This was written April 1st, 2020
Business Model Summary
Launched in 2008 in Sweden, Spotify is the most preeminent streaming audio platform with over 271 million monthly active users and 124 million paying subscribers in over 79 countries (According to Spotify December 31st, 2019). Spotify began as a Swedish startup in 2006 by Daniel Ek and Martin Lorentzon. Soon, Ek secured licensing agreements with the biggest global labels — Universal, Sony, and Warner — in 2008. Since then, Spotify has inseparable relationships with these label holders, who hold over 15–20% equity stake of Spotify.
This streaming platform is provided through desktop computers, tablets, and smartphones. Having over 30 million songs across the globe, Spotify allows users to create playlists, listen and save songs, shuffle mode, and follow artists, friends, music tastemakers; not to mention, it also offer radio functions, and its innovative recommendation system playlists like “Discover Weekly”, “Your Daily Mixes”, “Your Top Songs”, “Taste Breakers”. (See Image 1) Besides the licensed music content, Spotify also recorded performances with artists under the “Spotify Session” (See Image 2) banner in producing a documentary, audio, videos for written music history.
There are two versions of the pricing service on Spotify: Premium $9.99/month or Free Subscribers. The free version limited individual’s ability to select songs they wanted to listen to (you can only listen to the playlist but no selection on the particular song), no offline listening, and advertisement interruption. With this pricing point, Spotify’s mainstream revenue is the monthly subscription fee and advertisement. Notably, the “Spotify’s payout formula” is the revenue sharing between Spotify and music rights holders. From Image 3, Spotify paid 70% to license channels with overall share revenues that is proportional to the artist’s popularity and streaming percentage on the service.
Strategic Challenge
Today, Spotify is facing three main challenges: competition with other established technology streaming platforms, legal disputes and challenges with licensing pre-requisitions with labels and artists, and extensions beyond music service.
Although Spotify is the shark in the market of music streaming services , the bigger beasts — Amazon, Apple, and YouTube — cannot be overlooked when evaluating its threats and challenges. Besides providing music videos (like,vevo) and music playlists, YouTube now also has its YouTube streaming music service with the price of $4.99 per month. The existing iTunes on Apple is another supplementary service that consumers choose over Spotify. These streaming platforms have deep pockets with multiple streams of revenue compared to Spotify’s simple revenue model.
The Big Machine’s artist Taylor Swift dispute with Spotify in 2014 is a perfect example of how legal disputes and scepticisms from musicians would hinder the future growth and reputation of Spotify. How to get artists on board with Spotify’s business model is difficult. Just like what Taylor Swift said during her dispute with Spotify on how music should not be free (the free users on Spotify), individual artists and their labels should be able to decide the price point for their album or song. If high-profile artists, (Beyonce, Taylor Swift, Coldplay), continuously adopt the approach of negotiating or simply not licensing Spotify with their albums, it is going to be a domino effect for other artists to do so. Thus, Spotify will also face the risk of losing their value to attract subscribers and advertisers.
Carrying the concepts from two previous challenges, how can Spotify secure its value proposition without the dependence of artists and companies like Apple and YouTube to drive them out of the market ? Extending their profit model beyond music streaming if necessary to create product value that cannot be replaced by other companies is critical. In this competitive digital entertainment world, Spotify needs to either be a specialist in its service or jack-of-all-trades.
Strategic Growth Opportunities
1. Market Penetration & Development Strategy
- Expand Spotify’s service availability to more markets in regions/countries
- Entry in markets with high population density
- The launched of Spotify in india increase users for over 2M
- Maintain its competitive pricing or create cheaper package deal plan
- The Family Plan of $14.99/month extension version to attract non-premium users
PROS (Strength)
- Wide market reach, accessibility, reach on potential online advertisers → experienced with market development and penetration
- Music personalization and the recommendation system to attract new users and new premium users (Image5)
CONS (Weakness)
- Dependence on Internet connectivity → challenges when expanding service availability
- Competition with pre-occupied new markets → how to attract local loyal consumers to Spotify
2. Production on music content/ programming in different market segments
- Support directly with independent small artists onto the streaming platform → to be able to pitch artists into influential and popular playlists while skipping the deals with major labels (attraction with the “Ed Sheeran” case of making him popular through promotion)
- Entry into talent marketplace, replacing some of the big record jobs in artists management (production, promotion, marketing, and copyright) → worked with artists marketing team
PROS (Strength)
- Tested & runned assets to support possibility of extensions in music operations
- Capable software engineer & data scientists working with dataset on AI and machine learning → better capture the market’s interest and trends to do creative programming
CONS (Weakness)
- Monetary Funds to create new content
- Marketing skills in attracting different market segments from other age group (Image 4)
- Low pricing and payout formula keeps Spotify profit running low → less monetary fund to extend service availability
3. New Partnerships with other creative content channels
- Partner with major music YouTube channels to create additional value
- YouTube music platform showcasing artists: COLORS, NPR Music, Kinda Neat, Mahogany
PROS (Strength)
- Brand popularity and loyalty
- Experienced from Spotify’s artists marketing team in recruiting talent and to work closer with artist
CONS (Weakness)
- Competitor mainly from YouTube
- Less experience than major label in recruiting music talent
Recommendation for Opportunities
Taking the Taylor Swift 2014 Dispute as a lesson learned, Spotify needs to learn to give up its reliance on music creators from big labels and work on finding their own talents. The opportunity that I recommended Spotify to take on in the foreseeable future is to fundamentally change Spotify’s organizational structure while maintaining its corporate culture. Spotify is known to be a company that doesn’t operate in a traditional workplace and promotes “squads”, “tribes” and “communities” in their office to have more autonomy. Spotify allows employee’s role to be integrated across different professions. For example, a community working together share similar interests and passions in photography while having skills in different areas across coding to marketing. Utilizing its HR skills in project management to foster small teams that are jack-of-all-trades in production of programming and partnership with other music platforms is an opportunity.
To be able to work as a music label in directly signing deals with artists to license their music to skip many steps in Image 6, Spotify could take three steps:
- Public Relations and Artist Marketing Team to sign licensing deals directly with artists
- Promotion of their music to potential subscribers who have similar music taste (data scientists who work on recommendation systems in supporting this technical part)
- Work with recording cost by “Spotify Session” specialists. Besides alleviating its heavy dependence on major labels in the long run, Spotify can also focus on its branding to generate other forms of revenue stream. For example, the Spotify Music Award (similar to billboard music award) because they have the credibility in choosing the most popular or best album with data and statistics to support. Spotify Hosted Concert in regions is another opportunity since Spotify has “Top 50 Charts by Country”. By having Spotify concerts in countries with their most popular artists from the top 50 charts, this could increase its publicity and also branding. From Image 7, Spotify subscribers by region are mainly in Europe and North America. In order to strategize market development and penetration, Spotify can work with local artists especially in Asian countries in hosting Spotify concerts to increase publicity in attracting new subscribers in the most populous potential market India and China. The Spotify Session featured YouTube channel brand COLORS(4.43M), NPR Music(3.77M) is another opportunity to attract subscribers from YouTube to Spotify. Having live shows, documentaries, interviews with artists, Spotify Session could introduce artists in its “music making process” or “stories behind the lyrics”. Having podcasts similar to format in radio to attract GenX and Boomers from Image 7 is another opportunity Spotify could look at. To sum up, in order to keep a constant revenue stream without competitions with other streaming services, Spotify needs to step up in its game by creating more brand values to the current subscribers to attract more new-coming subscribers and artists.
Appendices
Image 1 & Image 2 Source: Spotify, 2020
Image 3 Source: Stereogum, 2020
Image 4 Source: Statistica, 2017
Image 5 Source: Spotify, 2018
Image 6 Source: Spotify, 2018
Image 7 Source: Spotify, 2018
Work Cited
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