Spotify is a truly remarkable growth story. In just six years the company is valued at more than $10 billion and has more than 50 million users, 12.5 million of which pay for the service. But how did the company get to where it is today and what is its growth engine? We dive deep into Spotify’s story to uncover the key elements that helped them grow to incredible heights. We'll look at:
Read on as we break down their unique and revolutionary growth story.
Spotify founders Martin Lorentzon and Daniel Ek met in Sweden in 2005. On a Quora thread about the startup’s early days, Ek explains:
“We discussed a lot of ideas back and forth and spent a lot of time hanging out in my apartment in a suburb to Stockholm. ... We sat around my media htpc machine quite a lot and thought that it was cumbersome to get content, despite the technology having been around (Napster) since at least 2000. I think that's why we got stuck on the idea of Spotify.” [1]
After a period of closed beta, Spotify officially launched on October 7, 2008, with $21.6 million in Series A funding from Li Ka-shing, Creandum, Northzone, and Horizons Ventures. In August of 2009, the company received another $50 million in Series B funding from Li Ka-shing, Horizons Ventures, and Wellington Partners, followed by $16.1 million in Series C funding from Founders Fund and Sean Parker in February 2010. [2] By September 2010, just shy of two years post-launch, Spotify’s catalog had grown to over 10 million tracks—closing the gap between Spotify and iTunes, whose catalog at the time included 11 million tracks. By March of 2011—just four months prior to the company's US launch—Spotify had grown to 6.67 million users, one million of whom were paid subscribers. [4] By November of that year, the number of paid subscribers had more than doubled to 2.5 million. Just one year later, in December of 2012, the service had grown to 20 million users and 5 million paid subscribers. [6] In that time, three more rounds of funding from investors such as Digital Sky Technologies, Kleiner Perkins Caufield & Byers, Accel Partners, 137 Ventures, AFSquare, The Coca-Cola Company, Fidelity Ventures, Lakestar, Goldman Sachs, and Technology Crossover Ventures, brought the company to its current total of $537.8M in funding, [2] with the most recent round at an estimated valuation of more than $4B. [7]Since that last round in 2013, the company is likely at or near the $10 billion valuation range. [66] The company’s most recently-released data, dated November 11, 2014, puts Spotify’s total user base at 50 million—12.5 million of whom are paid subscribers.
So how did the company that began in “a tiny office-cum-apartment with a broken coffee machine” [4] grow into the music industry disrupting giant that we know today?
As Kartik Ayyar explained on Quora just days after Spotify launched in the United States, the value proposition is at once fairly simple and quite profound: "Almost all of the music in the world at any time or place for only 10$ [sic] a month." [14] Options for accessing music online were limited prior to Spotify—consumers could listen to streaming services like Pandora, though they couldn't actually pick their own songs, or they could purchase tracks from iTunes. Other streaming services like MOG and Rhapsody existed, but hadn’t gained much traction with consumers, due to a combination of the pricing models, catalog of music and feature sets. Spotify, by contrast, aimed to give users complete control and access to any song, on demand, for just $10/month, along with a free option that offered more than simple radio-style streaming—not to mention the fact that it was totally legal. Though other companies are now attempting to offer the same service—more on those in a bit—Spotify was one of the first to offer this value proposition, and it has been overwhelmingly integral to the company’s success as a truly disruptive force in the music market. Discussing not only Spotify but music streaming services in general, journalist Scott Timberg explains:
“It’s no coincidence that album sales peaked, at $14.9 billion, in 1999—the year Napster ushered in the digital era of music by effectively making all recorded music free to anyone with an Internet connection. By 2009 album sales had fallen by more than half, to $6.3 billion. For a while, digital music sales, chiefly through iTunes, made up some of the difference. But after half a decade of consistent growth, downloads of individual tracks declined for the first time in 2013, by 5.7 percent, and by 13 percent in the first six months of this year, according to Nielsen SoundScan. Streaming music over the Internet via services like Spotify, Rdio, and Pandora, by contrast, is up 42 percent between the first half of 2013 and the first half of this year.”
There’s no denying that Spotify and services like it are revolutionizing the way that people listen to music. Yet unlike many streaming options, Spotify puts the control firmly in the user’s hands, allowing them to select specific songs and create playlists instead of roughly approximating terrestrial radio by choosing an artist or station and listening to or skipping whatever song comes on, as is the case with Pandora and Last.fm. The fact that Spotify is interactive certainly gives the service an edge over some of its competitors, and this control is a big part of the must-have nature of the product, driving the company’s growth. Yet there’s much more to the disruptive power of Spotify, even if the everyday user doesn’t fully leverage or grasp the implications of these other features. For starters, users can also upload local tracks to Spotify, which means they don’t have to leave their own libraries and playlists behind in order to make the switch to Spotify—significantly decreasing the friction of adoption. That’s one less reason for users to open iTunes, or, as LinkedIn’s Mario Sundar asserted on Quora in July 2011, “Spotify is to Apple iTunes as Google is to Newspapers.” [14] After focusing primarily on delivering on-demand streaming, in late 2011 Spotify expanded to offer a Pandora-style radio service that allows users to expand any song, artist, album, or genre into a station and learns from users’ tastes over time. [15] This—in conjunction with Spotify’s Discover feature, which makes predictions about which artists users will like based on what they’ve listened to—went a long way toward helping Spotify to position itself as not only a replacement for iTunes, but as replacement for Pandora as well as pretty much any other platform through with users previously accessed and interacted with music. The combination of on-demand streaming and discovery through both algorithmic and editorial curation has helped round out the product for music listeners of all types.
The company introduced a browser-based version of the service in late 2012, making Spotify available to those who for whatever reason couldn’t download the desktop program—in particular, users on work or library computers, or netbooks like the Chromebook for which there is no desktop version. Finally, in late 2013 Spotify made mobile streaming available to all users (it had formerly been available to Premium subscribers only). In addition to the product, Spotify made a big deal out of the quality of its audio experience. While other online services offered 64k AAC+ and/or 128kbps, Spotify delivers three different bit rates, all the way up to 320 kbps–essentially the output of a CD. Long the bane of audiophiles, this attention to the music experience as well as the technology experience made Spotify’s product one-of, if not the, best on the market. These factors combine to increase accessibility and decrease the time it takes for new Spotify users to reach their “aha moment” with the service. Pretty soon, it’s more than simply a music streaming service—it’s the primary way in which users interact with music. The disruptive potential of Spotify was apparent very early on. Just five months after launch in the company’s home country of Sweden, Spotify had already generated more revenue for Universal than iTunes. By September 2010, Spotify’s music catalog had almost caught up with iTunes—the companies had 10 million and 11 million tracks, respectively. At the time, however, iTunes had 160 million users and Spotify—still negotiating the terms of a US launch and thus yet to tap into the world’s largest music market—had just 10 million. Journalist Scott Timberg is not the only person to draw parallels between Spotify and Napster, perhaps the most disruptive force in the music market to date. Many, including Napster co-founder and Spotify investor Sean Parker, have claimed that Spotify is the logical conclusion of peer-to-peer file sharing networks like Napster which launched in the late 1990s. At the Daily Beast’s Innovators Summit in October of 2010, Parker claimed, "What I’m trying to do with Spotify is finish what I started at Napster," explaining that he had dedicated the rest of his career to “fixing what [he] broke.” [17] Parker went on to say, however, that before the music industry can truly recover, it’s critical they accept that the war on piracy has been a failure. “You have to be willing to believe,” he argued:
“that somewhere between 4 and 10 trillion songs are illegally downloaded every year, while only 4 billion or so legal downloads happen per year—that’s orders of magnitude more illegal downloading. Once you’re willing to admit that, you then have to ask yourself, what are people willing to pay for? The answer is convenience and accessibility.” [17]
For Parker and many others, Spotify epitomizes both convenience and accessibility—almost all the music in the world at any time and place for only $10 a month. But Napster isn’t the only file sharing network that Spotify has been compared to. As Businessweek’s Brendan Greeley explained on the eve of the service’s US launch, “Spotify owes a more direct technical debt to file sharing: The very technology that makes it so fast is borrowed from techniques honed while sharing pirated files.” [18] As with the Swedish torrent giant The Pirate Bay, Spotify is able to increase speed and lower the demand on central servers by spreading files across several connections. As Greeley explains:
“Songs you listen to often on Spotify sit, encrypted, on your hard drive. The application looks first for these; if it doesn’t find them, it pulls down 15 seconds of the song from the closest server while it looks for copies of the rest of the song on the hard drives of other users near you. This is file sharing.” [18]
“Spotify and The Pirate Bay don’t just share a country;” Mario Sundar agrees, “they share an operating system.” [14] In many ways, Spotify is an embodiment of Andrew Chen’s 80/20 Rule—that is, products that copy the fundamentals (80%) of a successful product and reinvent the remaining 20% can significantly shorten the time it takes to find product/market fit. [19] However, Chen asserts that the 20% can’t be secondary, tertiary product features, but should be “baked deeply into the core of the product … Something the end user can see and feel within the first 30 seconds.” [19] Despite the fact that Spotify may share around 80% of its characteristics—after all, value proposition and operating system are by no means minor characteristics—with Napster and Pirate Bay, unlike those two, Spotify is legal, and that distinction might be more significant than it seems (if that’s possible). In order to grant users legal access to the music that makes the service what it is, Spotify had to to negotiate a fair deal with record companies. As ReadWrite’s John Mitchell explains, these deals included “unlimited free samples of music, frictionless sharing among friends, and a future industry free of the massive overhead of record manufacture and breakage, old-school promotion, and the bottlenecks of regional radio dominance.” [20] Still—perhaps because Spotify didn’t initially offer terms with which they were happy, or maybe because they were unwilling to accept Parker’s assertion that the war against piracy had indeed been lost—negotiations over a mutually beneficial agreement between Spotify and the four major US record companies took quite a while. When Spotify finally made it to the US, Ken Parks, chief content officer and managing director for Spotify North America, claimed:
"We have full catalogues from all the major labels and a raft of independent labels including those represented by Merlin, which means all of their artists are being fairly compensated for their creativity every time people enjoy music through Spotify."
Parks went on to refer to the service as a "better, simpler alternative to piracy," reinforcing Sean Parker’s widely-accepted assertions. [21]
In many markets, disrupting the pricing model allows new entrants to shrink the existing market made up of legacy players who charge a premium for a similar service. For example, Encarta (and then Google and Wikipedia) shrunk the encyclopedia market from a $1 billion market to essentially zero. Encarta, $99 on CD compared to $1,000 for Encyclopedia Britannica, grew to $100 million in its first five years as it shrunk the market. It’s a powerful growth opportunity for companies that can pull it off. iTunes similarly shrunk the music market while taking a massive chunk of cash from existing players like Tower Records. What’s interesting about freemium in music however, is that is not just a market shrinking mechanism, but also a potential growth mechanism, as it can act as a bridge between piracy and legacy buying options. Before Spotify, there was little other choice than pay-per-track, or CD, or pirate music. But with Spotify’s freemium version, people who only pirated out of ease or economic necessity now have another way to get music legally. Spotify’s big bet then is that it can increase the market of new listeners (or return those lost to piracy) through a freemium pricing model. Consumers have certainly flocked to the idea. 37.5 million of Spotify’s 50 million users listen to an ad-supported version of the product. In theory those 37.5 million would otherwise be pirating music, listening on YouTube, or not listening at all. That’s Spotify’s argument anyway. Artists, as we’ll see later, are yet to be convinced. This unique dynamic of freemium not just as a market shrinking mechanism, but one that can also grow the market is the big promise of Spotify’s unique value proposition. Let’s take a look at how the company architected a freemium model in a tricky, rights-based market. Initially the company offered three tiers of pricing, but now there are just two:
Furthermore, though streaming has always been unlimited in the US, in some markets Spotify placed streaming caps on free accounts after the first six months of use. Time limits were abolished for all users in January of 2014. Of course, freemium comes at a big cost, especially with royalties being paid for each song played. Spotify has worked hard on its royalty payment model to help mitigate the costs of freemium while compensating artists fairly. In order to fully understand how hard freemium is in this type of space, it helps to understand Spotify’s payment structure. Approximately 30% of revenue is retained by the company, while around 70% is split among rights holders in accordance with the popularity of their music on the service (though, as Spotify points out, it is up to the label or publisher to divide royalties and accounts to each artist, depending on their individual deals). [26]
There is no fixed “per play” rate for tracks on Spotify. Instead, royalty payments are calculated according to several factors, including: the country in which music is being streamed, the number of paid Spotify users as a percentage total users (a higher percentage of paid users results in higher royalties), the relative premium pricing and currency value in different countries, and the artist’s royalty rate. “Recently,” Spotify explains, “these variables have led to an average ‘per stream’ payout to rights holders of between $0.006 and $0.0084 … across our tiers of service.” They note, however, that “per stream” payout generated by Premium subscribers is “considerably higher.” [26] Though the names of artists have been replaced with descriptions, the chart below shows, in USD, actual royalty payments for a range of albums for the month of July 2013.
As with companies like Evernote and Dropbox, the freemium business model has been an important factor in Spotify’s success, and the revenue in question is generated by monthly subscription fees from Premium users along with revenue from advertisements for Free users. Still, Spotify would obviously prefer users pay monthly subscription fees, and the company is is working hard to convert free users into paying customers—including the aforementioned free trial and student rate, along with running Premium ads within the free service (though data as to the success of these efforts is unavailable). According to a recent company blog post, 80% of Spotify subscribers began as free users. Billboard’s Glenn Peoples also points out that in 2013, Spotify grew subscription revenue 42% in the United Kingdom—yet another indicator of a strong free-to-paid conversion mechanism. [58] As for its free tier, Spotify currently runs six types of ads—audio, display, billboard, homepage takeover, advertiser page, and branded playlist. Though Spotify has always used some form of freemium, the fact that free memberships were initially invitation only when the service first launched certainly served as incentive for users to purchased paid plans. Currently, Spotify only offers just two tiers of service—Free and Premium. Free users experience limited mobile capabilities, and there is a student discount available for Premium services.
But long before Spotify launched in the US in 2011, the company gained significant traction throughout Europe. Spotify officially launched in the UK, Germany, France, Italy, Spain, Finland, Norway, and Sweden in October of 2008, but the service had been operating in closed beta for over a year—a move which served to not only control costs and the early user experience, but also to increase the hype and anticipation surrounding the new service. Many of Spotify’s beta testers were influencers and tech reporters, and their praise of the service further heightened the anticipation. Upon official European public launch, these beta accounts were immediately transitioned to free Spotify accounts, and access to paid Spotify accounts was also made instantly available, while invitations for free accounts, were gradually released “into the wild” over the next several months. Their scarcity further served to build anticipation among Spotify’s target market. It wasn’t until February of 2009 that Spotify tried offering no-invitation-required free accounts in the UK. Spotify’s Andres Sehr explains via the company blog:
“We’re taking our first baby step to open up Spotify to a larger audience today. Up until now we’ve kept a close eye on controlling our user growth with invitations so that we don’t run into any problems and to ensure that everyone gets a really good music experience when they signup, so far so good.”
Sehr claim that if growth happened too quickly, the invitation-only system may be temporarily reinstated. In September this proved to be the case, as signups swelled in the days following the launch of Spotify’s mobile service and invitations were temporarily reinstated. [By the time Spotify had finished up negotiating with record labels and was ready to launch in the States, the service had already grown to more than 6.67 million users, 1 million of whom were paid subscribers.
Anticipation of the service’s arrival to the US began building long before Spotify was available Stateside, and this anticipation created huge potential energy for the product launch in the States to ramp growth dramatically. Just as they had in Europe, Spotify leveraged this momentum to their benefit, gaining press attention from places TechCrunch, Lifehacker, and Mashable—sources of, as Andrew Dumont of Moz puts it, “those coveted, tech-loving early adopters”—as well as outlets such as MTV and Rolling Stone for music fans. [53] Referring to Spotify as “the best music app on the planet,” journalist and beta tester Eliot Van Buskirk explained in early 2009:
“Those who have tried Spotify know it’s like a magical version of iTunes in which you’ve already bought every song in the world—and it’s free to use if you can put up with a 20-second ad every half an hour.” [22]
It wasn’t just influencers and beta testers who got to try Spotify early. Those outside Western Europe came up with several inventive, backdoor ways of accessing Spotify, the most common of which involved using a UK-based proxy server and a London zip code to “trick” the service. [23] Spotify was in such demand—not just in the US, but across the globe—that blog posts, forum threads, and entire websites were devoted to such workarounds, like LifeHacker’s How to Get Spotify Free Without an Invite. Though the company initially claimed that Spotify would be made available in the United States sometime in 2010, negotiations with the four major record labels proved to take a bit longer. In the fall of 2010, Wired UK’s Duncan Geere explained:
“Some have speculated that if Spotify ever does launch over the pond, those negotiations will have yielded a severely cut-down version without a free, ad-supported option and with fewer benefits for people who subscribe.”
Though the wait for Spotify’s US launch was the unintentional result of drawn out negotiations with record labels, it nevertheless served to increase anticipation. Spotify finally launched paid and invite-only free accounts in the US on July 14, 2011, [24] and US users piled onto the site to subscribe or sign up for an invitation:
Initially, Spotify offered three tiers—Free, Unlimited, and Premium. Ad-supported Free accounts were invite only and featured unlimited desktop listening for the first six months, after which users were limited to 20 hours of streaming per month. Capitalizing on the anticipation that had been building up to that point, both paid plans were immediately available to users who didn’t want to hear ads or couldn’t wait for invitations to become available. The (no longer available) Unlimited plan cost just $4.99 and included everything in the free plan but lacked ads and a streaming limit. The Premium plan cost $9.99 and included everything in the other plans, along with mobile access to Spotify via iPhone or Android app and the ability to download content for offline access. [24] Early praise for Spotify came from celebrities like Ashton Kutcher, Britney Spears, Trent Reznor, and Talib Kweli. [53]
Music is about to be fun again! Join me at Spotify http://t.co/RiOQiBb — Talib Kweli Greene (@TalibKweli) July 14, 2011
Rainy day in NOLA but nice to be home. Just posted my fav playlists on Spotify. Even posted my boys favorite songs http://t.co/wpkxM5A -Brit — Britney Spears (@britneyspears) July 14, 2011
What a relief, now that it's legal in he US, I can finally come out of the closet about my #Spotify addiction. — ashton kutcher (@aplusk) July 14, 2011
As part of the launch, Spotify also partnered with several large brands—including Coca-Cola, Chevrolet, Motorola, Reebok, Sonos, and The Daily—to extend their reach and distribute the limited invitations to their free plan. One particularly popular promotion involved social media influence ranking service Klout. On launch day, there was so much interest in the Klout-Spotify promotion that both Klout and Spotify almost crashed. The service was forced to temporarily stop issuing invitations, as Klout CEO Joe Fernandez explained:
"Spotify asked us to pause giving invites for the rest of the day as they were seeing issues on their side also and we both want to maintain a top notch experience for the users. We should have more codes going out in the morning tomorrow but it's a pretty fluid distribution and we are working extremely closely with Spotify to ensure a steady ramp." [19]
It seems that not just the US, but in every country where Spotify launched, the private beta period, along with the resulting scarcity of Spotify invitations (whether merely a marketing tactic or a legitimate result of concerns over the service crashing) generated buzz and increased demand among potential users. Just as sites were devoted to accessing Spotify before it was available in certain countries, in the wake of the US launch there were plenty of blog posts and forum threads outlining the various means of getting a Spotify invite code without having to wait. Within a year, the company had gained more than 3 million US users, 20% of whom were paid subscribers. [54]
Yet another way in which Spotify is similar to earlier file sharing programs is its attitude toward sharing and discovery. In September 2011 at Facebook’s f8 developer’s conference—at which Spotify CEO Daniel Ek was a speaker—the social network announced a new partnership Spotify, among other media companies, that would allow these companies to publish listening, reading, and viewing activity to users Timelines. Though now this kind of activity is just considered the way people share music, at the time it was totally novel. The chart below illustrates the impact that the integration had on Spotify’s active users:
Today, Spotify users can register for the service via an email address or through Facebook connect, and once registered, users can see their friends’ activity within the app—including what they’re listening to, who they follow, and any public playlists they’ve create—as well as in the Facebook News Feed if they’ve chosen to share it. For Ek, sharing is at the core of the music experience. As he explained to Greeley, “I want to replicate my first experience with piracy.” As a teenager, he said, when he found someone on Napster with similar music taste, he would copy their entire library—when he discovered Ella Fitzgerald this way, “the world opened up.” Ek goes on to assert, “Napster, as a service, worked for the consumer. What eventually killed it was that it didn’t work for the people participating with the content.” [18] Similarly, in a statement following Spotify’s US launch, Ek cited sharing as one of the driving forces behind the service:
"We believe that music is the most social thing there is and that's why we've built the best social features into Spotify for easy sharing and the ultimate in music discovery. Even if you aren't a total music freak, chances are you have a friend who is and whose taste you admire. I'm looking forward to connecting with some of you in Spotify and discovering some cool new tracks." [21]
As Airbnb Product Manager Gustaf Alstromer noted on Quora in early 2010, one of the features that makes Spotify so sharing-friendly is the fact that each track, album, and playlist has a unique URL. Alstromer explained:
“[This] might sound like a minor detail, which it is not. If everything is (technically) available to everyone the way we listen to music changes. Spotify has created a new way people share and send tracks, albums and playlists to their friends and others.” [14]
From the start, Spotify was built in a way that facilitates the intrinsically social nature of music. Partnership with the super-platform Facebook has only served to magnify this element, helping it to drive Spotify’s growth. Spotify also offers users the option of automatically publishing tracks to Last.fm, as well as sharing individual tracks, artists, albums, and playlists via Twitter, Facebook, Tumblr, private message, or embedding them into a blog or website. Collaborative playlists allow friends to work together to curate music for parties, road trips, and everything in between.
Spotify has worked to enhance social sharing and discovery over the past couple years. Three more recently added features are Messages, Following, and Browse—all of which debuted in 2013. Messages allows users to engage in conversations within the service and, as with Facebook, the Spotify inbox saves messages with each friend as lifetime treads, chronicling all the music you’ve ever shared. Messaging is available for desktop, web, and mobile versions of the service, and it also works as a simple messenger, allowing users to send compliments, ask for recommendations, and have conversations. Spotify switched from a system of “subscribers” to “followers” in March of 2013. Users can follow friends, artists, influencers, celebrities, and organizations and receive updates when artists they follow add music to their catalogues. Powered by Tunigo (which Spotify acquired for an undisclosed amount in May of 2013), Browse allows users to search for playlists made by friends, influencers, and other Spotify users based on a variety of factors including genre and mood. According to the company blog post announcing the feature, Browse offers music for every moment and mood, along with “all the latest album and single releases from your favourite (or soon-to-be favourite) artists, and a collection of our top lists.” As Spotify product manager Miles Lennon explains:
“If it’s five minutes before friends arrive and you think ‘shoot, I haven’t put together the music I need’, you’re two clicks away from a playlist designed for having friends over for dinner.” [15]
As with the company’s earlier addition of radio stations, the Messaging, Follow, and Browse features represent how Spotify is working to make other music services obsolete. Lennon spells out the company’s strategy:
“It’s important to have it all under one roof. Our hypothesis is that the best discovery experience will combine social—recommendations from people you trust, influencers, and artists; intelligent recommendation algorithms based on your listening history and tastes; and human curation by experts and millions of community members. The way we move the needle is by satisfying more use cases.” [15]
In addition to the company’s acquisition of Tunigo, in March of 2014 Spotify acquired The Echo Nest—the industry’s top music personalization and discovery API—for around $100M. [41] The two companies had worked closely in the years prior to the acquisition, as Ek explains:
“We have a long relationship with the guys at Echo Nest that stems back to 2007 before Spotify was even launched as a service publicly. We’ve been working together for a few years. We look at the world in the same way.” [38]
Echo Nest CEO Jim Lucchese agrees, explaining, “We’ve both invested in platform approaches to music. To combine those creates such a cool opportunity for developers anywhere that music lives.” [38] Lucchese goes on to claim that combining The Echo Nest’s understanding of music with Spotify’s technology, platform, catalog, and huge audience will allow both companies to connect more people to music on a scale that wasn’t possible otherwise. As far as short-term applications go, Lucchese and Ek claimed that Echo Nest technology would be implemented in the months following the acquisition, and users could expect “instant” improvements Spotify’s radio algorithm, discovery suggestions, and more. Then in June of 2014, the company announced that music discover data from Echo Nest had contributed to Spotify’s newly-released, expanded set of web APIs. Spotify’s Web API endpoints return metadata in JSON format about artists, albums, and tracks directly from the Spotify catalog. Subject to user authorization, the API also provides access to user-related data such as playlists and music saved in a “Your Music” library. In a statement regarding the new APIs, the company claimed:
“Spotify and subsidiary The Echo Nest are more committed to the developer community than ever. Our newly combined platform makes it simpler than ever before to provide amazing music experiences on the web, and these enhancements are just the beginning.”
As for longer-term, larger scale implementations like the ones Ek and Lucchese mention in their announcement of the acquisition, TechCrunch’s Josh Constine speculates about what those might look like:
“Imagine being able to authenticate your Spotify account in other apps the way you sign in with Facebook today. But instead of bringing your social graph and bio data, Spotify Connect would you let you listen to full songs and your playlists on demand in whatever app you wanted. Essentially, it would set Spotify’s app platform free from its green walls, and let legal music bloom all over the Internet.” [38]
In other words, The Echo Nest could help Spotify to become, as Constine refers to it, “the music identity provider across the web and mobile the way Facebook has become a social identity provider,” arguing that an API-centric Spotify could solve the music licensing program for every developer. [38] Uber, the ridesharing company, for example integrated Spotify into its app to offer the streaming music service to its riders. [68] These mobile SDKs serve as further evidence of Spotify’s commitment to the developer community and indicate that Constine’s predictions might not be so far off. Debuting in May of 2014, the integration of Algoriddim’s iOS app djay with Spotify gives us a sneak peek into what Spotify as music identity layer might look like. Prior to the integration, djay users were limited to the music in their personal collections. A Spotify Premium subscription (the app comes with a 7 day free trial), however, now grants them access to the 20 million tracks in Spotify’s library as well, along with Match and Automix Radio—two new features that leverage the Spotify integration. Match recommends songs that would be a good fit to play after the current track. DJ and Algoriddim CEO Karim Morsy said that prior to Spotify’s Echo Nest acquisition, he’d believed this kind of technology could never be automated. The second new feature, Automix Radio, creates and entire mix, complete with transitions, based on a single song. [39] Spotify’s ambitions as a platform hasn’t been without its bumps. The aforementioned APIs served to replace the Spotify app ecosystem, which, originally launched with much fanfare, is currently being phased out. Introduced in 2011, the Spotify Apps platform at one time hosted apps such as Tunewiki and musiXmatch, both of which provided lyrics; along with Pitchfork, Billboard Top Charts, Last.fm, and Soundrop—which in June of 2012 became the first Spotify app to attract major funding with $3M in Series A funding from Spotify investor Northzone. [42] Formerly accessible through the Spotify desktop player’s App Finder, the company announced in March of 2014 that they would no longer be taking Apps submissions [54] and then in November of 2014 that they were killing the App platform entirely, suggesting developers look into their web API instead. [56]
Spotify launched their mobile app for iOS and Android devices in the fall of 2009. Initially, mobile access was exclusively for Premium subscribers, but as of December 2013, limited mobile streaming became available for free users as well. According to Spotify, the share of users listening on mobile tripled between 2013 and 2014. Perhaps the potential ad revenue from free users on mobile provided incentive for the company to make some mobile access available, or the company wanted to give free users a taste of limited mobile functionality in hopes of converting them to paid. Though free users can’t play any song at any time on mobile as they can on desktop, they are able to play shuffled tracks from a specific artist or playlist, while paid users have full mobile listening capability, along with the option to save data by selecting playlists to download for offline listening. As mobile grows, the constrained free plan is likely a powerful conversion point to paid accounts where users want the same control they’re used to on the desktop version.
One of the most common arguments in favor of Spotify is that, as Sean Parker claimed, Spotify is getting people who previously didn’t pay for music to start paying. According to studies done in Sweden, Norway, Denmark, the US, the Netherlands, and the UK—all of which are cited on Spotify’s page for Artists—that may very well be the case. [26]Still, many artists claim that, though legal, the revenue generated by Spotify and services like it simply isn’t enough to live on. David Byrne, formerly of Talking Heads, refers to the royalties artists receive from streaming services as a “pittance,” arguing that "if artists have to rely almost exclusively on the income from these services, they'll be out of work within a year." [28] Echoing that sentiment, Patrick Carney of the Black Keys claims, “For a band that makes a living selling music, [revenue from streaming] isn’t at a point where it’s feasible for us.” [29] Country singer-songwriter Rosanne Cash, who has recorded 13 albums since the 1970s, told a House subcommittee that she was paid $114 for 600,000 plays on an unnamed streaming site. Cash argues, “Everyone gets paid except the music creators. We are creating a culture where content creators are a new servant class, and paid as such.” While the debate is long from settled about whether Spotify adds value or destroys it for music creators, there is no doubt that the controversy around it spurs awareness of Spotify and acts as a growth driver for the company. Every time a high-profile artist gets into a public dust up with Spotify over royalties, the company has an opportunity to make its case for the value they create for listeners and artists, driving greater awareness and new users in turn. The most recent example of this mechanism was seen with Taylor Swift, who a week before the launch of her Billboard-topping album 1989, pulled her entire catalog of music from the service. While obviously a critical loss for Spotify, the company received a ton of exposure in consumer publications, blogs, a TV news programs around the world. The controversy creates a platform where Spotify can put a fine point on its value proposition to listeners.
This seems to be the essential question that will determine the long term viability of Spotify. While Spotify is clearly a bridging technology between piracy and paid, will they be the long-term winner, or will they be usurped by bigger players such as Google or Apple? Going back to the encyclopedia example, Encarta won in the short term, but was ultimately eliminated by services like Google and Wikipedia. Similarly in the entertainment space, RedBox, a video rental kiosk business, has won in the short term of video rentals but faces increasing pressure from video on demand services from cable providers and companies like Netflix and Amazon Prime Video. In a recent thread on GrowthHackers.com, the community discussed how to best grow Spotify, paying particular attention to the current controversy between Spotify and rights holders. After all, there’s obviously more at play that simply user acquisition. As Joseph Bentzel explained, it’s not really a growth problem that Spotify is currently experiencing, but a product/market fit problem. He explains:
“Spotify’s full ‘product’—at its core—is really a form of ‘two-sided marketplace’ in which its ‘producers’—i.e. artists and writers—benefit from providing their offering via a paid and/or ad-sponsored revenue model.
What Taylor Swift basically did was say that from the producer perspective of the two-sided marketplace model—she didn’t see value in participating anymore. Rather, she saw ‘channel conflict’ between Spotify’s model and her other revenue generation channels.” [50] So while Spotify has clearly found product/market fit on one side—hence the 50 million people who currently use the service—if artists withhold their music, then the system breaks down. Spotify must address the issues on the “producer” side of the marketplace. Yet as Ek explained in the wake of Swift’s breakup with the company, in a blog post entitled “$2 Billion and Counting:”
“When I hear stories about artists and songwriters who say they’ve seen little or no money from streaming and are naturally angry and frustrated, I’m really frustrated too. The music industry is changing – and we’re proud of our part in that change – but lots of problems that have plagued the industry since its inception continue to exist. As I said, we’ve already paid more than $2 billion in royalties to the music industry and if that money is not flowing to the creative community in a timely and transparent way, that’s a big problem. We will do anything we can to work with the industry to increase transparency, improve speed of payments, and give artists the opportunity to promote themselves and connect with fans – that’s our responsibility as a leader in this industry; and it’s the right thing to do.”
In other words, Spotify is doing all it can to ensure that artists are compensated for their work, and if record labels don’t share, then it’s not their fault. Nevertheless, if artists choose to remove their music because they aren’t happy, it doesn’t matter whose fault it is, because Spotify—and its users—will be the ones to suffer.
As the company explains on their page for artists, despite expanding to a total of 55 countries thus far, the company “plans to continue this rapid expansion around the world” in order to “add millions more users quickly and in turn enable us to pay even more out in royalties.” [26] One such expanding market is Canada. Though a launch date has not been announced, the country is currently in a state of anticipation similar to the pre-US launch, and a Spotify.ca site is currently accepting requests for invitations. [36]
One way to grow the Spotify user base is through new partnerships and platforms. The company has released SDKs for iOS and Android developers and has launched high profile integrations with companies like Uber. It’s not hard to imagine Spotify shipping on Samsung or HTC phones, Spotify on Xbox One, Spotify on PS4, Spotify on Roku, Spotify in your BMW, and so on. Starting in November of 2014, Uber began rolling out something along these lines in London, Los Angeles, Mexico City, Nashville, New York, San Francisco, Singapore, Stockholm, Sydney and Toronto (with more cities added in the following weeks). The car service now allows its customers to remotely control the music that plays through their ride’s speakers. To integrate the two services, users connect their Spotify accounts from the Uber Profile screen. After that, whenever they request a ride from the Uber app and are matched with a music-enable dUber, a music bar will appear at the bottom of the Uber app. Users tap the music bar and choose a song from any of their Spotify playlists while waiting for the car to arrive. The Spotify + Uber partnership is available to Spotify Premium users only, though Spotify does offer a free, no-credit-card-required week of Premium so that Uber customers can try out the service. [62] By making these integrations available only to premium subscribers, Spotify may be able to drive not only user growth but upgrade conversion to paid accounts.
In May of 2014, Joshua Brustein of Businessweek cited a report published by Generator Research the previous November, claiming that the business model for streaming music might be “inherently unprofitable.” According to Andrew Sheehy, the report’s main author, “No current music subscription service—including marquee brands like Pandora, Spotify, and Rhapsody—can ever be profitable, even if they execute perfectly.” Brustein went on to claim that, according to a report written by the firm PrivCo using Spotify’s financial disclosures, the company had lost a total of $200M since it was founded, though Spotify declined to comment. Despite these claims, plenty of streaming services are attempting to make a go of it. In fact, an August 2014 article from Time.com cites 102 available music streaming services—though they did count basic and premium versions separately. [65] Nevertheless, that’s still a ton of competition for Spotify. Conducted by Edison Research and Statista, the survey’s the main points of consideration were whether those surveyed had heard of certain services and which ones they had used within the past month. The chart below represents that data:
Yet in addition to competitors like Pandora and Rdio, Spotify is now also faced with competition from well-funded giants like Apple and Google, toward whom Ek is particularly (and probably rightly) hostile—claiming in the company blog post responding in detail to Swift’s departure, “Our whole business is to maximize the value of your music. We don’t use music to drive sales of hardware or software.” The market for streaming radio is becoming increasingly crowded, with established services—such as Beats and iTunes—joining forces and new services—such as YouTube’s music streaming service—entering the fray left and right. In particular, the launch of YouTube’s service could mean trouble for Spotify, since many see YouTube, with its 1 billion visitors per month, and 4 billion music video streams on Vevo alone, as the biggest streaming music site on the planet. [52]. In March of 2014, TechCrunch reported rumors that Spotify might go public at some point in the fall of 2014. That time has come and gone, though in February their website had listed a job opening for an External Reporting Specialist to “prepare the company for SEC filing standards. Set up all reports necessary to be SEC compliant.” Furthermore, there were reports that Spotify received a $200M credit facility from Morgan Stanley, Crédit Suisse, Deutsche Bank, and Goldman Sachs, which TechCrunch perceived as a bid to to improve their chances of being the underwriter when Spotify does go public. [37] Little more was heard regarding a Spotify IPO until August of 2014, when the company relisted the same regulatory filings expert position. In an email to Reuters, Spotify director of communications Marni Greenberg affirmed, “This is the same role that was advertised back in February,” though she declined to explain why the position was being re-listed or provide any further comment. [49] Current speculation is that the company will go public sometime in early 2015. There’s no denying that Spotify has turned the music market on its head, providing a value proposition attractive enough to decrease digital piracy and convince millions of people that music is worth paying for. Only time will tell, however, whether that business model is sustainable. Nevertheless, if Spotify does have intentions of going public, revenue losses of $200M are certainly not sustainable—especially in light of increasing competition for paying users and artist dissatisfaction.
Source: GrowthHackers
Written by MB Morgan Brown
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