When Martin Lorentzon and Daniel Ek decided to enter the online music streaming market with Spotify in 2008, Pandora and iTunes were already popular among listeners. There seemed to be little room for competition in this industry. iTunes was controlled by mighty Apple and Pandora was another US company that was stacking users rapidly.
Now, fast forward 15 years, and Spotify boasts incredible figures up its sleeves.
- had 356 million Spotify users in Q1 2021,
- owns 158 million paid subscribers
- can lay claim to 36% of the global music streaming market
- has users in 79 countries worldwide
- has the second-highest number of users in the US with 47.2 million customers
- owns a catalog of over 50 million songs
- adds 40,000 new songs every day
So, what is the secret of a newbie’s rise to the top of the market?
We will pinpoint the tactical genius that Spotify used right after its inception in the streaming music industry. As if to make matters interesting, Spotify adopted a rather obvious, yet effective perspective that all the other big players knew but did not implement: “Customers first.”
The digital music market
Before Spotify came into the limelight, people were limited to only a few online streaming services. Pandora and iTunes were the major players in the market. There were other streaming platforms such as MOG and Rhapsody. However, they were not popular among customers due to several limitations.
Back in 1999, Napster marked the inception of online music sharing. Sean Parker was nonchalantly enabling happy pirates to transfer mp3 back and forth through peer-to-peer (p2p) communication channels. This was, of course, very, very illegal but just like The Pirate Bay in its glory days, the service was too good not to use.
Since then, the online sector has been a growing name in the music industry. The company effectively made all the existing songs available to every internet user in the world. Although it had a brush with the law due to copyright infringement only a year later, Napster managed to continue the trend of online music sharing. Needless to say, the trend single-handedly shaped the overall listening habits of music lovers. You can’t take something that good back and expect the users to calm down.
The global album sales had reached their peak in 1999, generating $14.6 billion in revenue that year. However, thanks to Napster, the album sales figures saw a gradual decline. Within ten years, the figure plummeted by more than half – only $6.3 billion in 2009. The implication was crystal clear: online streaming was the future of music.
The big players read the signs and joined in just after Napster’s arrival. Apple came up with iTunes. Pandora was launched in 2000. Amazon also broke in later. The potential of the market was obvious and everyone wanted a piece of it by harnessing the early mover’s advantage.
However, the field of online music streaming was completely new at that point. So, the possibility of improvement was existent. The two most popular services – iTunes and Pandora – had their limitations. In Pandora, you could not listen to the song you wished to.
As for iTunes, you had to purchase the songs to listen to them. A couple of individuals liked that option since they could buy “bangers and hits” only if they wanted to, but for true music aficionados, this was sacrilege.
If you’re a serious music enthusiast, you will be spending hundreds of dollars a week and the only thing to show for your music collection is the proverbial fatter iPod — no vinyl or CD collection.
Other platforms had different issues such as limited music collection and incongruent pricing models, reasons why they could not compete with Pandora, and iTunes on a large scale.
The conclusion was simple. Music was readily available. However, listeners as stated before, had less control over their preferences. Having to pay for each song is never an ideal option for a music lover. But most importantly, curbing the freedom of the listener is inherently paradoxical to the original intent of creating music: infusing life in people.
Simply put, the online music streaming services that existed before the Spotify era were not consumer-friendly enough.
Martin Lorentzon and Daniel Ek identified this opportunity. They decided to enter the market with a tool that would restore control to the listeners. Ek had explained his mindset regarding this potential startup on a Quora thread –
” We discussed a lot of ideas back and forth and spent a lot of time hanging out in my apartment in a suburb of Stockholm. ... We sat around my media HTPC machine quite a lot and thought that it was cumbersome to get content, despite the technology having been around (Napster) since at least 2000. I think that's why we got stuck on the idea of Spotify.”
However, as simple as the idea sounded, it proved to be a real game-changer in the days to come.
Building anticipation and using it
Spotify was founded in 2006. Before its public release in October 2008, Spotify used a very modest approach in its promotion. Unlike other big-budget startups, Spotify opted out of the usage of TV advertisements and decided to depend on word-of-mouth, PR, and co-marketing. It all makes sense. Napster was snuffed out and people were screaming because something so valuable was taken away. The market was primed and hungry for a replacement. In the end, the strategy proved to be a brilliant turning point.
Primarily, the Spotify team worked for eight months and came up with a beta version of Spotify in April 2007. To gain traction, Spotify invited influential music bloggers to use the beta version.
This particular way of promotion worked wonders. The beta users were blown away by how good the service was. Reaching out to influential music bloggers translated to accurate word-of-mouth promotion: it reached the audiences for whom it was intended. The bloggers spoke very highly about Spotify in their blogs. Eventually, people read blogs and got equally excited. Now was the time to wait for the ultimate music streaming platform.
The expectations were high, and the Spotify team worked relentlessly to live up to them. Daniel Ek wanted to render the service as perfect as possible for the customers. A seamless experience for the listeners was all he desired. To achieve so, Ek did everything in his capacity to ensure state-of-the-art technological excellence.
“We spent an insane amount of time focusing on latency when no one cared because we were hell-bent on making it feel like you had all the world’s music on your hard drive. Obsessing over small details can sometimes make all the difference. That’s what I believe is the biggest misunderstanding about the minimum viable product concept. That is the V in the MVP.” – Daniel Ek, on a Quora session
Ek’s vision ultimately resulted in Spotify’s most notable competitive advantage up to that point – a frictionless music experience for the listeners. This attribute gave Spotify an edge over every other music streaming service. However, Ek knew that there is room for improvement, and he along with his team was relentless in working out ways to ensure that Spotify gets better by the hour.
This constant need for improvement pushed the Spotify team to invest a lot of their initial gains and funding over hiring talented and capable engineers. Ultimately, the vision translated into Spotify and it became the best music experience in the streaming industry.
The company wanted to make sure its beta users get a taste of what the actual platform will be like. Hence, the company began testing ads on its beta versions in February 2008. Back then, Spotify wrote in a blog post:
"We have started testing ads in Spotify for a group of interested beta testers. If you want to be a part of the test, please let us know and we’ll get you some ads. In this phase, we’re testing different formats and models, so any ideas, input, or feedback are highly appreciated. How would you like to see ads in Spotify and what do you consider a good ad?"
The feedback thread gave users the option to participate in the test. For Spotify, it was an opportunity to identify customer preferences and usage patterns.
Finally, Spotify was officially launched on 7 October 2008 in Scandinavian countries, the United Kingdom, France, and Spain.
Spotify’s promotion, however, was not limited to influential blog posts. The public release of the platform was already highly anticipated, but the Spotify team put forward another brilliant move at the time of the release: keeping the premium subscription open for everyone. On the other hand, its free version was available for subscription through invitations only.
Therefore, the premium subscribers sent out invitations to people they knew. The referral program proved to be a solid strategy to generate word-of-mouth. Moreover, the Spotify team was confident about the platform’s superiority in terms of providing the perfect music experience. Hence, they were sure that word-of-mouth will spread, and will be positive since, from a customer’s point of view, user experience is the most reliable metric for judging a product. Finally, the program made sure that the potential subscribers of Spotify considered the platform a tried and tested one.
The bottom line is that Spotify managed to create a huge sense of anticipation, and finally managed to live up to the expectations it created with the help of pre-launch promotional activities.
From Europe to the US
The European launch: gaining traction
When Spotify launched out of its beta version, it was only made available in four European nations only. It was not available in the United States where Pandora and iTunes were the most popular music streaming platform at that time.
Before Spotify’s US release in 2011, Spotify had already become an extremely popular music streaming service across Europe. As for the reasons, after the official launch in 2008, Spotify fast-tracked the beta users to free subscription accounts immediately. The management also made sure that the premium subscriptions were available at the same time.
As mentioned before, the free subscription was available to people only through invitations sent by other users. The very scarcity of the service contributed to the hype and anticipation among music lovers. Spotify channeled the hype to its advantage. In February 2009, Spotify started offering free accounts that needed no prior invitation. The feature was introduced in the United Kingdom only. Andres Sehr from Spotify wrote in the company blog:
“We’re taking our first baby step to open up Spotify to a larger audience today. Up until now, we’ve kept a close eye on controlling our user growth with invitations so that we don’t run into any problems and to ensure that everyone gets a really good music experience when they signup, so far so good.”
Sehr further explained that the invitation-only free accounts system may be pulled off if the growth curve escalates quickly and uncontrollably. As expected, Spotify had to revoke the feature just a few days after the launch of its mobile service in September that year. A large number of new subscribers were signing up every day. Hence, Spotify had to make the service scarce again. By the time Spotify was ready to launch in the US, it already had 6.67 million users, with 1 million paid subscribers among them.
The US launch
Spotify used their tactics of creating hype in the United States long before they made the service available in the area. They contacted platforms such as TechCrunch, Lifehacker, and Mashable as well as MTV and Rolling Stone outlets. The collaboration worked brilliantly for Spotify and the company managed to gain significant pre-launch press attention added to the nationwide anticipation. The expectation bars were set extremely high. Eliot Van Buskirk wrote in his review about the quality of Spotify:
“Those who have tried Spotify know it’s like a magical version of iTunes in which you’ve already bought every song in the world—and it’s free to use if you can put up with a 20-second ad every half an hour.”
Spotify laid a very well-thought-out and well-executed plan to create demand for the service in the consumers’ minds. Originally Spotify had planned on the US launch in 2010. However, the negotiation with the four major record labels delayed the launch. Despite the delay being unintentional, it contributed to the substantial anticipation. The strategy unwittingly proved to have had a positive impact on customer demand for Spotify.
Moreover, Spotify also used traditional marketing to get the words across the US. To get higher reach, Spotify decided to collaborate with famous brands such as Coca-Cola, The Daily, Chevrolet, Motorola, Reebok, and Sonos. The agreements led to phenomenal reach in the campaigns.
Furthermore, Spotify’s promotion campaign in collaboration with Klout became the talk of the town. The campaign reached such hype that both the websites almost crashed on the day of public release in the US. Finally, the company had to eventually pause the no-invitation-free-plan feature. The CEO of Klout, Joe Fernandez, stated:
"Spotify asked us to pause giving invites for the rest of the day as they were seeing issues on their side also and we both want to maintain a top-notch experience for the users. We should have more codes going out in the morning tomorrow but it's a pretty fluid distribution and we are working extremely closely with Spotify to ensure a steady ramp."
Effect of the US Launch
Imagine how investors would be jumping from joy to see a graph like that for your startup.
Building anticipation followed by active promotion seemed to work perfectly for Spotify again, this time in the US. In fact, the success gained from launching in European countries played a defining role in achieving the incredible demand for Spotify.
People from unauthorized regions tried to hack into getting access to the service. Different social media platforms, blogs, websites, and comment threads started to discuss ways to bypass the platform and gain access to free subscriptions without invitations. A common way was to use a proxy server of an area where people had access to Spotify and use the zip code of that area. As counterproductive as it sounds, the scarcity of Spotify ultimately amplified the buzz that surrounded Spotify.
Finally, Spotify gained more than 3 million subscribers within a single year, with one-fifth of the subscribers paying for the service.
With this blue ocean strategy, Spotify was trying to acquire as much land, before big market players like Apple and Google tried to claim their dominance. However, at the same time, they had to provide the product people were “paying” for.
“An easier alternative to piracy”
The marketing strategy of Spotify is brilliant. Prioritizing the product by providing the best music experience for the customers was a key factor that set the service apart from other music streaming platforms. However, the biggest success factor of Spotify is that it restored freedom and access to the users. One has access to every song he/she aspires to listen to, and one does not have to pay for it.
Spotify’s unique selling point was that it provided the same service that Napster did. Legally.
The arrival of Napster in 1999 changed the way people listen to music forever. Its disruptive force reshaped the whole industry. As mentioned earlier, album sales started declining after the arrival of Napster. However, Napster had to leave the industry due to legal issues.
Sean Parker, the co-founder of Napster and an investor of Spotify, talked about the nature of the product and the industry and expressed his desire to fix the problems that arose from the introduction of Napster. His analysis of the online music market was concerning and enlightening:
“You have to be willing to believe that somewhere between 4 and 10 trillion songs are illegally downloaded every year, while only 4 billion or so legal downloads happen per year—that’s orders of magnitude more illegal downloading. Once you’re willing to admit that, you then have to ask yourself, what are people willing to pay for? The answer is convenience and accessibility.”
Convenience and accessibility are the magic combinations for user growth - make something easy to get and use and you might reap the same growth numbers as Spotify does.
Spotify wanted to come up with features people are willing to pay for. The number of illegal downloads of songs was insanely high. Nonetheless, once people taste the taste of free music, they would not want to pay for the same privilege. Instead, they would be willing to pay for… wait for it... convenience and accessibility.
Thus Spotify established two rules. Firstly, you could get access to any song that you want to listen to. Secondly, you could do so legally. Moreover, backed by its superior music quality, Spotify was absolutely worth it for a reasonable payment, or, with some limitations, completely free. Actually, the accessibility was upgraded since you didn’t have to “look for” your piece of music on shifty sites, download it onto your computer and pull it into your music folder so Winamp would play it. You could just “google search” your artist, album, or song and it was there, playing from a magical cloud in some distant server.
Another feature that set Spotify apart from its competitors was restoring control to the users. Freedom became a game-changer, as Spotify’s competitors completely overlooked this fundamental human quality. Spotify managed to negate the two gaping problems that existed among its two biggest competitors.
Pandora users had no control over the songs they listened to and iTunes users had to pay for each song they listened to.
For the first time, legal online music streamers felt what it was like to be in control of the music they were listening to. They could choose their favorite songs and listen to them as much as they wanted to. Why pay more than they would have to on other platforms? Even the free plan subscribers also enjoyed a great deal of control. Spotify gradually learned to identify the music taste of each user. With each passing year, the sweet and powerful algorithm got better than ever.
When Spotify finally made it to the US, the Chief Content Officer and Managing Director of Spotify North America, Ken Parks, talked about how Spotify was “an easier, simpler alternative to piracy.” He also stated that people could listen to their favorite artists knowing fully well that they are contributing to the performers’ success.
"We have full catalogs from all the major labels and a raft of independent labels including those represented by Merlin, which means all of their artists are being fairly compensated for their creativity every time people enjoy music through Spotify."
Spotify’s users had the privilege to decide whether they wanted to pay for the music they listen to or not. Even the experience of the free version catered to the user’s taste. On the other hand, the premium version had in it all the songs in the world available to users for a negligible sum of $10 every month.
Hence, in the process of ensuring convenience and accessibility, Spotify indeed became a simpler and easier alternative to piracy.
The 80/20 rule
Spotify has been compared to file-sharing platforms such as Napster and Pirate Bay ever since its inception. As we look closely, we can identify a lot of common ground between Spotify and other platforms. However, as we dig deep and analyze thoroughly, we can conclude that Spotify implemented Andrew Chen’s “borrowed” ‘80/20 Rule’ to perfection (which stems from Vilfredo Pareto’s 80-20 rule).
Finding a product market is difficult. It usually takes the most time to find the perfect fit.
However, according to Andrew Chen, companies can reduce the time needed for product-market fit significantly by using the ‘80/20 rule’ effectively. To clarify, the developers can replicate 80 percent of the fundamentals of an already successful business model and reinvent or improvise on the other 20 percent. In this regard, Chen asserted that the invention needs to be unique and distinguishing enough for the plan to work successfully. He explains:
“(The 20 percent should be) baked deeply into the core of the product … Something the end-user can see and feel within the first 30 seconds.”
The business model of Spotify is an archetype of the implementation of this strategy.
Spotify used the fundamentals of two established companies i.e. Napster and The Pirate Bay. Its file-sharing technique is intricate and similar to the one used by The Pirate Bay. As Brendan Greely from Businessweek explained:
“Songs you listen to often on Spotify sit, encrypted, on your hard drive. The application looks first for these; if it doesn’t find them, it pulls down 15 seconds of the song from the closest server while it looks for copies of the rest of the song on the hard drives of other users near you. This is file sharing.”
The same principle was used by Pirate Bay in its file-sharing endeavors. On the other hand, Spotify’s peer-to-peer file sharing principles are similar to those of Napster. Nonetheless, it is not these features aka the 80 percent that set Spotify apart.
The main reason that Spotify could channel the ‘80/20 rule’ to its advantage is that it used the 20 percent to overcome the shortcomings of the established practices in the industry. While Napster and The Pirate Bay were illegal, Spotify found a loophole to make it legal.
To summarize, Spotify used the principles of the most popular platforms in the market and recreated the model better than others did to create a legal platform, which was there to stay.
The freemium business model
Initially, when Spotify started its operations, it gave the customers three pricing plans to choose from.
The free accounts were available only through invitations. The users of the free accounts had to watch advertisements from time to time — a small “price” to pay to listen to endless music from a vast catalog. Additionally, they would be able to listen from their desktop for an unlimited amount of time for the first six months. However, the users were restricted to 20 hours per month.
The unlimited accounts were pretty similar to the free accounts, except that there was no advertisement and time limit. However, the user paid $4.99 per month. As of now, unlimited accounts no longer exist.
Finally, the premium accounts had every feature available in the unlimited accounts plus some additional services. Premium accounts provided access to mobile phones through iPhone or Android app. The users could download songs to their devices. For this privilege, each user paid $9.99 per month.
However, Spotify has updated its business model since then, and now only has two plans i.e. free account and premium account.
With the free account, it is possible to listen to songs from mobile phones as well. The service is ad-supported. It uses a skip-restricted shuffle. The playlists are ready-made. You can choose any song you want at any time on tablets and computers.
As for the limitations, you will have bare with advertisements after every couple of songs. Even though you can listen to any songs at any time from your desktop, you will be restricted to only 7 playlists that Spotify creates from judging your music taste with the help of its machine learning technology. The algorithm is in full play while you are using the mobile app.
The premium accounts, on the other hand, offer everything you can ask for: unlimited access to almost any song in the world plus no hassles of advertisement at all. Moreover, it also has the option for users to download songs since such a feature ensures convenience.
The quality of audio improves significantly in the premium subscription. On the free account, you will have access to 96kbps on the mobile app and 144kbps from the desktop. With your premium account, you will be able to listen to music at a bit-rate of 320kbps.
Ultimately it appears to be a win-win situation for the customers. Whichever account the customers choose, they are guaranteed to get a very complete experience. However, the freemium business model is extremely difficult to pull off. This is where the intricate royalty payment model of Spotify comes into play.
Spotify Free vs Premium
Compensating the artists with satisfactory payment is a daunting challenge in a freemium business model. To tackle this issue, Spotify chose not to adopt a pay-per-track strategy. Instead, Spotify uses a combination of several factors to decide on compensation. The factors include:
- The region where the music is being played
- The relative currency value in that particular region or country
- The number of paid users compared to the number of total users (if more paid users listen to songs, the royalty rate will be higher)
- Royalty rate of the artist
After analyzing these factors and more, Spotify stated that the per-stream payout on average varied a lot:
“Recently these variables have led to an average ‘per stream’ payout to rights holders of between $0.006 and $0.0084 … across our tiers of service.”
Spotify only retains 30 percent of its total revenue. The rest 70 percent of its earnings are used to compensate the labels and rights holders. Spotify pays out the money to the rights holders in terms of the factors that they use to decide which label gets what amount of money. However, the individual compensation of the artists is not regulated by Spotify. Instead, the right holders split the money based on their terms.
Spotify Model for Royalty Payouts
As mentioned before, implementing the freemium business model is not an easy task. On the contrary, its freemium business model was one of the biggest success factors for Spotify. Spotify allows users to listen to millions of songs for free. It also allows access to the best listening experience for the customers who are willing to pay for it.
The freemium model, combined with the amount of control it gives to the users, has been a work of tactical genius. People started to quit pirated music to use Spotify. Moreover, Spotify used the two sets of accounts in such a way that the conversion rate from free to paid subscribers was surprisingly high, a crucial topic we will discuss in detail in Chapter 10.
The other major advantage of a freemium model is the fact it’s extremely easy for new users to say yes, even for just a free trial.
And just because the offer from Spotify is so sweet and enjoyable, it reflects their conversion numbers. Just like Slack, the conversion from a free subscriber to a paid customer is finger-licking delicious.
In 2015, The Fader reported that Spotify’s 20 out of 75 million active monthly users were paying customers. That's a 26.6 % conversion rate.
If you look at Spotify's report of Q1 from 2021: out of 356 million active users, 158 million are paying subscribers. That would mean a 44% conversion rate.
Therefore, with the help of the freemium business model, Spotify managed to overthrow both of its major competitors and emerge as the best option for anyone willing to stream music online.
Music is the most social thing ever
When Spotify decided to enter the online music streaming market, there were several misfitting trends in the industry. People could listen to songs as they would have on the radio, and hence, no control over the song they are listening to. For example, Pandora users are the most common to have such experiences. On the other hand, people would need to buy each song to listen to. iTunes users had to go through such trauma.
What both these platforms lack is the social factor of music as a product. Music is something to be enjoyed and listened to socially. While individual tastes do vary from person to person, music has been known as a potential channel to bring people together.
The social aspect of music was completely lost in the existing music streaming services. Spotify identified the misfits and came up with ways to negate the pain points.
In September 2011, the popular social media platform Facebook announced that it was going to collaborate with Spotify that would allow people to share music through the social media platform. However generic the idea sounds now, back then it was a novel and revolutionary idea.
Why the partnership would have a huge impact on people is a no-brainer. They could now share the songs they liked or the songs they did not like. People could compare their music tastes and connect to people with similar music tastes. Eventually, tons of social media music communities were formed. People could now post their reviews of different songs. At the very least, people could then engage with other people with similar tastes. In Daniel Ek’s words, Spotify was replicating his first taste of piracy.
"We believe that music is the most social thing there is and that's why we've built the best social features into Spotify for easy sharing and the ultimate in music discovery. Even if you aren't a total music freak, chances are you have a friend who is and whose taste you admire. I'm looking forward to connecting with some of you in Spotify and discovering some cool new tracks."- Daniel Ek
Spotify’s collaboration with Facebook meant that the largest social media community had access to a whole new era of music sharing. Spotify thus reached more and more people every day. In turn, the overall appeal of the product was heightened to a whole new level. As of now, Spotify users can publish tracks on Last.fm. They can also share music on Twitter, Instagram, Tumblr, and different websites and blogs. Users could also create collaborative playlists that allowed a group of people to enjoy their favorite music over any activity that they do together:
- Road trip to the mountain? Lord Huron, Arcade Fire, and some old folk songs, right?
- Studying and need to focus? Some lo-fi no vocal beats should do the trick?
- Not a fan of beats but still need some background for programming? Deep House Relax will do the trick (as proven by 2M followers).
And let’s not forget the endless capabilities of following your friends’ daily mixes, their carefully curated playlists and generating radio playlists.
Miles Lennon, Spotify product manager, talks about how sharing music tastes has made life easier for everyone.
“If it’s five minutes before friends arrive and you think ‘shoot, I haven’t put together the music I need’, you’re two clicks away from a playlist designed for having friends over for dinner.”
Spotify finally managed to create the largest online music community. It now has features such as Following, Messaging and Browse. These features encourage people to be social about their music tastes. What’s more is that Spotify uses social interaction to create more personalized playlists for each individual, which ultimately leads to a more complete experience overall for Spotify users.
People can now engage in conversation via Messaging on Spotify. This feature allows people to share their music tastes, send compliments, ask for recommendations, and chat with fellow music lovers.
By introducing the Following option, Spotify has made sure that users can now keep in touch with other users, artists, and influencers. This feature created room for online fan bases and communities, as well as connecting people with similar music tastes.
The Browse option has made it possible for users to search for other users’ playlists. This allows users to find someone with a similar music taste and discover songs that they never heard. Daniel Ek had a similar experience while using Napster, where he was introduced to Ella Fitzgerald after he copied the playlist of a user with similar music tastes. In his words, it felt to him like, “the world opened up.”
Miles Lennon felt that Spotify gave users the satisfaction of going through a very well-constructed social music platform. Emphasizing the social aspect of the product ultimately made sure that people have access to and can discover better music. He explains:
“It’s important to have it all under one roof. Our hypothesis is that the best discovery experience will combine social—recommendations from people you trust, influencers, and artists; intelligent recommendation algorithms based on your listening history and tastes; and human curation by experts and millions of community members. The way we move the needle is by satisfying more use cases.”
Spotify managed to acknowledge the social appeal of music which its competitors could not. We believe that the acknowledgment stemmed from prioritizing user satisfaction over anything and everything.
Creating musical identities
In May 2013, Spotify acquired the music discovery app, Tunigo. It also acquired the top music personalization API in the online music streaming industry – The Echo Nest – for $100 million in March 2014. The indication was clear: Spotify wanted to personalize the music experience for each user.
Even before the acquisition of The Echo Nest, Spotify worked with the company to engineer its service better. The collaboration helped Spotify to create personalized playlists for its users. However, Spotify wanted to keep working on this sector to offer the users the perfect music experience. As Daniel Ek states:
“We have a long relationship with the guys at Echo Nest that stems back to 2007 before Spotify was even launched as a service publicly. We’ve been working together for a few years. We look at the world in the same way.”
The timing was certainly precise and led to a very advantageous position. Spotify was then digging deep into creating social media communities for the users. The basic assumption for people to connect to others with similar music tastes is that people must have individual musical identities.
Hence, the acquisition of The Echo Nest was a very timely and strategic move from Spotify. Having a proven set of people in the team working single-mindedly towards improving the personalized experience for users was exactly what Spotify needed at that point. The CEO of Echo nest, Jim Lucchese, says:
“We’ve both invested in platform approaches to music. To combine those creates such a cool opportunity for developers anywhere that music lives.”
The acquisition translated into improved user experience straight away. Spotify’s radio algorithm was improving. Moreover, the collective effort from Spotify and Echo Nest resulted in better and more suitable discovery suggestions. In Lucchese’s opinion, the strategy worked well because Echo Nest understood Spotify, knew in-depth about the platform, the music catalog, and the users as well. Therefore, the positive effect was readily spotted.
However, Spotify’s long-term plan was unique, to say the least.
“Imagine being able to authenticate your Spotify account in other apps the way you sign in with Facebook today. But instead of bringing your social graph and biodata, Spotify Connect would let you listen to full songs and your playlists on-demand in whatever app you wanted. Essentially, it would set Spotify’s app platform free from its green walls, and let legal music bloom all over the Internet.”- Josh Constine, TechCrunch
In Josh Constine’s opinion, Spotify was looking to create music identities similar to what Facebook did with social identities. From a customer’s point of view, Spotify would gradually become a social platform where the perfect music experience was available. Users would have their own music identities, and the prerogative to connect people with similar identities, or interesting ones.
The social factor plays a strong role here as well. The end goal was to build a musical world within the service for its users. The core concept is so different from other platforms that Spotify stands out very immediately from its competitors.
Collaborating with Facebook was a masterstroke, but Spotify was not the one to stop. It expanded its collaboration further, as we will talk about further in the next chapter.
People could now associate songs with almost everything they do. Going to coffee shops or having a ride or playing games – different music is available for each of the activities. Such a concept was novel and unique.
To sum up, Spotify is diving deep into the depths of customer personalization. It is not only creating music that will cater to every user on a personal level, but also ensuring further layers of music identities within a single user. Spotify has gone beyond personalization on an individual level and is now attempting to personalize in terms of tastes during different daily activities.
Spotify has created a world full of inhabitants with music as the sole identifier.
Partnership with popular platforms
Spotify’s collaboration with Facebook before its US launch in 2011 was a major success. Integrating with the giant social media platform was an exceptionally smart move.
When Facebook and Spotify integrated each other, they both got awesome deals. Facebook had another channel to reach their users and offer a valuable proposition to the existing ones. Spotify on another hand got 1 million users overnight.
According to Inside Facebook’s AppData, Spotify had the hockey stick growth, shortly after the integration announcement.
The success led to similar moves in the future.
Facebook opened the door to music sharing among Spotify users, and the new features were an absolute hit. Facebook was the most popular social media platform there was. Spotify thus noticed the opportunity to partner up and expand its services to the other popular platforms that would ultimately result in massive reach.
Major partnerships took place as Spotify teamed up with Sony, Uber, Starbucks, Tinder, BMW, and other major corporations to boost its reach. Today, the Spotify in-app integration is almost standard. Dating apps use the piece of information around music taste as social credibility.
The factors based on which Spotify targeted popular platforms were far from random. Instead, Spotify took note of how much of its target audiences use the other platforms and how it can associate music in the process.
According to Nielsen 2015 Music U.S. Report, the most popular platform that people use to listen to music is radio. The list was followed by TV, smartphones, PCs, TV-connected devices, and tablets. So, it was obvious what platforms Spotify should target. Spotify’s goal was to make sure that people started associating music with different platforms and activities.
The aftermath is there for everyone to see.
Spotify teamed up with platforms associated with TV and connected devices such as Philips, Roku, Samsung, and PlayStation. The partnership resulted in a higher number of premium customers and acted as a catalyst for more conversions.
People have a habit of listening to music when they are traveling regardless of whether they are alone or they are within a group. Spotify identified this consumer insight and acted upon it quite befittingly. Soon Spotify decided to partner up with the ridesharing service, Uber. It also collaborated with BMW, Tesla, and Ford, companies that support the CarPlay feature.
Spotify wanted to make riding cars a personalized experience for Spotify users. With the ridesharing app Uber, the process was a bit tricky. Nonetheless, Spotify managed to create a system where a user could integrate its playlist if he/she wanted to. Thus, users could log into their Uber profiles, connect to their Spotify accounts, and play their personalized playlists in the car. The feature is available to premium subscribers only.
Spotify went even further to collude with Virgin America. Spotify users now have access to their favorite songs even when they are traveling via plane.
These partnerships with popular platforms converted new people. Partnering up always translated to Spotify’s acquiring a new group of users added to its already massive customer base. Just like the “law of attraction” or the sales rule of 7 (a prospect needs to see a company brand at least seven times before making a decision), Spotify was everywhere, even on billboards!
The intention to learn from user activities and target them accordingly again showed that Spotify’s priority was to provide a perfect music experience for its users.
Spotify was no more a music streaming platform. By then, it had become a part of its users’ lives.
45% conversion rate from free to paid
What is a good conversion rate?
According to Jason Cohen:
“A really good conversion rate for free-to-paid is 4%, like Dropbox. Awesome for them, but normal rates are more like 1%, and that’s if users are reasonably active.”
And here stands Spotify, with a staggering conversion rate of 44 percent. 158 million of its 356 million active users pay for the service.
This is an incredible figure, however, one might try to discredit the rate. Users have the option to listen to music at any fee or pay $9.99 per month. Yet, almost half of Spotify's customers decide to pay for the service.
However, the conversion rate was as impressive in the past as it is now. In 2015, Spotify had 75 million users overall, with only 20 million paid subscribers. Even then, the conversion rate was astoundingly high: 26.6 percent.
Since then, there have been 138 million additional paying users. This phenomenon is not a random event. Rather, well-thought-out strategic moves are at play here.
A taste of the perfect music experience
Spotify lets users go through a 30-day trial period during which they can avail of the features of the premium accounts. The trial phase gives the users the taste of a sophisticated music experience that they will later crave.
The premium account has exceptional audio quality with a 320-kbps bit rate. You can download music and save them offline with increased convenience. You get to choose your own songs and playlists, and not worry about advertisements popping up. You can also connect to all the other platforms that Spotify has partnered up with.
The length of the trial period, however, is crucial. It gives you just enough time to develop a habit of enjoying the perfect music experience. At the end of the trial period, you start to miss the experience. The feeling of craving for music is a crucial driving force behind the conversion of users.
Spotify understood that listening to music is a habit, and people have a hard time getting out of it. This consumer insight led to the decision to provide a 30-day free trial period of the premium account, a step that later proved to be a masterstroke.
Strategic pushes towards conversion
Spotify wants its customers to upgrade to premium. However, unlike other platforms, it does not force the idea upon its users. Instead, it induces a feeling of want or need in the mind of Spotify users, not annoyance.
Spotify uses a combination of pushes that will make the users switch to premium. The hard pushes ask the users if they want to upgrade to premium or not. The soft pushes work more like hints, where Spotify suggests that the user can avail of a better user experience through premium subscriptions.
Spotify provides hard pushes whenever a user wants to:
- skip advertisement
- skip tracks more than 8 times
- select ‘Available Offline’
- improve streaming quality
- download using mobile phones
- improve download quality
Conversely, Spotify uses soft pushes when a user tries to:
- select a particular song
- listen without an internet connection
- not listen to the random playlist up next
These pushes are constant reminders that the user can experience better services in the premium version. Given that the user already tasted what premium feels like from the trial period, Spotify manages to remind the user of that smooth and convenient music experience every day or at some point in the future.
Does it work? Ask the 158 million people who are paying for the Spotify service.
Future of Spotify: The Joe Rogan deal and their foray into podcasts
“Based on radio industry data, we believe it is a safe assumption that, over time, more than 20% of all Spotify listening will be non-music content. This means the potential to grow much faster with more original programming — and to differentiate Spotify by playing to what makes us unique — all with the goal of becoming the world’s number one audio platform.”
In the same month, Spotify acquired podcast companies Gimlet and Anchor for $340 million. The move made clear Spotify’s intention of entering the podcast industry. The company also acquired Parcast later that year, a true crime and mystery network.
In February 2020, Spotify acquired The Ringer and Bill Simmons’ podcast show for almost $196 million. Afterward, in May, Spotify announced its acquisition of The Joe Rogan Experience show. One of the biggest podcast shows in the world, ranking at number 2 in the Apple podcast chart by the world’s biggest podcast star, Joe Rogan, is now set to be a Spotify exclusive.
Spotify is thus anticipated to become the leader in the podcast industry as well. The deal is significant for another reason. With this deal comes the added competition with the biggest player in the podcast market – Apple. Nonetheless, three years into the podcast industry, Spotify is already doing an exceptional job.
Spotify now has an edge over Apple with the sudden boom of the podcast industry. Apple adopts a different strategy with podcasts. It does not have any share in the content that creators create and stream through its platform. Moreover, as of now, Apple does not make its shows or goes for advertisements.
Spotify, however, has used the last two years to invest carefully and add quality to its podcast service. It already had some amazing shows, and after the deal with Joe Rogan, Spotify now has the most popular podcast stats in the world. A large chunk of Joe Rogan fans is sure to sign up for Spotify now because of the exclusivity contract.
A little backside napkin calculation would tell you that the 100 million exclusivity acquisition of Joe Rogan isn’t that big of a price. Joe has more than 10 million subscribers on YouTube alone. Because of his polarizing personality, a majority of those will follow Joe to the new platform and deal with friction.
Let’s say that 10% converts to paying subscribers. With a $10 per month subscription, this means roughly 12 million of revenue per user (12 months x $10 per month x 1 million subs).
This is highly inaccurate and there are tons of factors like Spotify viral loops, growing subscriber-follower rate by Joe Rogan, and the advertising model, however, if you take that into account the break-even rate comes in 8 years.
The amount of money spent to acquire these podcasts is large. However, the investment is expected to pay off quite handsomely as well. In the case of songs, Spotify had to pay the labels based on the number of streams. On the other hand, with podcasts, there is no third party involved. Due to the in-app ad placement, Spotify makes more money as more listeners tune in.
Therefore, the podcasts are not restricted to premium users only. As the service is open to all Spotify users, a higher number of listeners will convert to a larger revenue from the advertisements. Ultimately, podcasts are expected to generate higher payoffs.
The Joe Rogan deal alone can drive the podcast section to profitability. Joe Rogan confirmed that his show is downloaded 190 million times a month. With advertisers willing to pay anywhere between $18 to $50 per every 1000 listeners, The Joe Rogan Experience alone can generate $3 million per month. According to Forbes, Joe Rogan made $30 million last year.
The deal with Joe Rogan is significant for the whole podcast industry as well. There is going to be a massive shift in the existing business models in the podcast industry. Many experts are anticipating that subscription-based podcasts are going to take over in the future.
It is also expected that the trend of making podcasts exclusive as tv shows has begun. The inclusion of exclusivity in podcasts does have its pros and cons. While the content creators will benefit from the exclusivity in terms of revenue, there is a huge chance of losing a large chunk of the audience if the shows are not open to everyone.
However, two things are for certain. Spotify has started to set the trends and shape of the podcast industry. But more importantly, Spotify is willing to take charge of the podcast industry.
“Are our eyes really worth 10 times more than our ears? I firmly believe this is not the case.”- Daniel Ek, in his blog post “Audio-First”
The growth of Spotify is truly a remarkable story. Its journey of conquering the online music industry shows how focusing on something as simple as customer satisfaction can lead a company to become the market leader. What’s more inspiring is that Spotify plans to go beyond and become the leading audio platform in the world. The vision to transcend music drove and will continue to drive the growth of Spotify in the years to come.
Spotify has revamped the way we listen to music, and now, is trying to redefine what we listen to. From the looks of it, Spotify is surely succeeding.