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Spotify was launched in 2008 by Daniel Ek and Martin Lorentzon in Sweden. The streaming service quickly gained support from artists and became the most popular streaming platform worldwide with 60 million active users. The business model the technology derives from has constantly come under criticism in the past and will need to be adapted in the future for the company to remain market leaders. I will be exploring this model in the following essay to determine what makes Spotify unique, its strengths, weaknesses and the future of the company.
By using up to date data and reliable sources I hope to examine Spotify’s core system to express these points. By comparing Spotify to similar models I will show how they continue to compete market share and the advantages and disadvantages each of these businesses have.
Finally, I will evaluate the company and by using credible information, predict what the future outcome could be. Due to its ongoing success and traction from the beginning, Spotify has remained relevant in today’s industry by providing arguably the best platform for musicians to share their music on to be streamed instantly.
With 60 million users, artists can share their records with the public on a fairly transparent platform, which details how royalties should be distributed. In the news last week, (Cooke, 2015) reported “Spotify today confirmed an alliance with Starbucks in the US – set to extend to the UK and Canada – which will result in a “first-of-its-kind music ecosystem”. By partnering with Starbucks they can offer exclusive deals for coffee buyers to further promote the platform in a popular worldwide shop.
This is relevant because it is the first time a streaming company has teamed up with a coffeehouse in an attempt to win new subscribers. By combining forces with a dissimilar brand both companies will benefit by enticing in a wider user-base.
Interestingly, Starbucks has had a history of selling music in its shops, from 1999 until mid-February they sold CD’s in store to add to the in store experience. The deal with Spotify will continue the heritage Starbucks has with music creating a unique experience for coffee lovers. This could be the first of many deals Spotify will make with catering companies in an attempt to network their platform through stores across the globe. If users are able to link their accounts to the in-store account and perhaps have an input on the stores playlist, it will create a strong market Apple will struggle to compete with. By dealing with stores, Apple will be unable to affect the way the shop visiting consumer will hear their music, creating a disconnection Apple may have with retail. For now, Starbucks is the only company to agree to such a deal with a streaming service, which could suggest there will be more to come in the future. The freemium tier Spotify provides acts as its main selling point to new customers.
By providing an ad-based service it allows users who are not willing to pay the monthly subscription the opportunity to access Spotify’s instant streaming benefits. To fund this model, free users must listen to audio adverts every few songs which allows the platform to be paid and artists to get their royalties. This free model has come under much criticism in the last year as many musicians and label owners feel the prices Spotify pays to artists through free streams is too low. Late last year the artist Taylor Swift decided to remove her whole catalogue from Spotify right before she launched her newest album ‘1989′. She complained “On Spotify, they don’t have any settings, or any kind of qualifications for who gets what music. I think that people should feel that there is a value to what musicians have created, and that’s that.” (Engel, 2014). In her statement she suggests free users should not have the same access to music that the paid customers have. This could be because through the ad-funded version each stream sale is far less than the already tiny premium royalty rate. This is a fundamental flaw with the free tier of Spotify and is certainly something that will need to be changed in the future if the service expects to hold its own against competitors.
As mentioned before, the platform offers a form of transparency to users who wish to know how much money their streams can earn. By setting up the website: http://www.spotifyartists.com/ they hope to achieve this by offering information on their system and how it is used. From this website we can see the royalty system in detail. The first step is Spotify’s monthly revenue. This means how much money they are getting per month depending on what country they are in and how many premium subscribers they have. Next in step two, the revenue is multiplied by the artist’s streams divided by total Spotify streams. In essence this gives the artists ‘market share’ of Spotify for the monthly streams that have accumulated. The figure is then distributed outside of Spotify between the master & publishing rights owner and the artists. Steps 3 & 4 typically happen between Spotify, the label and artists depending on their contractual agreement. From this we can see how clearly Spotify intend to pay artists depending on how popular their song is.
Through their detailed website they do not shy away from figures and methods they use to pay the rights owners which may seem beneficial to those included. Other services such as Youtube do not have much information online providing their own payment methods through music channels such as Vevo. This could be because their pay out system is not as fair on the artists as Spotify’s is so they do not want to damage their business by publishing it. Using this model Spotify have managed to grow each year into a service the majority of popular artists are happy to be on. Their deals with Universal, Sony and Warner’s back this up and it is agreeable to suggest the model can successfully be used to support musicians and labels to increase money made from records.
However, this model only details the premium tier of Spotify usage. Their advertised funded free version is not detailed on the aforementioned website which could also suggest they do not wish to publish this model as it will damage their business by showing the lack of royalties paid out. The free tier is what artists constantly slate and they receive poor media response frequently. The future of the service depends greatly on the advertising Spotify can receive through the press, therefore this free tier model needs to either change or be scrapped in order for them to continue pulling in new customers and converting them to premium ones. The free model is what acts as the main competitor to the upcoming Apple streaming platform being released later this year. In recent news it has been reported “The Verge has learned that Apple has been pushing major music labels to force streaming services like Spotify to abandon their free tiers, which will dramatically reduce the competition for Apple’s upcoming offering” (Singleton, 2015). This proves that currently Spotify are a massive threat to Apple, especially with their freemium service. If they were to abolish this it would allow Apple to come into the streaming world with technology that would not isolate customers who are on a free service as it no longer exists.
This could also explain why Apple have pushed back their release date as they hope to have enough advantages over Spotify before they release their model. Spotify will definitely feel threatened by the upcoming launch Apple have yet to unveil. Previously they have waited until the opportune moment to release their technology when the market is at its peak and they can gain the most customers. This is what could happen later this year, so it is essential for Spotify to remain in the spotlight and to hold on to their freemium service for as long as they can.
Although Apple are a multi-billion pound technology company with a proven track record at wiping out its competitors, Spotify certainly hold a reasonable chance at defeating them to keep the market share on streaming sales. Luckily they already have the advantage of having 60 million users worldwide and with deals such as the Starbucks alliance this is only set to increase. Another benefit Spotify has had on the industry is the decrease in piracy, which has fallen dramatically with help from streaming services. The free tier they provide enables them to compete with piracy at cost, as well as bring former illegal consumers into the legal streaming world. Two years ago, the Telegraph reported the decrease in music file copying in the following report: ”According to a new report published by Norwegian research body Ipsos MMI, almost 1.2 billion songs were copied without permission in Norway in 2008, but that figure had plummeted to 210 million – just 17.5 per cent of its level four years earlier” (Curtis, 2013). These figures show the impact the platform has had on piracy and prove to the industry there is hope in defeating music piracy and bringing money back to the industry.
Without the free tier it will be difficult to compete with piracy as there are many music fans that will never be able to afford to pay for music. This is another reason why it is imperative the free tier thrives in today’s industry as it is actively combating piracy every day. This is important for the music industry as it has proven to be a successful way of combating piracy which has caused huge losses for record labels over the last 15 years. By giving a free and legal alternative, piracy has declined massively thanks to Spotify. By using these figures Spotify can defend their free tier model against poorly reported media attacks. Another streaming service that is competing with Spotify at the moment is the platform owned by Jay-Z called Tidal. Tidal’s main selling point is that it offers higher quality audio files so the user can stream the best quality of music available. However, unlike Spotify they do not currently have a free service which has caused the platform to struggle to gain traction. They have also offered many exclusive tracks to Tidal only users, which has forced consumers to share the music amongst their peers or even upload it straight to YouTube.
This could be seen as a huge step backwards for the industry as inadvertently they are causing more pirates to illegally share their exclusive tracks online. This again proves why the free model is necessary in today’s industry to cut down on piracy and offer a legal alternative. By overcoming Tidal, Spotify have proven they are a worthy competitor in the streaming world. Their business model is stronger and, although a young company, they have great experience in streaming compared to others. It will be difficult for Apple to triumph over Spotify later this year due to these reasons. But what is next for Spotify? As mentioned before it is certain they will need to refine both their free and premium models in order to stand up successfully against future competitors. So what new features can we expect to see from the service to achieve this? In a recent press conference they gave the public some hints about what to expect in the future. (Ingham, 2015) reported “Amongst the freshly-unveiled features were Spotify Now on iPhone. With one tap of the finger, it promises to find music that suits your mood, your activity and the time of day. Not just music, though: Spotify announced that it would also be adding video clips and audio shows (aka podcasts) to its offering.” This could mean a huge change for the business with the founder Daniel Ek even calling it “New Spotify”.
By adding video clips they will be directly competing with Tidal who also offer high quality videos with their music. Additionally, YouTube will be under threat from Spotify, especially if they decide to include videos to all of their music currently available. These new features coming from Spotify indicate they’re already adapting to meet the needs of the industry and stay ahead of the curve. With this in mind I have created a SWOT analysis for Spotify below:
By reviewing this SWOT analysis it is required by Spotify to create a business model that appeals to consumers, as well as rights holders, artists and labels. This will be a very difficult process, especially as they also have to combat the existing and future competitors attempting to achieve similar goals. It is likely by the end of 2015 that there will be a platform that is edging above the rest as it will have created a model that is suitable for everyone. Over the past few years Spotify have proven to be innovative and adapt around the constantly changing digital music world. However, the name of the company that will take the consumer into a new age of streaming remains open. Interestingly, the first quarter of 2015 has seen Warner Music make more money from streaming than download sales – for the first time ever.
The Guardian reported “The tipping point came in the first quarter of 2015, according to WMG’s latest financial results, which saw the label’s revenues grow 4% year-on-year to $677m, helping it record a net profit of $19m. That included a 33% increase in streaming income, as it overtook WMG’s download revenues for the first time.” (Dredge, 2015). This increase in sales will no doubt spill over into other major labels that have seen a similar correlation between the decreases in digital downloads to the increase in streaming. By the end of the year Spotify will almost certainly include many more features than it does today so that it can compete against other streaming companies. The more people that get on board with streaming (through various companies) the further the technology can grow, creating a better system for everyone. With artists creating big statements and bad press it is very damaging for the future technology and its main efforts to eradicate online piracy. Unfortunately, this is often forgotten about which can cause frustration of fans as well as isolating the public who aren’t customers.
Hopefully, in the future the music consumer will not only have a greater choice of service from each provider, but a greater understanding of how digital file sharing works. By this time next year online music sales will almost exclusively come from streaming, and downloads will be wiped out, just like the CD and Vinyl before it. By using reliable and up to date sources I have examined Spotify’s business model and discussed its strengths and weaknesses. Comparing the platform to others has helped define where the company stands and how it is affecting the industry in terms of sales, promotion and its innovative technological advancements. Lastly, the future of the industry has been evaluated and how streaming services as a whole will help take the consumer to a new age of digital sales. Such services are constantly changing, and so 6 months from now a better understanding of the technologies involved will become apparent.
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