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Spotify 2.0 — Growing Beyond a Personal Music Streaming Platform

The article was originally published on LinkedIn:(https://www.linkedin.com/pulse/spotify-20-growing-beyond-personal-music-streaming-platform-modi/)

Spotify started 2018 with lots of noise:

The recent news flow perfectly summarises my opinion on Spotify’s current state — It is a great company with a great product (70m paying subscribers!) and has a sustainable business model (enough to opt for a direct listing through which no new money is raised). However, it could be more successful if it could master content, which I see as the single most important key risk as well as an opportunity for the firm.

In this article, I introduce three growth strategies: (1) original content, (2) Video and (3) focus on B2B that can transform or augment its current business model. But let us start with the basics first…

Streaming Vs. Sales

Founded in 2006, Spotify is one of the dominant music streaming platforms with c.140 million total subscribers (c.70 million are premium subscribers as of Jan-18). During 2017, streaming overtook sales for the first time as the leading driver of revenue for the US recorded music industry. Spotify and similar streaming services are here to stay given the structural change in how music is distributed (streaming vs. sales). They are also poised for future growth by increasing penetration into existing markets and expanding into new ones (e.g. Developing Economies).

What is Spotify? — Revisited

Fundamentally, Spotify is a digital channel to bring music to its subscribers. On a deeper level, it is a platform that has the potential to connect content creators (music artists) with content consumers (music enthusiasts). It currently adds value by providing the infrastructure and curating content using technologies such as Machine Learning to fit content consumer’s ‘wants’. Therefore, its core competencies include managing and matching (music) content to consumers (listeners). However, Spotify also has a significant valuable resource: it has gathered c.140 million people with one common interest — music!

How does Spotify make money today?

In a nutshell, Spotify licenses music from music labels and aggregators and enables its subscribers to stream it via app and website. Spotify currently generates revenue via monthly subscription fees charged to premium subscribers and ad-revenues from non-premium subscribers. In 2016, Spotify reported revenues of c.$3bn (+52% y-o-y) with losses amounting to $0.6bn. An excellent take on Spotify’s financials by GP Bullhound is available here. A 2018E revenue breakdown is provided in the appendix.

How to grow Spotify by leveraging its core competencies and valuable resources

While increasing its subscriber base for its current product is the key growth strategy to drive top-line growth in the medium term, I look at 3 strategies for long-term success that focus on how to expand its offering to (a) differentiate itself from other streaming services (Apple Music, Amazon Music, Pandora etc.) and (b) offer more value to its subscribers. I believe leveraging Spotify’s core competencies and its valuable source (subscriber base) are key in achieving long-term success.

STRATEGY 1: Original Music Content + Ecosystem for Artists

Description: Currently, music labels own the music rights of the majority of music available on Spotify and have high bargaining power over the platform. As a result, Spotify is estimated to incur c.80% of revenues as royalties and distribution costs. I would argue that Spotify should become a producer/owner of the content, similar to what Netflix is currently successfully pursuing in video content. Although such a pivot may result in high initial investment costs and is risky, the long-term benefits include better margins, a closer connection to artists, more content for listeners and independence from music labels. Spotify’s data analytics capabilities may potentially provide it with an edge over music labels to identify emerging talent and changes in consumer taste. There is a concern that music labels may pull off content from Spotify similar to Disney’s recent move to remove its content from Netflix ahead of the launch of its own streaming service. However, the reach of Spotify is too influential for music labels to play such a strategic game.

The first step to attract independent artists to potentially sign up to Spotify as a music label, is to create an open platform for independent artists. Connecting selected emerging artists to Spotify’s platform directly and cutting out the music labels would provide better margins for Spotify.

As an experiment, Spotify has reportedly created original content (mostly music without vocals for genres including jazz, chill and peaceful piano playing) using ‘ghost’ producers. Spotify owns the music rights and pays a flat-fee to the artists. The content is useful for ‘strategy 3 — Spotify for Business’ (see below for more details) but it is difficult to attract emerging artists for mainstream consumption using the flat-fee model and ‘ghost’ mode. Maybe that’s precisely why Spotify has recently introduced RISE, its New Emerging Artist Program, to “identify and break the next wave of music superstars”. It seems that the artists already have a record deal. However, one could see it as an initiative to connect with the music community to warm them up for its open platform.

Another (potentially parallel) approach would be to buy up music copyrights, similar to Kobalt’s recent move into the acquisition of music rights.

In terms of data analytics, Spotify has recently taken the right steps to create a useful dashboard for artists to gain insights via real-time streaming data and audience demographics. For example, artists can check their popularity by geographic location, helping them to organise concerts at the best locations.

Revenue model: Monetise artists’ content on the Spotify platform and/or license to other third-party platforms

Existing Competition: Music labels, Soundcloud

STRATEGY 2: Video / VR

Description: Given Spotify’s ambition to become a multimedia hub for the music industry, an integrated video strategy is crucial. Spotify is currently focusing on creating original TV series for its platform with some major hiccups along the way. An alternative would be to focus on live concerts/events which arguably is ‘closer’ to its core competency of providing a music-led experience to its subscriber base.

Streaming live concerts/events through the Spotify app could be combined with Virtual Reality (VR) technology to offer an enhanced experience. VR massively increases the size of the potential audience for live concerts as anyone with a VR headset can enjoy a ‘quasi’ live music experience.

Whilst the VR headset industry is relatively competitive, the ecosystem of content creators and distributors is at an early stage. Particularly in the music industry, event organisers such as Live Nation are currently experimenting with VR to create content and reach a broader fan base for live concerts. While content creation is costly and event organisers would want to own that part of the ‘supply chain’, content distribution can be easily dominated by Spotify. Its core competency (providing an infrastructure to connect content creators with content consumers), provides it with the technical know-how and the subscriber base (its valuable resource) to fully leverage the VR revenue stream for event organisers.

Revenue model: A licensing agreement between Spotify, artists and event organisers. Subscribers will ‘pay as you go’ to watch live concerts/events.

Existing Competition / Potential Partners: Event organisers, Facebook, Youtube, NextVR, NoysVR, Rowzero,

STRATEGY 3: Expand Spotify’s B2B Offering

Retail stores, pubs and bars play music and represent a massive B2B opportunity for music streaming services. Spotify is indeed an investor in Soundtrack your Brand, a Nordic-based B2B music streaming platform (co-founded by Ola Sars and Andreas Liffgarden), which has shown some traction in the Nordic market. The company relies on the Spotify library to provide a curated playlist depending on the type of audience, desired energy level and ambience. Although Spotify’s core focus is the consumer market, the B2B market represents a low hanging fruit. Acquiring Soundtrack Your Brand or building an in-house solution would enable Spotify to leverage its data on music habits and apply it to the large and untapped B2B market. It would also be interesting if Spotify could transfer data across such its retail and B2B offering. As an example, a retail Spotify subscriber could automatically keep a record of any music he/she listens to in retail locations which use “Spotify for Business” or its business subscriber could get an insight into what kind of music Spotify subscribers listen in or near its premise.

Revenue model: Soundtrack your Brand, the Spotify-backed B2B music streaming platform, currently charges £34.99 per location per month (compared to £9.99 for retail subscribers). To give an estimate of the market size, there are c.300,000 retail locations and c.53,000 pubs in the UK alone. Furthermore, given that retail locations play instrumental ‘mood’ music (no branding needed; relatively straightforward to produce), Spotify could easily establish a partnership with independent artists or create original content, at a low cost, to boost its margins for the B2B business.

Existing Competition: According to Soundtrack your Band own research, two-thirds of businesses still use CDs. The rest of the market is fragmented and served by players dedicated to B2B music streaming and start-ups such as Jamendo Licensing as well as B2B offerings of larger players such as Pandora. An illustrative list of B2B music streaming services can be found here.


written while listening to my ‘Your Top Songs 2017’ playlist on Spotify :)


Appendix

2018E Revenue Breakdown