Spotify and platform theory
When Spotify was launched back in 2008, it marked the rebirth of the music industry. The long slump in revenue growth was halted thanks to the smart new service that allowed people to enjoy the benefits of unlimited music access.
The main reason people download music illegally is not because it is free. It is because one is able get instant access to all the music in the world. In the old days, purchasing music meant going to the record shop and buying an album, and even then you only have access to the songs on that particular CD. Services like iTunes made access easier, but the product was basically the same as the one offered for free by the illegal alternatives.
The founders of Spotify understood this, and developed a product/platform that was more user-friendly than any downloading alternative. Streaming the music means that one doesn’t have to download anything, and you have unlimited access as long as you have got an internet connection. Spotify charged for access instead of ownership, and it worked. The user base has grown ever bigger, meaning that more and more artists and record labels have wanted to offer their content on the platform. Spotify is thus a huge success!
Or is it? Sure, the consumer is better of, and so are the record labels. However, as Spotify has grown, so have the losses. In 2012, the company more than doubled its revenue, to 434 million Euro. Unfortunately, the losses also grew by 50%, to 59 million Euro (http://www.dn.se/ekonomi/spotifys-svenska-bolag-gor-forlust, http://computersweden.idg.se/2.2683/1.516763/okade-forluster-for-spotify). Spotify has serious troubles turning a profit. An article in the Swedish business magazine Affärsvärlden (Affärsvärlden, 14th February 2013, Volymen räcker inte för Spotify) discusses what the company itself sees as its main problem: there are still too few users that prefer the ad-sponsored version to paying the full monthly fee.
It is also possible to analyze Spotify’s situation from a platform theory perspective. Most of the world’s music is in the hand of three big record labels: Sony, Universal and Warner. Early on, Spotify had to subsidize these major record labels, who were “magnets” that could provide strong cross-side network effects, attracting a large user base. This meant that Spotify would have to charge more from the music consumers. However, music consumers were used to not paying anything at all (high price elasticity), which meant that Spotify had to subsidize them too, basically giving the content away for nothing. As consumers, over time, have come to accept paying a small monthly fee, Spotify has been able to charge more. However, it is still far from the amount needed to cover the heavy royalty rates that Spotify has to pay to the record labels.
As more companies are now getting in to the music streaming business (Google, for example (http://crave.cnet.co.uk/software/google-will-launch-a-free-music-streaming-service-ft-says-50010505/)), Spotify will face price competition on both the consumer and content provider side, limiting its options even more.
I know that this question has been asked before, but in light of the interesting lecture on platforms we attended this Friday, what advice would you give to Spotify? Is it time to throw in the towel, or is there a way out?
My tip is that Spotify will either go bust, or be bought by another, financially stronger actor.