subscription is charged for additional features and functionality. Spotify has managed to create such a business model successfully. Spotify has a significant conversion rate which gives the company a solid base with which to grow and scale. Some key elements of the Spotify model that can help other media businesses specifically include:

  • Protecting the Free Element: Spotify ensures that it does not launch in any new market without a free feature. According to former VP for Europe, Chris Maples, “The balance of free to paid subs has always been in our DNA. If you want to set up a premium service it is fairly simple. We try to create a unique and healthy balance between free and premium.” 
  • Focus More on the Goal and Less on Competitors: Spotify built up its model without focusing too much on existing models. The company believes it is vital to focus on a strong strategy and not worry about what competitors are up to. The key here is to ensure that the focus remains on the target market and their unmet needs along with the content of whatever is being offered.
  • Provide an Excellent Service: Beyond the content itself, there is the service that the company provides. People may come for the content but they stay for the service. A good user experience, customer service and strong technology are the elements that create long lasting users and customers. Spotify managed to create a seamless user experience and ease of use across devices.

CRITICISM OF SPOTIFY

Spotify has been under constant criticism from the music industry regarding its royalty payments.

Royalty Related Issues

One of the issues that come up for Spotify is the accusation that it does not pay fair royalties to the artists whose work is available on the site. There are several cases of artists and labels conflicting with Spotify over this issue. For example, in 2009 the Norwegian newspaper Dagbladet reported that a record label called Racing Junior managed to earn only the equivalent of US$3 despite their artists having been streamed over 55,100 times on the service. In 2012, artist Mike Vennart stated that he would rather have his work stolen than to have Spotify stream it because they pay virtually nothing to the artist while making a lot of revenue. The service has also caused sales of material to fall in certain places which would be acceptable if the artist was paid a fair amount. The service has been criticized by such popular artists such as The Black Keys, Radiohead and David Byrne (formerly of the band Talking Heads).

The counter argument to this has been presented by Charles Caldas, CEO of Merlin Network for independent artists. His argument is that Spotify pays to record labels and this means very little money actually makes it to the artist themselves.

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