Discuss Spotify’s Business Model in Brief
Spotify is an online music streaming platform with a strong global presence. The music streaming platform enjoys strong brand awareness and popularity in various corners of the globe. Its user base has also grown at a sharper rate over the recent years. Among the various other things, the key factor driving the platform’s growth in recent years is its focus on technological innovation, user experience and brand image.
Spotify is operating in a highly competitive business environment where it is set against leading players like Amazon, Google and Apple. There are other smaller players also competing with Spotify including Pandora, and Soundcloud. However, while at the surface, Spotify may look much like the other platforms including Amazon music, it is different at the core.
In recent years, the company has increased its focus on innovation to drive faster growth. Its investment in research and development over the recent years has increased sharply.
Spotify uses a business model that is generally known as Freemium or a mix of premium and free services. This business model has worked well for Spotify as the platform has been able to expand its user base faster. There are other platforms too that use a similar model. However, the additional advantage in case of Spotify comes from the large collection of songs and podcasts.
Spotify was incorporated on December 27, 2006 as Luxembourg private limited liability company and on March 20, 2009, it was transformed into a Luxembourg public limited liability company. Its legal name is Spotify technology SA. The company has its headquarters at Stockholm, Sweden.
The mission statement of Spotify is:
“Our mission is to unlock the potential of human creativity by giving a million creative artists the opportunity to live off their art and billions of fans the opportunity to enjoy and be inspired by these creators.”
Spotify Mission statement
Spotify is the world’s most popular audio streaming subscription service with more than 406 million Monthly Active Users (MAUs) as of the end of 2021 across 184 countries and territories. Since 2015, when it reached its digital inflection point, the recorded music industry has grown at an impressive rate. Spotify remained a key driver of Global recorded music revenue growth as the most popular music streaming platform. Since its launch and by the end of 2021, the company had paid more than 26 billion Euros in royalties to several record labels, music publishers, and other rights holders. In 2021, the company launched its services across 80 new markets.
Over time, Spotify has transformed how people access music online. People can access more than 82 million tracks including around 3.6 million podcasts from just any corner of the globe whenever and wherever they like. The platform is also actively investing in podcasts and other types of content to complement its large music library.
SPOTIFY’S FREEMIUM BUSINESS MODEL
The business model of Spotify includes both ad supported and premium services.
The premium subscribers of Spotify can have unlimited online and offline high quality streaming access to the streaming network’s vast catalog of music and podcasts. Users can access music and listen to podcasts using computers, laptops, tablets and mobile devices as well as through speakers, receivers, televisions, cars, game consoles, and smart devices.
The premium service revenue of the network is generated through the sales of premium service to users. Spotify sells premium memberships directly to the users and also through telecom partners that generally bundle premium services with their own services. Spotify also offers several types of premium plans including Standard plan, Family Plan, Duo Plan, and Student Plan. The company offers different plans targeting various age groups, lifestyles and various customer demographics. Its pricing varies according to the various markets and is aligned with the consumer purchasing power in each of the markets where it operates. It means, the costs of similar services can be higher in western markets compared to the Asian markets. At the end of 2021 the number of premium subscribers of the company was 180 million compared to 155 million at the end of 2020.
The number of Spotify’s premium subscribers has improved at an impressive rate in recent years. However, the main source of its premium subscriber user base is its ad supported services. It means the company mainly converts the ad supported users into premium users to grow its premium user base. Apart from its online platform, the company also uses online advertisements to encourage its ad supported users and convert them to premium subscribers. It highlights the key features of its subscription offerings before the ad supported users to drive premium subscription. Spotify uses product links, online advertising campaigns and performance marketing across various social media platforms to encourage the ad supported users to become premium subscribers.
Ad supported services:
The company also offers ad supported services to a large segment of customers that is unable or unwilling to pay for premium subscription services of Spotify. However, compared to the premium subscription users, the ad supported users have limited access to the music content available on Spotify’s online platform. The ad supported users enjoy unlimited access to podcast content. Spotify generates revenue from its ad supported user base through advertising that includes audio advertising, display ads and video ads. It delivers advertising impression through its music and podcast content to generate advertising revenue.
The company generally enters into agreements with advertising agencies that purchase advertising for their clients on Spotify’s platform. It also has direct agreements with several large advertisers in the industry. Apart from continuing to improve its advertising strategy and the advertising tools, the company is also focusing on data and analytics to improve the advertising experience for both the advertisers and end users.
In February 2021, the company announced its Spotify Audience Network (SPAN) which is an audio advertising marketplace and connects advertisers to listeners across its podcasts.
Spotify segment wise revenue distribution
Spotify has divided its business into two main reportable segments that include premium and ad supported. The premium segment is the larger segment based on net revenue generated. Its margins are also better from the premium segment compared to the ad supported segment.
In 2021, the company generated 8,460 million Euros from the premium segment compared to 1,208 million from the ad supported segment. During the previous fiscal, the company had generated 7,137 million Euros and 745 million Euros respectively from the premium and ad supported segments of its business.
Spotify’s gross profit from the premium segment in 2021 remained 2,474 million Euros compared to 117 million Euros from the ad supported segment.
Clearly, the premium subscription segment accounts for higher revenue and gross profit for the online music streaming platform compared to its ad supported services.
How does Spotify acquire music for streaming?
Spotify acquires rights to musical and other content it streams on its network through licensing agreements and by paying royalties or other consideration to the right holders. It has sound licensing agreements with leading and independent music labels. The company has entered into licensing agreements with Universal Music Group, Sony Music agreement, and Warner Music Group. It has also entered into licensing agreements with Merlin, which represents the digital rights on behalf of hundreds of independent record labels. Spotify pays royalties and in some cases a minimum guaranteed payment to these labels.
Spotify also obtains licenses for two types of rights related to musical compositions - mechanical rights and public performance rights. In the US, the company obtains public performance rights through intermediaries known as performing rights organizations.
The company also streams podcasts from its platform. For rights to podcast content, the company negotiates with individuals directly or obtains rights through its owned and operated platforms like Anchor, Soundtrap for Storytellers, and Spotify or Podcasters.
A few last words:
Spotify has maintained its leadership position in the music streaming industry through a strong focus on innovation and customer experience. The company has achieved strong growth in its user base over a short period of time. within just a span of six years, its user base ahs grown more than 400 million from 100 million. The company has adopted a freemium business model which has helped the company maximize revenue, enjoy impressive profit margins and penetrate global markets with success. There are very few of its rivals that have been able to become truly global brands like Spotify.
The online music streaming network enjoys strong brand awareness globally and offers its services across the world in 184 countries and territories. The company offers both free and premium accounts. The free accounts are ad supported and apart from generating advertising revenue for the company, the free accounts also help the company acquire premium subscribers. More than half of the premium subscribers of Spotify are the ones which joined the platform as free subscribers. In this way, the free accounts offer a dual benefit to the company. They are a source of revenue for the company and also a source of premium subscribers. Spotify has continued to invest in technology and acquired several businesses to strengthen its competitive advantage. Now, it has also achieved the status of a leading podcasting platform with more than 3.6 million podcasts. Several of the acquisitions that the company made in its history were related to podcasting and dedicating to improving the podcasting experience on Spotify.
Spotify has enjoyed faster growth in its user base in recent years driven by improved brand awareness, excellent user experience and solid branding. While the company is operating in a highly competitive industry environment and pitted against industry leaders like Apple, Amazon and Google, its distinctive business model has some outstanding strengths that have helped the brand outperform the others.
Other Sources: Spotify Annual Report 2021.