When Spotify, the Swedish music streaming service, made its debut in 2008, there was every reason to believe the company’s business model would fail or would be crushed by one of the tech or music giants.
However, ten years later, Spotify leads the music streaming industry with more than 159 million users and billions of interactions per day. And the company filed to go public last week, a clear indication that it has a solid business and revenue model.
But how did Spotify come to build its online music empire?
The challenges
Spotify was up against some very tough odds since its launch. First, as a non-American company, it would have to overcome much more barriers to funding in comparison to Silicon Valley startups. Moreover, it didn’t have any of the resources of the incumbents such as Google, Apple, SoundCloud and Amazon.
As a nascent startup, Spotify was always under the threat from bigger tech companies. If one of the tech giants found Spotify’s business model attractive, it could either choose to acquire the smaller company or, in case it declined, imitate it to death, a practice that has become all too common.
Meanwhile, companies such as Apple, Google and Amazon manufacture their own hardware, which mostly come preinstalled with apps and subscriptions to their own services. Spotify didn’t have such an advantage.
But more importantly, Spotify was entering a space that was already marked with hostility and past grudges. The music industry’s relation with tech companies soured with the advent of Napster and other file-sharing services because it came at a great cost to their business model.
Spotify would have to find a way to work with record labels and other music companies that were generally wary of endorsing any new type of technology. It would have to pay high royalty fees to record labels (a very greedy lot to begin with) to earn their trust for the right to use their music.
Further complicating the scene is the fact that three companies, Sony, Universal and Warner, control a huge chunk of the music industry. They could be dictating costs and royalty percentages to Spotify. Falling out of grace with any of the three giants would make Spotify’s catalog very limited, costing it lots of users—and possibly its entire business.
The business model
Spotify’s best defense against the threats that lay ahead of it was to gain enough traction to establish itself as an influencer player in the field. This would protect it against music giants dictating terms and tech giants devouring it.
By all accounts, Spotify has so far managed to navigate the complex minefield of the music tech industry masterfully.
Spotify opted for a free, ad-supported business model, complemented with an ad-free, paid subscription. This enabled the service to lure millions of users who were looking for quality music as opposed to the hodgepodge of legal and illegal stuff that is being uploaded in other platforms. Spotify is now present in 61 countries and has 159 million monthly active users (up 29 percent year-over-year).
On average, Spotify users spend 25 hours per month on the service, a little less than an hour per day. This incentivizes many to pay the $9.99 monthly premium fee to do away with the ads and have a more authentic experience. In Q4 2017, Spotify counted more than 71 million premium users, marking a whopping 46 percent year-over-year increase.
The huge user base gave Spotify plenty of data to tinker with. Spotify reportedly logs 150 billion plays, shares, skips, follows and other signals per day, putting it in a unique position to analyze how users interact with music and provide the recommendations and playlists that its audience craves. The large user base and sheer amount of specialized music data the company holds makes it very difficult for other tech companies to threaten it through imitation.
It also enabled Spotify to transition from a music streaming service to a music discovery platform. Spotify users gradually shifted from using it to listen to their favorite artists to letting the service tell them what they should listen to. Spotify’s special playlists, such as the Discover Weekly and Release Radar, have become one of its most popular and distinguishing features. Spotify users turn to these playlists to discover what they should listen to next, and the lists are gradually taking the place of the top X playlists that radio stations used to play.
To a degree, Spotify’s newfound power levels the ground between the Swedish startup and the giants of the music industry. Now music companies and record labels need Spotify as much as it needs them, which enables it to negotiate better terms.
Spotify is also looking toward other practices such as creating original video content to makes its revenues and business model less dependent on music companies.
Future challenges
While Spotify has met great success so far, the company will still be facing some serious challenges down the road, and it will have to innovate more to maintain its edge. Perhaps its most serious threat comes from Apple Music, which has seen tremendous growth since its debut in 2015. Apple is no longer the frail and dying company it was at the turn of the century. It now has the power to define the standards for hundreds of millions of users, and that standard might be that they should only use Apple Music.
Spotify will also have to overcome its hardware challenge. Without specialized hardware to go with its service, the company might see a slowdown in subscriber growth and gradually surrender its number one spot to one of its competitors. For instance, Apple’s HomePod doesn’t work with Spotify through Siri, which might encourage users to sign up with Apple Music. (You can still use Spotify trough AirPlay, but the experience is less convenient.)This might push the company toward creating its own line of hardware, such as Spotify-enabled smart speakers or LTE-connected headphones.
Whether Spotify will manage to overcome the challenges that lie ahead remains to be seen, but so far, the Swedish company’s story of tremendous success will serve as a glimmer of hope for startups that feel awed by the authority of the powerful few American companies that dominate the tech industry.