Spotify’s Still Hitting All the Right Notes
Spotify has done it again.
In its most recent quarter, it’s shrugged off global economic concerns to hit 615 million monthly active users (MAUs), a year-on-year growth rate of 19%. Of these 615 million, 239 million are premium subscribers.
In Q1, it also crossed the milestone €1 billion gross profit mark.
Just a few years ago, this seemed impossible. Spotify has long faced profitability issues, due to the inherent complexities of the streaming market. This is due to the high royalties that Spotify has to pay out to artists. For every dollar Spotify makes in revenue, it pays about 70 cents back to artists.
To clarify, Spotify doesn’t pay out these royalties on a per-stream basis. Instead, royalty rates are determined in negotiation with the artists’ labels or distributors. (See Spotify’s website for more info). This misconception has played into the argument that Spotify’s business model is inherently unsustainable. However, it’s simply not true.
Okay, so streaming can be feasible. Another concern is competition. As Spotify rode the music streaming wave to great success, many competitors have emerged to try and steal its crown. Apple Music, Tencent Music, Amazon, Youtube Music, Netease.
Surely these ambitious platforms, backed by large, deep-pocketed parent companies, would be able to outprice Spotify and demolish its market share, right?
The answer, so far, has been a resounding no. Spotify still remains the clear market leader (with 30.5% market share, far above all of its competitors.
That’s despite aggressive efforts by rival streaming platforms. For example, Apple Music generally charges the same price as Spotify, but Apple Music pricing is often bundled at a huge discount with other Apple services like AppleTV, Apple Fitness+, and Apple News. Apple Music also boasts 100 million songs to Spotify’s 80 million. Most experts also agree that Apple Music’s 24-bit/192kHz-encoded “Lossless audio” is leaps and bounds better than Spotify’s 320kbps encoding.
No matter, Spotify still wins.
Why? The first reason is its amazing personalisation. Spotify was the first to initiate personalisation on a large scale in the music streaming industry, and they’re still the leader today. From older initiatives like the Discover Weekly and Release Radar playlists, to its new AI DJ feature, Spotify has continually led the curve in personalisation. Of course, other streaming platforms have their own recommendation algorithms and personalisation playlists. But Spotify’s the one that started it in the first place, and it’s reaped the benefits accordingly.
These playlists help contribute to a lock-in effect for Spotify’s platform. As one redditor puts it:
for me at least i think its because ive built up all my playlists and listening history on spotify for years now and i dont want to restart.
True, there are services online to move playlists from Spotify to Apple Music. But there’s something special about Spotify’s own playlists (e.g., Discovery Weekly and Release Radar). For other platforms like Apple and Amazon Music, playlists are usually created manually by “music experts”.
On the other hand, Spotify uses Hadoop, an open-source software, to curate playlists for users based on their listening history, using a complicated mix of algorithms such as audio models and collaborative filtering. This allows for a better personalisation approach, and creates a higher incentive for users to stay on Spotify since Spotify-curated playlists can so nicely mesh with their own tastes.
And of course, there’s Spotify Wrapped. The quirky annual review has become a megatrend in its own right, with 120 million people opening Spotify Wrapped last year.
If you’re not one of those 120 million people, here’s a quick summary: started in 2016, Spotify wrapped is an annual feature that provides users with personalised insights into their listening habits over the past year. It includes statistics such as top artists, songs, and genres, as well as a curated playlist of their most-played tracks. Come end-November, you can expect to see your Instagram / Facebook / Tiktok feeds be swarmed with people posting their Wrapped.
In hindsight, it’s no surprise that Wrapped has been so successful. Music taste is something really special and unique to us. So when we have a stylish, fancy presentation dedicated to recapping our listening tastes for an entire year, we feel appreciated and connected to Spotify — even if we know that 120 million other people are getting the same thing. Also, Wrapped campaigns have included dedicated messages from top artists and “Sound Towns” where listeners get to know a singular place in the world that has the same music taste, further strengthening the personal touch.
The artsy graphics and personalisation also make it perfect to share across social media, providing Spotify with bucket loads of free advertising.
Of course, Spotify doesn’t have it all figured out. Indeed, its journey has been nothing if not fraught with controversy. In 2014, Taylor Swift pulled her music from the platform, and wrote an op-ed for the Wall Street Journal criticising how Spotify was devaluing music. More recently in 2022, controversy over offensive material in Joe Rogan’s podcast has led artists like Neil Young to pull their music from the platform too. It’s also faced business struggles in its pursuit of profitability, cutting a quarter of its workforce in 2023 to slash costs.
But CEO Daniel Ek has grand plans for the company. These include reaching one billion users on a “far more dynamic and open platform”, and achieving $100 billion in annual revenue (compared to $15 billion currently).
As long as Spotify continues focusing on customer experience and personalisation, these aims might be more achievable than you think. Over the past decade, Spotify has enjoyed a huge early-mover advantage of the music streaming industry. If it plays its cards well, it can hold that advantage for the next decade to come.
