Daniel Ek and Martin Lorentzon of Sweden started the company in 2006. The main app, along with the subscription service, started in 2008. As of September 2016, the company has 40 million subscribers. At $9.99 per month, this amounts to $400 million per month in revenues. This does not even include the amount received from the 60 million free members who are shown advertising to continue using the service. The retention rate seems to be strong as the company increased from 30 million paying members in April 2016.
The company pays music labels based on the market share of how many songs of their artists are streamed as a proportion of the total number of songs. Artists feel this is an unfair system and are not getting compensated properly. There is no indication the company plans to change this arrangement.
It’s believed the name of the company is a combination of the word “spot” and “identify”, although how this translates to a streaming music service is anyone’s guess.
How the Company Started
The company was started by Daniel Ek and Martin Lorentzon. They wanted a way to get music to anyone who wanted it.
The company received seven rounds of funding for a total amount of a half a billion dollars. Recently, they received $1 billion in debt to ramp up for its IPO.
The debt does come with some strings attached which could make the arrangement difficult to keep. IPO’s in the streaming media space have not done very well. It seems investors are not sold on this type of business model alone.
It’s still an ongoing battle, but the freemium model has artists feeling the pinch and in some instances, superstars are revoking access to the service.
However, Ek has stated that without his service, which does pay music labels (who in turn, pay the artists), they would not have the exposure they received.
Whereas pirated versions of songs and albums pay the artist nothing at all. Having access to a service such as Spotify significantly reduces pirating as subscribers don’t need to go anywhere else to listen to music. The subscription rate (either free or $9.99/month) is low enough to keep them using.
This sets up a conundrum for the company as well as the artists. If Spotify cannot attract superstars, will subscribers continue to use the service? If more superstars back out, will they be leaving money on the table that could have been earned due to increased exposure?
Another issue with artists is that Spotify has relationships with music labels rather than the artists directly. This causes severe delays in getting paid. Spotify seems to be in the driver’s seat as they can bring exposure to 100 million subscribers (free and paid).
Why it Works
The concept works for this company because it is an early adopter. At the current subscription rate of $9.99, it’s likely to keep many members for several years. As members become more invested with playlists and following other users, they will be more likely to continue with the subscription.
They do face competition from Rhapsody (formerly Napster), Pandora, Amazon, iTunes, and others. Spotify seemed to appeal to more people with the type of service and the number of songs available.
Many artists are choosing not to allow Spotify to release any music from albums recently released. Then several weeks later, after they have received royalties from the debut, they open it up to streaming services like Spotify.
Artists (or their music labels) eventually succumb to getting on the service due to the sheer volume of subscribers. Therefore, the company will continue to boast having the most number of artists available to subscribers, which gives them a huge competitive advantage.
Spotify takes advantage of its data to recognize up-and-coming artists across a wide variety of genres. They can be looked upon as a kind of super Billboards magazine. This feature can attract new viewers to its website and ultimately get them to sign up. The charts can be used as content to send to potential subscribers.
Word of mouth is a huge driving force for this service. People want to be able to share music with their friends and this platform gives them the ability to do so. If one friend is a paying subscriber, they will likely convince others to follow suit as the premium service offers more songs and features.
It could be difficult to share when one member has the premium service while friends stay on as free members. The free members have fewer songs to choose from.
Free members were only allowed to join by invitation. This gave the impression of exclusivity that caused people to find others who were already members and ask for an invite. This technique has spread virally and is a large reason why the company was able to obtain the mass user base it currently has.
Co-marketing and publishing partnerships is another avenue the company uses to gain more subscribers. This allows them to rely on the efforts of others to do the promoting for them.
In the case of Spotify, subscriptions act as a rating. If their subscriptions increase, this can be viewed as acceptance. If subscriptions should start to fall, that should alert management they have a problem. The choices of music and playlists selected by members can be viewed as a means of rating artists as well.
Lessons Learned By The Business
- Ek believed in getting everyone on board as early on as possible. Music labels, publishers, and artists can use the medium as a way to get exposure and earn money. Subscribers get to have a choice of all the music they want to listen to. Ek established deals with the right people from the very beginning.
- Establishing a sharing paradigm helps to encourage more people to sign up to Spotify. If you love a song and know a friend would, you simply need to share it with your friend. If your friend is not a Spotify member, send them an invite along with the reason why they should join.
- The company targets publishers across various niches. People who work out, like to listen to music. Publishers on fitness websites would make a great partner. It’s not just about listening to music. It’s about how music is important in other aspects of our lives. People at work listen to music to make the time go by faster.
- The company learned that it needs to explain how streaming can benefit artists. It’s a tug-of-war between having access to millions of people they wouldn’t otherwise have. Taylor Swift decided to pull her album in 2014 from Spotify because she felt the free members would exploit artists and reduce sales. Ek has stated that the company paid out billions to artists and they still get royalties when free members stream.
- The company needs to ramp up the idea that their service has the potential to reduce piracy, which means artists will get paid more in the long run. How much is lost to piracy? That is the point the company needs to get across.
How Other Businesses Can Learn From This
Understand what will and will not work and determine what your potential users want. Spotify knew people wanted to listen to music. Just think about the success of Napster. Take away the problems associated with Napster (copyright, piracy, etc.) and you can give users what they are looking for in legitimate ways.