Spotify is by far the most successful audio streaming platform in the world. Even during the pandemic, the stock price of Spotify went up by 70%. Now, on the outside, while Apple Music has only 72 million users, Spotify has more than 345 million users, and the rest of the competition is not even close. On top of that, the recommendations and playlists of Spotify have been so amazing that each of its users gets an incredible experience so far. Fortunately or unfortunately, in 2021, Spotify is in deep-deep trouble. While on one side the losses of the company have been stacking up rapidly, on the other side with the giants entering the streaming market Spotify is officially in business war.
Let’s go look back to history first. The music streaming revolution of the world started way back in the 1990s. Back then, from 1984 to 1999, CDs were the ultimate instrument of the music industry. The distribution channels of the music CDs made the record labels and musicians billions of dollars every single year. But in the 1990s, the Internet and the computer revolution began to pick up resulting in massive penetration of both, computers and the web, into the American household. At that time, the revolutionary combination of Technology and Connectivity gave rise to a new generation of startups. In the music industry, it was the company called Napster which was started way back in 1999 by Shawn Fanning and Sean Parker. In simple words, Napster was nothing but a music torrent; instead of buying a CD for 20 dollars, it was a way to download an MP3 file for free and share it with friends. Following the old pie rule, this invention was a disruption in the making because what followed next was the first wave of music streaming. Moreover, this wave did not just change the way people listen to music, it changed the entire music industry. Within a few months, it had 4 million song downloads and in less than a year, Napster had 20 million users. Initially, people thought that it’s no big deal. But within some time, the number of Napster exploded further to 60 million users by 2001. This is when the record labels began to realize that their stores are incurring losses. When they computed it, the results shocked them to see that they were incurring more than $100 million in losses due to Napster. That’s when hell broke loose for Napster. They got slapped with a lot of lawsuits and what followed next was the historic suit that led Napster to pay millions of dollars to artists, creators, and record label companies. Eventually, they had to shut down their operation soon. While most people thought that piracy will be gone and that CDs will be back as it turns out, Napster left the market but the behavioral design of the society had been so strongly altered that people just didn’t go back to CDs at all. The CD stores were still closed down and other piracy websites took the place of Napster. CD Companies were still incurring millions of dollars of losses because people just wouldn’t pay $20 for an album. This is where record labels were desperately looking out for an alternative to get their distribution channel back on track. While all of this drama was going on, there was one man who noticed this and decided to become an opportunist during times of chaos. And this man was none other than the legendary Steve Jobs himself and the solution that he brought to the table was to give people ultra-cheap music and to give record labels a non-pirating distribution channel for their music. This solution was none other than the iconic iPod and the rest is history. The record labels again started to make billions of dollars customers fell in love with the iPod as it brought along the second wave of the music streaming revolution. BUT, There were two major problems over here. Firstly, not everyone owned an iPod or a Macbook, and secondly, not everyone could pay for each album. However, everyone had computers and the Internet. So, guess what? This culmination of technology and connectivity, again, gave rise to another generation of startups and the most successful player in this segment turned out to be none other than Spotify which started way back in 2006. Spotify learned from the pain of the customers and decided to build a music streaming platform that could be used by everyone and could be used by everyone for free. This is where Spotify deploys its freemium model with an option to subscribe. but this time it wasn’t easy because they knew what happened to Napster and the subscription model was way more complex than the discreet model of iTunes. Because when it comes to CDs or iTunes, it was pretty straightforward if you buy a $1 album from iTunes 80% of that goes to record labels and 20% of that is mediator fees and that’s it. Whereas in the case of subscription, it’s quite difficult because you are giving unlimited access to everyone for a defined fee. So, the revenue distribution itself becomes very very complex. But fortunately, Spotify got through it and they spent about $9.8 billion between 2006 to 2018 just to get the music rights without legal issues and they built the freemium model to make music accessible to everyone. And what followed next was the third wave of music streaming that is, unlimited legal music that could be listened to for free. As a result of which, again, Spotify exploded and today it is a market leader with the highest number of paid subscribers. But again there were 3 problems. Number one, ad revenue was not enough to pay the artists well, and because the music is free, very few people opted in for a subscription. Number two, there was no profit for Spotify the company suffered massive losses during its rise. And last and most importantly things got ugly with the artists. Taylor Swift and Adele broke up with Spotify over low pay. And again it led to a series of troubles for them from the creators’ side. The company was badly cornered. With massive losses on one side annoyed artists on the other and on top of that, they’ve now got freebie-loving customers. This thing gave them no option but to run a lot of ads to push their customers to buy Spotify Premium and hence a lot of interruptions. At this very moment, two giant companies decided to step into the game. In 2015, Apple introduced that it’s going to kill iTunes and launch the subscription model which was Apple Music as direct competition to Spotify. Right after its 5 months, in November 2015, YouTube entered the streaming wars with YouTube Music. Now, if anyone observes this streaming war very closely, he/she will see that both these services, that is, Apple Music and YouTube Music are built over the weaknesses of Spotify. With just a few moves here and there, Spotify could be killed.
At this moment, I think that there could be another wave of social media revolution on YouTube. The question is- How is that even possible? If you look at this table, Apple Music deploys a premium model and it’s only for Apple users while Spotify and YouTube Music is for everyone and they use the freemium model which gives them a wider audience. Now, if you look at the user base, Apple has 1.65 billion users Spotify has 345 million users and the giant YouTube got 2.1 billion users. But when it comes to paid subscriptions Spotify is way ahead of Apple because of its accessibility through both Android and Apple. While Apple Music has only 72 million users but all of them are paid. Spotify has 345 million users out of which 155 million of them pay. Now, the dominating factor for Spotify over here is its amazing playlists and podcasts that are integrated into the app. This is where we Spotify is coming out with Spotify Originals like 22 Yarns and signing up creators like Joe Rogan to become Spotify exclusive. But Apple and YouTube both also have their podcast but separately. YouTube has Google Podcasts and Apple has Apple Podcasts. Here comes the big difference. While Apple Music generates revenue of $4.1 billion with very less profits because it’s just an ecosystem product Spotify being a stand-alone incurred a loss of $698 million despite generating a revenue of $9.2 billion. And about YouTube? Well, it’s way ahead of the game with $19.7 billion in revenue and this is mainly because of its video service. The most interesting fact is that YouTube is one of the most popular platforms to discover musicians and artists. Now if you take a step back (I don’t know if you see this) but YouTube can accommodate every single dominating factor of Spotify and Apple Music in the YouTube app itself. Number one, people are kind of already searching for songs through lyrics from Google and YouTube which is the USP of Apple Music. Number two, you can ask Google which song is playing and it will find that out for you which is nothing but a Shazam feature. And most importantly Google has Google Podcasts and a huge base of creators who are already making a podcast on YouTube. Now, every single creator knows that YouTube is by far the best platform for creating content. Users know very well how well YouTube understands them and their preferences. Now, if YouTube rolls out an update tomorrow saying that Google Podcasts is now integrated into YouTube as YouTube podcasts. Do you realize what’s going to happen? It is going to lead to another huge wave of creators who will flock to upload their audio content on YouTube because there are already a ton of audio creators who are desperately wanting to be on YouTube. And if given a chance with the YouTube algorithm, it’s going to be a game-changer for them. The best part is because it’s available on both Android and iOS the user base is insanely huge. So, YouTube has the best of both Spotify and Apple. And when integrated all features in, it will become unbeatable in the content space just like Instagram is right now for social media networks. And my sense is, one day there will be a grand announcement that’s going to change everything for Spotify. This is what is happening in the streaming wars.
Lessons of the article:
• Try to be a second-mover so that you can follow the first-mover. In the above case, iTunes was built over Napster. Then Spotify was built over iTunes. If you become the first mover in that case you should be very careful in every move. And for second-mover, you should carefully examine the mistakes of first-mover.
• Whether the company remains in the competition or not, the behavioral design of the company will stay forever. In the above case, Napster brought a change in music streaming. They didn’t last for long. Although they move out of the competition, the behavioral change they made, later on, was used by Steve Jobs.
• The combination of Technology and Digitalisation always come up with new startups.
