Spotify’s music streaming service was launched October 7, 2008 by Daniel Ek and Martin Lorentzon in Stockholm, Sweden. Ten years later, Spotify’s initial public offering on the New York Stock Exchange in 2018 was a huge success, as their company was valued at more than $ 25 billion.
Before Spotify we were still playing CDs or paying iTunes 99 cents for every song. Or, when you were naughty, you would download tracks for free from pirate websites that never paid the artists a penny. Then suddenly we could get with Spotify direct access to most of the music in the world for free (with advertising), or for $10 per month for an all-you-can-hear experience. And you were also able to save playlists to listen to them offline.
The most important obstacle on the content side of their business at the start, was to secure licensing rights to stream a complete music catalogue. It took more than two years to get the necessary content deals with sustainable commercial terms. Spotify pays out around 70-75 percent of their revenues in royalties to labels, producers, songwriters, and artists.
By September 2010, just two years after the launch, Spotify’s music catalogue had grown to over 10 million tracks—closing the gap between Spotify and iTunes, whose catalogue at the time included 11 million tracks.
May 2018, Spotify had 170 million monthly active users, including 75 million paying subscribers. Although Spotify now earns $5 billion a year in revenue, it has never made a profit though.
Growthhackers.com identified 5 growth levers of Spotify:
- A best-of-breed product that beat out existing players on every vector including: music catalogue, product features, pricing model and user choice.
- A freemium business model that bridges the gap between piracy and the pay-per-track model of iTunes.
- A massive US launch driven off the buzz of their European growth and invite-only system.
- An exclusive deal with Facebook to be the “default music service” of Facebook with their integration in 2011.
- Controversy between artists and the company over royalty payments and catalogue availability.
Except for having a truly disruptive excellent service, it is in my opinion the freemium business model of Spotify which accounts for their success. This is also how I adopted Spotify: for free. And after a few weeks, I got tired of the ads and upgraded to a premium subscription, which at € 10 per month is not a big deal. Especially having the opportunity to listen also offline to my favourite music.
Spotify has a bright future, depending on how they handle the following two challenges.
1. Though Spotify is cutting its losses, it still loses close to $1.5 billion a year. They have to find additional revenue streams or find ways to turn a huge number of free subscribers into paid ones soon.
2. Spotify faces criticism from artists and producers, who argue that it does not fairly compensate musicians. As Spotify is in a ‘two-sided marketplace’, their success also depends on making their artists and writers happy.
As premium user, fan and innovator, I wish Spotify lots of success on their innovation journey the next 10 years.
Note : This article was originally published on LinkedIn
Gijs van Wulfen
Gijs van Wulfen is a recognised authority and keynote speaker on innovation and Design Thinking. He was chosen as one of the first LinkedIn Influencers and as of 2017, 300.000 people across the globe are following his notably engaging, prolific and insightful posts. In 2016 Gijs came number 2 in the international Top 40 Innovation Bloggers. In 2017 his book ‘The Innovation Maze’ was elected ‘Management Book of the Year’.