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.
Sources:
http://computersweden.idg.se/2.2683/1.516763/okade-forluster-for-spotify
http://www.dn.se/ekonomi/spotifys-svenska-bolag-gor-forlust/
http://crave.cnet.co.uk/software/google-will-launch-a-free-music-streaming-service-ft-says-50010505/
3 responses to “Spotify and platform theory”
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Information Strategy 
Haven written a blog about Spotify just two days ago, your article caught by attention immediately, just to hear someone else’s opinion on this matter.
First of all, I think Spotify has quite a first-mover advantage. It is by far the most popular music streaming platform here in Europe and currently there are little reasons why its users would switch to Google Music or other entering competitors.
The advice I would give Spotify, and I have touched upon this in my article, is to try to cooperate with Sony, Warner and Universal to potentially provide them with data on user listening behaviour in exchange for lower royalties. One aspect Spotify should also improve as of current status is the social interaction possibilities. It should be easier to recommend songs to each other (at the moment I think this still goes through Facebook) and to follow your friends (it’s quite dull to have to enter all the people you want to follow manually, instead of seeing an overview with your (active) friends and then just select the ones you want to follow). How about yourself, what advice would you give?
Very interesting topic is discussed here. Spotify generates a healthy return with selling monthly subscriptions, while at the same time it loses a large amount of these revenues using free music as a marketing tool to attract those paying subscribers. So Spotify is faced with the challenging question of how to build its subscriptions without giving away too much ‘expensive free music’.
This means that Spotify’s key to survival lies in figuring out how to manage the marketing expense of free music. A likely choice would be to put limits on free listening to users. In some countries this is already implemented, but this could be expanded to all markets. However there are risks involved with these limits. Users could go elsewhere to competitors who do not have such limits, with the risk of increasing illegal piracy services.
I like the comment on the access to Spotify’s user data. Spotify itself is already making use of this by recommending artists through targeted music, and advertising for concerts of artists. It informs users of new releases, possible interesting artists and events or it reminds users of music they haven’t listened for a while. It could be expanding this service by recommending songs your friends listened to, or go one step further and incorporate the ability to exchange song/music preference with one another. Now indeed this possible through Facebook, but what if this could be done internally. If this option would be included in the Premium account, maybe more users would see the benefit of switching to the paid version of Spotify.
To help artists pay their bills, the company needs to attract more paying subscribers to use its online music service. That means steering folks away from current competitors Pandora, Rdio, MOG and Deezer. It’ll also have to fend off recent launches of Apple’s iTunes Radio and Google Play Music All Access. With that much competition, I’m not convinced Spotify can successfully hit its lofty goals.
I’ve been signed up to Spotify Premium for some time now and really like it. The software is excellent, both in terms of desktop and mobile, the syncing between the two is seamless and the range of music (for my tastes at least) is excellent. ‘Spotify Radio’ feature is also very good for music discovery (which is where streaming services come into their own). But at the end of the day, music is music, so though Spotify has had the first mover advantage, if the same service was offered to me for less money then I’ll switch.