Spotify is a well-known music streaming platform. By early 2019, Spotify had 242 million users and of that over 108 million subscribed users. It is currently the music platform with the largest amount of subscribers. Spotify was able to create and capture values in multiple ways that positively impacts Spotify’s ability to scale sustainably. The ways in which Spotify was able to do this is less well-known than one might suspect.
The Obvious: Music Streaming & Advertisements
Historically consumers have appreciated and attained music in many different forms- from live music, vinyl records, 8-tracks, mp3 players, illegal torrents, MTV, and now streaming services. “Spotify was founded in 2006 in Stockholm, Sweden, by Daniel Ek and Martin Lorentzon. The two wanted to create a legal digital music platform to respond to growing challenge of online music piracy in the early 2000s.” Because of the shift to digital consumption of music and how music piracy resulted in low quality audio and risk for listeners and loss of revenue for labels and artists, Spotify’s platform was appealing to many parties.
By partnering with the three largest record companies for access to their vast portfolio of songs, Spotify was set up to stream most mainstream songs from around the world. “Spotify typically pays a record label around 52 percent of the revenue generated by each stream, or play, of a given song.” This was a win-win as the service curbed online music priacy for labels (resulting in captured revenue for labels and their artists) and expanded songs to Spotify’s database which users demanded.
In addition to large labels, Spotify partnered with Facebook in 2011. This large user base brought on a huge surge of users and added to Spotify’s stickiness as Facebook was already an established social media platform. With the addition of Instagram in 2012, Spotify’s exposure increased further.
Spotify works on a freemium model where users can sign up for free but will experience ads and lower quality sound while listening to their favorite songs. With a membership, the ads are removed, quality of sound increases, and music can be downloaded to devices for offline listening. The free or membership models both provide revenue through music streaming the freemium membership generates additional revenue through advertisements.
Spotify’s platform that leverages algorithms associated with personal preference, mood, or trends in popular music have disintermediated many forms of previous music consumption that labels had relied on heavily (i.e. CD albums). Importantly, Spotify’s music streaming experience can be personalized. With integrated video, artist biographies, and lyric explanations, Spotify adds to feelings of personalized music that few other music platforms have. The more users utilizing Spotify, the better able the algorithm would be at suggesting new songs and creating playlists specific to a unique users tastes.
In addition to a differentiated, personalized music streaming experience, Spotify expanded its product offering to maintain the needs of its user base as well as tie into other platforms. They were able to do this through a few different strategic offerings.
The Not So Obvious: Social Media & Label
Social: While Facebook provided access to a large user base, Spotify capitalized on its personalization of music curation through other social media avenues. Music has become part of people’s personalities; something that helps define a person’s preferences and character. Discovery playlists that surface songs and artists to users helps shape an identity tied to music preference. This identity is tangible by many who are invested in music. Someone who listens to Tupac and Beethoven would probably have a different identity than someone who listens to Kanye and Miley Cyrus. Spotify partnered with Facebook but has also doubled down on network bridging with dating apps such as Bubble that place value in sharing interests and by extension identities with others. This provides a way for artists and Spotify to advertise themselves on social platforms in a subtle but important way. Integration into additional platforms again, increases stickiness and reinforces a global network so that personalized music choices help further Spotify’s defense against new entrants but also act as another potential revenue source.
Label: In the current structure, Spotify shares about 52 percent of revenue from each song with the label. “The label, in turn, pays the artist a royalty of anywhere from 15 percent to, in some cases, 50 percent of its cut.” By agreeing to a direct licensing deal with Spotify, artists and their representatives are able to keep the whole payout.
“Mathew Griffith, an analyst at Davidson, argues that record labels are becoming disintermediated. Their competitive position in the industry value chain is shrinking. He suspects Spotify will move aggressively to vertically integrate into concerts and merchandise, promotion and data analytics.”
With over 30% of music streamed on Spotify being curated by its editorial team or algorithms, Spotify has taken on some of the role of a traditional label. Getting artists in front of millions of listeners can make an artist. Spotify takes out the middleman (label) so that artists have ownership over their music (artists get a larger percentage of profits) without the fear of not being heard over other artists. When Spotify does take an artist on, they rarely ask for exclusivity, allowing artists to multi-home on other platforms. While some might find this a cause for concern, Spotify’s curated music lists and large member base help prevent users from multi-homing. Although some could also argue that exclusive contracts could allow for higher returns for artists, the few artists that did their music from Spotify for exclusive contracts returned to the platform. It is clear that the critical mass user base provides exposure for artists that are hard to find elsewhere in the current music streaming landscape. Spotify will also tread carefully in disintermediating labels too much as Spotify still relies heavily these labels for much of Spotify’s music content.
“65 percent of Spotify is owned by six parties: the firm’s co-founders, Daniel Ek and Martin Lorentzon (30.6 percent of ordinary shares between them); Tencent Holdings Ltd. (9.1 percent); and a run of three asset-management specialists: Baillie Gifford (11.8 percent), Morgan Stanley (7.3 percent), and T.Rowe Price Associates (6.2 percent). Interestingly, two large labels, Sony Music Entertainment and Universal Music Group own between six percent and seven percent of Spotify (Sony around 2.35 percent and Universal around 3.5).”
Incentives are intertwined on multiple fronts. “Tencent Holdings owns 10 percent of Universal, which in turns owns around 3.5 percent in Spotify, which in turn owns around nine percent in Tencent Music Entertainment, which in turn is part-owned by Universal’s two main rivals (Warner and Sony), but remains majority owned by Tencent Holdings, which in turn owns 9.1 percent of Spotify.”
Tencent already has its own social medial platform, music offerings, payment systems, and e-commerce platforms. It is one of the goliaths in the world market that focuses on many different products. In addition to the vast digital infrastructure Tencent has, it also has an understanding and deep penetration in the Chinese market. With regulatory restrictions on information and content, Tencent might be better positioned to take learnings from Spotify’s platform to build a product that would integrate into its existing systems. With Tencent’s large shareholder position and competing incentives, Spotify should be aware of the potential of disintermediation.