Started in Sweden in 2006, Spotify is an online music streaming service. Their mobile app first launched in 2008, providing users access to 50 million protected tracks. In the initial year’s customers could either pay for the app, or access a free account, but this free account was only available via invitation, as a means to control growth.

Since their inception Spotify has seen considerable and impressive growth, going from 18 million paid subscribers at the start of 2015, to 124 million at the end of 2019 (Spotify, 2019). They are also the worlds largest audio streaming platform with 36% of the market share, double that of Apple Music who are in 2^nd with 18% (Watson, 2019).

The video above (8 minutes) gives a brief insight into Spotify’s current position, and potential future direction.

How Does Spotify Make Money?

Nowadays, Spotify offers a “freemium” business model in which users can use a limited version of the app for free (without invitation) which garners advert revenue. Alternatively, users can pay to access the premium version of the site. Premium accounts cost £9.99, or £4.99 for a student and £14.99 for a family account. In 2019 Spotify grossed €6.76 billion, 90% of which was from the premium accounts (Spotify, 2019).

However, despite its enormous revenues Spotify does not make a profit. In-fact they have made a loss every year they have been in operation:

(€Millions)	2019	2018	2017
Revenue	6,764	5,259	4,090
Gross Profit	1,722	1,353	849
Net Profit (Loss)	(186)	(78)	(1,235)

So where is all their gross profit going…

Developing Technology and Staying Ahead in a Competitive Landscape

Zhang, Kettinger, Kolte, & Sungjin (2018) explain several factors that mean an incumbent firm is at risk in a sharing economy, most of which apply to the online music streaming industry such as:

1. Value can be broken down into segments that are managed digitally
2. Many newcomers and high competition in the industry
3. In-exclusive or under used assets (Spotify does not have exclusive rights to songs (the asset here), so any number of firms can sell the same thing as them essentially
4. Intra-industry expansion of rivals (rivals that mainly deal in podcasts can easily expand into the music market, and vice versa

They then go on to suggest means by which an established firm can protect against such a vulnerable position in a competitive market, such as:

1. Strengthen your core competencies
2. Invest in new technologies
3. Partner with other firms

And Spotify is doing all these things; looking again at their financial reports we can see that they spend huge amounts on their income on research and development (€615m in 2019), as well as pushing their marketing model to try and ensure they snap up as much of the market as possible in this relatively early stage.

Cooperating with Relevant Partners

The offer means that with either the student or regular premium accounts, the customer can connect their headspace account and unlock the premium version of that app too. Essentially giving users 2 premium apps for the price of one.

This is a good choice of partner app for 2 reasons; they do not compete with Spotify in their product offering but do target the same general customer base, and secondly it is a difficult offering to imitate, as headspace is the leading firm in the online meditation industry.

Reducing Piracy – Spotify’s PR

With the widespread introduction of the internet, the value of the music industry fell dramatically. People moved away from buying expensive physical CDs and records and towards downloading music online illegally. However, the process of illegally downloading music online is laborious (and illegal), and the emergence of platforms like Spotify gave people a relatively cheap way to access more music that they could ever imagine. The growth of music streaming services like Spotify have reduced piracy dramatically in recent years by offering a more convenient alternative (Aguiar & Waldfogel, 2015)

In the 90s £10 would maybe get you 10 songs in an album, when Spotify was introduced £10 gave you 50 million for the month.

Competition from Apple

Despite having double the market share and twice as many paid premium members as Apple, there is still a serious threat from a company which leads the worldwide smartphone market. Apples market leading position in the smartphone market gives them a unique ability to shut out foreign apps from full compatibility with many of their systems.

Apple is well known for being exclusionary with its products, for example not allowing other streaming apps to work with their “HomePod”, poorer compatibility with Siri, and slower app updates compared to Apple Music (Lovely, 2019). Naturally Apple want people to buy only their own product. Whilst Spotify is still going strong on android devices, Google owns the play store on android phones, and they are developing their own range of phones, smart speakers, music streaming services etc. There is always the threat that google will start to do the same as Apple have, leaving Spotify stranded as the less convenient option for end users.

References

Aguiar, L., & Waldfogel, J. (2015). Streaming Reaches Flood Stage: Does Spotify Stimulate or Depress Music Sales? Institute for Prospective Technological Studies.

Lovely, S. (2019, 04 7). Why Spotify Is Suing Apple. Retrieved from fool.com: https://www.fool.com/investing/2019/04/07/why-spotify-is-suing-apple.aspx

Spotify. (2019). Spotify Annual Report 2019. Spotify.

Spotify. (2019, 04 29). Spotify Reports First Quarter 2019 Earnings. Retrieved from newsroom.spotify.com: https://newsroom.spotify.com/2019-04-29/spotify-reports-first-quarter-2019-earnings/

Watson, A. (2019, 12 09). Subscriber share of music streaming services worldwide 2019. Retrieved from statista.com: https://www.statista.com/statistics/653926/music-streaming-service-subscriber-share/

Zhang, C., Kettinger, W., Kolte, P., & Sungjin, Y. (2018). Established Companies’ Strategic Responses to Sharing Economy Threats. MIS Quarterly Executive.