Spotify: success and challenges
A startup that challenged the industry dogmas… and won?
I really love Spotify. A great and simple music experience with more songs than I will ever be able to listen to (+30m songs). It suggests me songs I might like… and it even turns out I indeed do, and, on top, it’s 100% legal. It’s almost too good to be true, isn’t it?
The Swedish company, despite having a market valuation of+$8bn, has been recurrently questioned since its early beginings: “this won’t work”. “Who’s going to pay there?”, and so on. Truth is, Spotify is still there and rocking it, and though it still makes no profit, it has developed an interesting business model. This is specially interesting if we take into consideration that Spotify didn’t really “invent” anything: it was born 5 years later than iTunes, 8 later than Pandora and 9 after Napster. A great product, a brilliant execution and a combination of favourable paradigm shifts made the Swedish company what it is now.
Paradigm shifts in the music industry
1.- From scarcity to abundance.
Not so long ago, we used to pay for a defined set of songs: a casette, an LP, a CD. And we owned them. Even during the blooming of the P2P-fever, people stopped paying for the songs, but they still wanted to own them.
Nowadays, however, things are quite different: We pay for getting access to songs that we don’t own. And for the same price of one of those old albums we get the right to listen — for some time — to an almost unlimited number of songs. That’s probably why recommendation algorithms are so important: if Sptoify were just an HD containing more than 30 million songs, we would probably end up listening always to the same songs. That’s the paradox of choice, and it’s real.
2.- Music industry: from war to alliances
The music industry faced (or faces?) a deep crisis around their traditional model. The Internet made it just too easy to distribute ilegal copies, something that threatened the whole sector.
Spotify took a stance since the begining: instead of attacking the industry, they’d team up with it. That’s why today 77% of Spotify annual costs come from royalties¹. As usual, not everyone is happy with the royalties being paid, and some famous artists have publicly rejected to appear on the platform.
“Freemium services don’t work for online music”
You can google it: there are a few articles written around 2009 foretelling the impossibility of getting users to pay for an online music service. It makes sense though, given that in 2008 only 0.1% of internet users in Europe were paying for online music². That supposedly left Spotify with only advertising as a revenue stream.
Once again, advertising turns out not to be the only answer. This is the present share of Spotify revenues:
That share could obviously have little meaning, as the company could be totally bankrupt. During the last tax year available, (2015), the company had a net income of -€173m. The interesting numbers arise when looking at the evolution:
From 2014 to 2015 Spotify raised 80% both its total revenues as well as the number of paying customers (from 15m to 27m), and had a quite similar net income. The Net income/Revenues ratio decreased thus from a -14% to -8%… giving to me the impression that the company has these numbers under control. At the moment, there are 50m paying customer on Spotify, so they might not be far away from profitability.
Freemium: 10% paying customers + 90% free = False.
When looking at the available data, we realise that Spotify spent some years with around 25% of paying customers. (In Spain that number was probably way lower. We have something with the word gratis). However, this ratio is increasing. Their most recent disclosed data show 50m paying customers (March’17) and 100m users (June’16). There is a certain temporal lag between both numbers, but they are getting close to a 50–50 ratio. And their growth rate leads us to think they can even surpass it:
It makes sense: listeners have got used to a great service that is simple, social, and available everywhere. How many people go running while listening to Spoti? Paying customers are willing to spend €9,99/month… and once you are in, you never get out. At some point they might even start telling free customers to decide if they go up or out. With 50 million premium subscribers, the free ones might be starting to become worthless.
Coming challenges
I really think Spotify might make it: become a sustainable and profitable model. But the challenges they still have to face are not easy to overcome. In a hint:
- Not losing focus: Spotify has tried a million features since it started. Lists, advertising options, freemium limits, mobile vs desktop usage, scarcity strategies, … but they have been great on keeping focus around a great and simple product. A product that is usable both for a DJ and a 70 year-old classical music fan. On their way to profitability; will they stay just around this, or will they try new venues? Generating their own content? Going into video? Whatever they try, it will be key to not forget about the Job-to-be-done they are solving, or they will be threatening themselves.
- Being profitable — or showing they can be— . For doing so, they have a wide range of levers. I don’t know how many people would leave if they raised the price from 9,99 to 10,99 per month. But with 0 churn that would increase their bottom line a 10%, exactly what they need to become profitable.
- They are not alone. And their competitors are not begginers: Apple, Pandora, Amazon, Google. So as we can see below, let the games begin:
Will Spotify make it? We’ll see. Just in case, let me go back to my list ;)
