A popular and cherished audio-streaming platform, Spotify is used by millions of people around the globe. From its very yearly spotify wrap -Discover Weekly and the never-ending genres of podcasts, the app has now found its place as the benchmark of all audio-streaming services in just a little over a decade of its arrival. But how is it that while being a market leader, Spotify still consistently struggles to obtain profits and how does this translate for their future?
The birth of this company all started in Stockholm, Sweden by Daniel Ek and Martin Lorentzon when they developed its idea in 2006. The premise was to create a legal and convenient music streaming service amidst the domination of Napster, a platform which allowed streaming music illegally. Once the law caught up with such platforms, Daniel Ek saw an opportunity to work towards his plan and established Spotify in 2008.
Although spotify is perceived as the first of its kind, many other platforms such as Deezer, iTunes, Pandora, Band-camp, and Last. FM and SoundCloud had already existed before. However, over the years, Spotify has managed to surpass all of its user numbers. This could be highly credited to their success in the American market back in 2010 when Mark Zuckerberg posted a message about Spotify on his Facebook wall, marking a partnership between the two.
The impact further snowballed by allowing Spotify to become accessible globally and has become home to over 615 million users with 239 million of them subscribed in over 180 countries, according to current statistics. So what made it set out to be different from the others?
1. Freemium Model –
Since the beginning Spotify has maintained a freemium model which allows users to listen to music free of cost but with the catch of ads interrupting their jam session, this can be surpassed by switching to the subscription mode to go ad-free plus other benefits. Unlike iTunes charging a minimal cost for each song, this move attracted a larger audience towards Spotify.
2. Curated Algorithm –
Most of Spotify’s charm is through the personalized recommendations it provides its user base. Its algorithm focuses on learning its users’ tastes and providing mixes to help them find new songs, artists and bands which they would grow to love. When the Discover Weekly feature launched in 2013, most reviews were in awe at the accuracy of the ability to provide personal curated mixes every single week. This also gave a chance for many up-and-coming artists to showcase their music without getting clouded by more prominent figures.
Another beloved feature of the platform is the yearly Spotify wrap which allows users to see how their music developed throughout the year, and which song, genre and artist they heard the most, all encapsulated in colourtul visuals to provide a feeling of nostalgia. Due to the growing trend of the same many users forcefully spend hours on the app to curate a ‘superior’ Spotify wrap.more users and motivate current users to keep using the platform.
The constant efforts to keep up with user expectations, new technology and trends have led to Spotify becoming a market leader in its industry and have changed the entire working for streaming music and audio for us.
3. Community Development –
Through Spotify people can follow art-ists, influencers and friends, share public playlists, make collaborative playlists, host sessions to listen to the same music as their friends and also view their friends’ activity. All of this translates to forming an integrated community which allows people to share their preferences, find people who have similar tastes and bond with one another through their love for music.
4. Introduction of Podcast –
During the early stages of podcasts, Spotify saw its potential and began heavily investing in them to gain access to a new target audience. They brought about popular trending shows, provided a broad range of genres and also helped new podcasts find a proper foothold in the market. The arrival of podcasts enhanced the amenities offered to drive more users and motivate current users to keep using the platform.
The constant efforts to keep up with user expectations, new technology and trends have led to Spotify becoming a market leader in its industry and have changed the entire working for streaming music and audio for us.
Revenue Model
Spotify places its revenue on various outlets which help sustain the platform’s working. This proves essential as over half of its user base consists of the free version of the app rather than the subscription model.
1. Premium Subscription –
In India, an Individual Premium subscription costs 7119 a month and in the U.S. the price recently shifted from $9.99 to $10.99 a month. A premium subscription allows users to gain ad-free, listen to music offline, higher quality music and other various features. The subscription is one of the most stable and primary revenues Spotify earns.
2. Advertisement Revenue –
The use of advertisements for the free version of the app, in the form of audio ads, display ads and podcast ads is done by giving a platform to other brands to showcase themselves. The use of Spotify as an advertisement platform helps bring in more revenue by maximizing user participation for data-driven ads.
3. Collaborations –
Collaboration with big music labels, more users and motivate current users to keep using the platform.
The constant efforts to keep up with user expectations, new technology and trends have led to Spotify becoming a market leader in its industry and have changed the entire working for streaming music and audio for us.
Even while having such a dominating role in the audio-streaming industry and having multiple sources of revenue, Spotify still finds itself struggling to gain consistent profits.
One of the biggest financial strains faced by the company is the overwhelming amount of money required to maintain licensing costs to help keep its huge catalog afloat. This problem arises for all streaming platforms however Spotify have taken a substantial hit from the same. Unlike its competitors, Apple Music and Amazon Music, who have higher returns from other platforms to stay in business, Spotify finds itself stranded with no other business ven-tures.
Even though Spotify invested a huge sum of money (over 1 billion dollars) in Podcasts and began offering Audiobooks for its listeners, the sum of money given to further licensing all of these additions is found to fall back with the number of people it’s pulling in.
To manage all the costs, Spotify took a huge turnover to try and cut costs as much as possible, hurting streamers, artists and their workforce. During 2020 and 2021 the company took the initiative to expand its workforce due to lower capital costs available back then. However, with the current slow economic growth, they decided to lay off over 17% of their personnel globally by the end of 2023.
Another implementation to fund costs was by making changes to the user ex-perience. This involved increasing prices in the U.S. as mentioned earlier and adding restrictions to the free services in In-dia. These restrictions included not being able to play music in a certain order, repeat songs and not go back to previously played songs. This was not well-received by most free listeners (natural-ly) and caused the ratings of the app to drop from 4 stars to 2.3 stars. The price increase also caused a minimal dent to its users, but many supported paying the fee to listen to the extensive catalog, still a fair price to pay.
Besides these, changes were made to the royalty system of the platform. One of them including, by restricting only songs of over 1000 streams a year as eligible for royalties. This move has faced considerable backlash as it prevents small artists from gaining substantial revenue for themselves, and keeping the bar of 1000 streams would lead to excessive saturation of the music found within the app. Many critics also mention these changes would not bring forth a major increase in Spotify’s revenue.
All of these loose ends draw out a big question: What does the future of Spotify look like? Well understandably, this isn’t an easy question to answer. How-ever, some steps such as making an initiative to find new branches of revenue, making innovations to keep up with technology and having improved relationships with their artists could be the right step towards improvement.
Spotify is loved for its personalized recommendations and staying true to it while adding more novel features can make Spotify still compete in the game.
The mode of listening to music has always shifted as technology and society grew. What started as the purchase of Vinyls to cassettes, then CDs and pirated music, further Ipods and now streaming music, there is no telling which new invention would take over the industry and find its way into the spotlight. As long as Spotify puts efforts to stay up to date and maintain a relationship with its listeners through the love of music, it may last much longer than anticipated.
Written by Kriti Shetty
Edited by Inara Gohar