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How Spotify surfed the disruptive waves in the music industry

July 25, 2016 - Strategy
How Spotify surfed the disruptive waves in the music industry

Spotify’s growth history

From 1973 until 1981, music on vinyl dominated the market in terms of revenues (see figure 1). From the 80s on, the cassette soon took over as the key choice of format for music but was soon overtaken by compact discs in 1990. With these three media carriers, the music industry boomed with a peak in 1999. Everything changed quickly after that year.

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In 1999, Sean Parker founded Napster (Lamont, 2013); a peer-to-peer sharing internet service aimed to connect users all over the world; Napster users were able to share digital files with one another. With Napster’s success, numerous others arose in the arena which soon would become and still is the David to the music’s industry’s Goliath. Peer-to-peer sharing set in a new age with immense challenges for copyright holders; the challenge of illegal downloads of music, movies and tv-shows yet has to be to overcome.

Naturally, Napster’s services were attractive to consumers worldwide due to that it was free (but, again, illegal). However, an underemphasized benefit of using Napster was that users could download only the songs that they really wanted instead of having to buy the entire album.

With Napster and its competitors steadily but surely chipping away at CD album sales, Apple jumped in on an opportunity to revolutionize the way we listen to music on the go and introduced iPod and iTunes in 2003 (Apple, 2003). From 2003 until 2014, digital downloads have quickly become the dominant revenue generator for the music industry. The music industry as a total still is in a strong downward trend, which raises the question as to why this is happening. One of the reasons is related to the underemphasized benefit of Napster, which, with the introduction of iTunes, becomes much more apparent. In figure 15, global music volume by format is shown. After 2003, the year iTunes was launched, we see a strong positive change in sales of singles and a perpetuated negative change in full albums sales (volume for LPs, MCs, CDs, Music video, Other and Digital albums are full albums). From 2004-2014, full albums’ volumes show an average year-on-year decline of -10 percent, whereas singles’ volumes sold showed year-on-year increases of 28 percent (see figure 2). With consumers’ preference to purchase singles over albums and the rise of digital music stores, singles quickly started to cannibalize full album sales.

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Despite that digital downloads have become the dominant format since 2012, we are at the beginning if not amidst the next revolution; digital music streaming. In 2006 Daniel Ek and Martin Lorentzon founded Spotify (Sawers, 2012), the current market leader in digital music streaming (coincidentally, Napster’s founder, Sean Parker, helped Spotify to its success today). The service provides unlimited streaming of music, ability to easily create playlists, share playlists amongst friends, and discover new music based on your music history (Spotify, 2015). Not only is Spotify available for a fixed, monthly subscription fee, it also offers a free, advertised option. Spotify has increased its paying user based from 2011 until 2015 by 700 percent (see figure 3).

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Value proposition

Diving into the benefits of Spotify to the customer, we can again ask ourselves whether its value proposition is easier, better, faster and/or cheaper.

Pricing model

Besides its paid subscription, Spotify offers a free subscription as well. With almost 55 million additional free users, the music industry is a clear example of business model revolution from buy-to-own (cassettes, CDs, LPs) to pay-to-use (paid streaming subscriptions) to free-to-use (free streaming, YouTube). Free-to-use subscriptions offer free content, but with intermittent advertising (similar to Youtube’s revenue model).

Get-keep-grow

Not only is Spotify frontrunner in digital music streaming, it is also leading in partnering as a strategy to get, keep and grow customers. Spotify’s long list of partners include Facebook, Uber and, most recently Starbucks (Prins, 2015). The partnership with Starbucks could lead to some interesting loyalty programs in the form of Starbucks reward points for premium Spotify subscribers. In 2011, Spotify in the Netherlands engaged in an exclusive partnership with telecom provider KPN, which would include a Spotify premium subscription in their mobile bundles (KPN, 2011). For the telecom provider, the inclusion of a streaming service in their subscription bundles worked as a differentiator in their commoditizing industry. Conversely, the partnership ensured yet another growth lever for Spotify’s fee business.

Besides partnerships to ensure growth and loyalty of Spotify’s customers, Spotify’s choice of revenue model plays a part in creating lock-in, the lesser attractive cousin of loyalty. With every minute of effort invested by users in creating and curating their playlists, the sunk costs in terms of time becomes increasingly higher over time leading to higher barriers to switch to competitors.

Future of Spotify

Spotify is on a tremendous growth trajectory, and clearly, with its 20 million current paying users it still has ample opportunity to scale up on a global level. With large companies such as Apple and Google entering the digital music streaming market, it will be interesting to see in what ways Spotify is going to maintain its first mover advantage.

Netflix, with a similar business model to Spotify but with content in the form of TV shows and movies, has made the transformation from a two-sided business model to becoming a successful producer of original content as well (e.g. TV shows critically acclaimed House of Cards and Orange is the New Black) (Kafka, 2015). Perhaps, whilst we are amidst the digital streaming revolution, the next one is already in the making.

Sources:

Apple (2003), Apple launches the itunes Music Store. Available: https://www.apple.com/pr/library/2003/04/28Apple-Launches-the-iTunes-Music-Store.html. Online.

IFPI (2011), Recording industry in numbers – the recorded music market in 2011. 2012 Edition. Print.

Kafka, P. (2015), Here are the original shows Netflix viewers say they’re watching. Available: http://recode.net/2015/08/26/here-are-the-original-shows-netflix-viewers-say-theyre-watching/. Online.

KPN (2011), Exclusieve samenwerking KPN en Spotify in Nederland. Available: http://corporate.kpn.com/pers/persberichten/exclusieve-samenwerking-kpn-en-spotify-in-nederland.htm. Online.

Lamont, T. (2013), Napster: the day the music was set free. Available: http://www.theguardian.com/music/2013/feb/24/napster-music-free-file-sharing. Online.

Prins, N. (2015), The Spotify-Starbucks partnership is digital co-branding genius. Available: http://www.forbes.com/sites/nomiprins/2015/05/19/the-spotify-starbucks-partnership-is-digital-co-branding-genius/. Online.

Sawers, P. (2012), Spotify: The Spotify so far. Available: http://thenextweb.com/eu/2011/07/14/spotify-the-story-so-far/#gref. Online.

Spotify (2015). Available: http://www.spotify.com. Online.

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