SPOTIFY CASE STUDY
Music industry
YEAR
1960s Cassettes
1990s CDs
1998 Free websites for downloading music, more illegal downloading
1999 Napster website- provided free downloading but failed due to data stored in
only central server.
Rise of digital music industry
Demand for online streaming music increased
In 2013, revenue from digital music accounted for 39% of all global music revenue.
67% of the worldwide revenue from digital music was generated by downloading
music files, selling albums and tracks and 27% from music streaming.
Spotify
Founded in 2006, the company mainly provides an audio streaming platform.
Launched in October 2008, the Spotify platform provides access to over 30 million
songs. Users can browse by parameters such as artist, album, or genre, and can create,
edit, and share playlists.
Legally available online music library
Differentiating factor from illegal sites was opening an account, downloading a
program and being able to listen to any of the 30 million tracks.
Spotify’s main agenda- delivering high speed to consumers- internet is the
prerequisite for accessing any digital services. With mobile network operators making
big investment in infrastructure and facilitating high speed internet services, accessing
seamless music online was a possibility for millions of users.
How Spotify worked
Spotify uses social networking and searches for nearby users using the service to see
if check if their caches have the song requested by user. If the cache contains the
requested song, Spotify enable those computers to play the music. That way,
Spotify’s servers are never overloaded.
All Spotify songs have small audio size which make it easily transferable.
Spotify Business model:
Spotify purchases a license from labels, artists, publishers, and other right holders for
streaming their music on its platform.
For paying royalty to the artists, the platform uses complex algorithms that finalize
the royalty per stream for every artist or label
The platform uses factors like country (in which the song gets played), currency value
of the country, contracts, artist value etc. to calculate royalty per stream.
The average per stream pay-out to the rights holder at Spotify lands somewhere
between $0.006 and $0.0084.
Spotify Revenue Streams:
Spotify makes money from two sources:
1. A free tier supported by advertising
2. A premium tier with paid subscription
The freemium version of Spotify allow users to browse through the catalogue of songs and
play them.
However, this music on demand service comes with advertisements that may interrupt a
user’s entertainment. The mobile apps of Spotify has more restrictions in freemium version
than the desktop or web apps.
The premium version of Spotify offers uninterrupted access to music across all devices,
including smartphones, tablets, and televisions. Along with a seamless user experience, the
premium version facilitates downloading songs to their devices for offline listening and high
quality audio. The subscription offers are available at $9.99 per month.
Challenges faced by Spotify:
Non profitable: even after rise in revenue the company was not profitable, 70% of the
revenue was paid to right holders.
Right holders were not happy due to less amount being paid to them
Threat from competitors specially Apple iTunes.
Low paid subscribers- total paid subscribers were 22% which contributed to 91% of
the revenue.
Costs of revenue (or marginal costs) increase with users — the more Spotify grows,
the more it pays.
Measures taken by Spotify
1. Collaborating with Facebook:
Allowed users to set up listening groups on the social media platform. Facebook
users could listen to the same music together with their friends, even if they were
on opposite sides of the world.
Users who linked their Spotify account to their Facebook account were 3 times
more likely to become paid subscribers.
2. Using other social media platforms to engage customers:
Using Spotify’s social media networks like twitter and Facebook to engage
customers.
Asking customers to share their playlists on occasions like mother’s day,
valentine’s day etc.
Launched development platform which allowed professional and amateur
developers create applications for Spotify, promoting more widespread use of
music.
3. Brand Partnerships:
Partnered with companies for advertisements in the form of audio and visual formats.
Offered advertisers that they can provide details about the potential customers by
giving them the data Spotify has generated.
Close relationship with brands like Lucozade, Coca Cola, Reebok, Volvo and Ford.
SWOT
STRENGTH OPPORTUNITY
Available on different platforms Potential market in non-music
(mobile, laptop) category like audio books and
Presence in various countries. podcast.
Huge music library (30 million) Brand partnerships
Growth in paid subscribers New pricing scheme
WEAKNESS THREAT
Non profitable Competitors- majorly iTunes
High operational cost Artists demanding more
Huge royalty payments to right royalties/payments and pulling
holders. back their music
Majority of freemium users Contract with right holders might
Not able to monetize get cancelled.
Recommendations
How Spotify can monetize money
Spoti fy's Revenue and Net Income from 2008-
2013
800
700
600
500
400
300
200
100
0
2008 2009 2010 2011 2012 2013
-100
-200
Revenue Column1
1) Exploring new pricing strategy-
Spotify’s major revenue comes from paid subscribers. Total paid subscribers were
22% which contributed to 91% of the revenue.
The company is only focusing on acquisition and retention, hence missing
monetization.
Acquisition will become more costly, and that is why strong monetization strategy is
needed
Exploring new pricing strategy instead of a single price point.
Launching new pricing tiers, such as raising prices can help in increasing their
revenue.
2) Launch own record label:
One of the major issues Spotify faces is that 70% of its revenue goes to the right
holders/record companies due to its pay per stream scheme so the more users it has
the more it has to pay to the right holders.
If Spotify launches its own record label it will be able to cut right holder’s cost since
it will be its original content. Netflix also follows the same strategy and focuses on
original content.
3) Focus on Sponsored content:
Spotify has launched a new “sponsored song” unit in which the song is sponsored
by companies so that it plays on the playlist of their potential customers.
In this way they can earn more dollars out of its ad-supported free tier listeners.
The company should promote more sponsored content so that they can monetize the
freemium customer base.
4) Focus on non-music content:
Audiobooks -EBooks and audiobooks have emerged as popular alternatives. Monthly
subscription for audiobooks can help generate more revenue for the company.
More focus on podcast by adding more topics.
