Playing music is part of civilized humanity.
Music is so important to us humans and has been for thousand of years, the last 20 of which have seen an incredible shift to online music.
What started out as music piracy became an 11 billion dollar industry, making up 56% of global music industry revenues in 2019.
And one company has become the clear winner globally in terms of paid subscribers.
Spotify is where everyone is at. Taking on behemoths like Apple, Amazon and Google, Spotify has dominated the streaming music industry with about 130 million premium subscribers worldwide, despite being number two behind Apple in the U.S., according to data from 2019.
Spotify has been on a winning streak recently with the acquisition of Joe Rogan’s incredibly popular podcast, along with exclusive deals with Kim Kardashian and DC Comics, all in an attempt to broaden its scope from music streaming to audio giant.
”The companies that we bought and the talent that we have brought onto the platform will helps us become the number one audio platform in the world.”
Dawn Ostroff, Chief Content Officer, Spotify.
The devastating global pandemic has also contributed to Spotify’s recent financial gains.
”Linear radio is moving to on demand. We’re talking about something that has billions of consumers around the world that are now moving their behaviors online. Something like the Covid will likely accelerate that trend.”
Daniel Ek, CEO, Spotify
But Spotify had an uphill battle from music rights to artists demanding fair pay.
This is a story of how a small Swedish startup came to define the way we listen to music in digital age and what we can expect in the future.
The Internet has changed so many aspects of media consumption, but few have had a more tumultuous relationship with these changes than the music industry.
CDs became the standard medium in the 1990s. At the same time, home computers were becoming more commonplace. Many with disk drives built in, allowing users to take their favorite CDs and rip them on to their devices as MP3 files.
This made way for peer to peer music sharing or music piracy through platforms like Napster and LimeWire.
If you look at Napster and of course other competitors that followed, it really disenfranchised the industry.
Apple, having had great success with iTunes and the iPod, decided to start selling music digitally on iTunes in 2003 as a way to charge into the music industry and combat music piracy.
And it succeeded. It was all about downloads, iTunes was the driving force. In return, it destroyed other music selling businesses, knocking out Tower Records and almost every other music store.
This was a tough pill to swallow for the music industry as whole.
The industry was so used to big margins – to sell a CD for 20 bucks and it only cost one dollars to manufacture. So the margins were huge. And then go from that to now albums are $9.99 at iTunes, those margins started to deplete.
And for music lovers who wanted their music for free, radio was still a resource they cherished.
Online radio company Pandora claimed some of that market when it launched in 2000 and 10 years later, it had 48 million subscribers. But pirating was still an issue.
A 2007 study concluded that 12.5 billion dollar in total output was lost in the U.S. annually because of music piracy. Radio was great, but users wanted to choose their music.
That left the market open for a small Swedish company to make its way in.
”We want music to be like water, everywhere.”
Daniel Ek, CEO, Spotify
Spotify was founded in 2006 and made its way to the U.S. in 2011. It started with an invite only beta program for the free tier and quickly garnered favorable reviews. But it faced an uphill battle to the top.
It was getting the rights. It was convincing subscribers to get onto the platform. These were extremely difficult times for Spotify to make sure that they were able to nab the content, especially at that time.
One reason for the company’s delayed entry into the U.S. market was because of music rights. It’s a complicated business that costs Spotify 9.8 billion dollars between its launch in 2018.
They made that risky bet at the time.
Clearly, the company was onto something and that piqued the curiosity of some major brands.
Now it seems every major tech player has its own music streaming platform. Apple dropped iTunes and created Apple Music. Amazon created Amazon Music. Google created Google Play Music and then YouTube Music. Jay-Z even formed his own service called Tidal, which focused on professional sound quality.
But Spotify kept its spot at the top thanks to its freemium model, where users can listen for free with ads or pay for a subscription without ads.
”We believe in a true free service. We believe in something where the user knows that they can go back month and month and month again and have access to your music.”
Daniel Ek, CEO, Spotify
By the end of 2019, Apple Music had 60 million paid subscribers worldwide. Amazon Music had 55 million subscribers worldwide, nearly of all which were paying subscribers. Chinese company Tencent had 39.9 million paying subscribers, while Spotify had 124 million paying subscribers.
It was about free going premium. Conversion was key, and Spotify was really the one that started that.
Platforms like Apple Music are more exclusionary, forcing customers to pay after their free trial is up. Apple even tried to kill Spotify’s free version back when Apple Music launched.
Free just makes sense for customers, which is a major reason why Spotify is so popular today. But free isn’t so great for musicians.
The ad dollars are actually less than the premium subscriptions. But Apple Music, Tidal, those platforms, you get your free trial but you have to pay.
Spotify gained popularity and artists started to wondered why there weren’t seeing the financial gains there were used to with CD sales and downloads.
Taylor Swift boycotted Spotify in 2014, pulling all of her music off the service and saying she and other artists weren’t being paid enough for each stream. Adele followed suit in 2015, announcing her album 25 would not be released on Spotify or Apple Music.
The term windowing became popular, where artist would only release an album on a certain platform or would not stream an album at all for a certain amount of time.
So a lot of artist window the records where it wasn’t on Spotify, say, for a certain period of time. Taylor Swift and Adele both released their albums on Spotify eventually, but it opened streaming services up to questions about how much they were paying their artists per stream. Spotify and Apple both don’t release exactly how much they pay to distributors per stream, but it has been reported that Spotify pays around 70% of the revenue made on stream.
In 2019, Spotify announced it was moving its music focus to a more general audio focus to broaden its offerings and widen its global lead on competitors.
It acquired the Joe Rogan Experience early in 2020 and penned exclusive podcast deals with Kim Kardashian and DC Comics. The company’s stock jumped 8% at the announcement of the Joe Rogan acquisition alone.
”A year ago, when I was on the show last time, I introduced the shifts in our strategy from music to audio. At that time, we were a very small player in audio, but growing fast. Now, we are the number one player in more than 20 markets around the world and quickly catching up in the markets where we are not number one.”
Daniel Ek, CEO, Spotify
That’s where Spotify is taking the future right now, and analysts believe it can ride that wave for a bit.
”90% of our monetization is on the subscription side. But 10% is on the ad side, and we do think that there is real growth opportunity for us in the ad space, particularly with podcasts.”
Dawn Ostroff, Chief Content Officer, Spotify.
Just after the podcast deals were penned, the global pandemic started taking its toll on the economy.
But Spotify was one of the few companies that weathered the storm. In fact, Spotify stock increased 70% from the beginning of January 2020 to the end of June 2020.
They benefited from Covid because the lockdown’s forced people to stop listening to radio and they discovered Spotify while stuck at home.
Of course, if you are Spotify, you’d much rather make money from the podcast acquisitions and that then having to pay 60 to 70 cents for every dollar to Universal or Sony.
In order to stay at the top, Spotify is going to have to stay nimble and quick.
Competitors like Tencent are already adding features like karaoke to their streaming music platforms. Tencent, at least, is on that path from a gamification perspective.
