Spotify – The Streaming Service that has taken the World by Storm

Brief Company Overview

Spotify is a privately held, online music streaming service. It’s designed to give its users instant access to single tracks and full albums on computers, mobile devices, tablets and the like. (Bloomberg.com, 2017)

Some Numbers

Conceived in 2006 by Chairman and CEO Daniel Ek, this company is headed by 37 executives and 10 board members. Despite having been founded in Stockholm, Sweden, Spotify’s headquarters are based out of The United Kingdom. It’s composed of a workforce of approximately 2,300 employees, with operations in over 15 countries. This includes operations out of Australia, Germany, America, and the Netherlands (to name just a few.) (Pitchbook.com, 2017).

These figures, however, pale in comparison to the sheer number of members it has accrued over a relatively short lifetime. As of 2017, Spotify boasts a whopping 140 million users, 50 million of which are paid subscribers (Statista.com, 2017). To accommodate the unfathomably eclectic tastes of its massive audience, it carries a music catalog of over 30 million songs, growing at a rate of about 20,000 new songs a day (Digitaltrends.com, 2017).

Spotify’s Assets

Partnerships-

Throughout the past decade, Spotify has engaged in multiple partnerships and ventures with other businesses. In 2010, Spotify founder Daniel Ek and Facebook creator Mark Zuckerburg began discussing a Facebook/Spotify integration. The integration was launched in 2011, and it allowed Spotify’s users to view what their friends were listening to through Facebook. In the fall of 2014, it entered into yet another partnership, this time with Uber. Premium members were granted the ability to stream music while soliciting
rides. The following spring, it announced it was working on a deal with PlayStation, with the goal of allowing streaming through the PlayStation Network (Crook & Tepper, 2015).

Its newest partnership was unveiled in 2017, when it joined forces with Hulu to offer a bundle between its premium plan and Hulu’s “limited commercials” plan. This new bundle is geared towards students and doesn’t cost more than its existing premium streaming plan (Perez, 2017)

Funding –

Spotify has also received financial backing from several big-name investment firms. In 2015, it was valued at about $8.5 Billion. In January of 2016, however, it began looking to raise about $500 million in convertible bonds, bonds that can be exchanged for stocks, from investors (Gauthier-Villars, 2016). By March of that year, Spotify had raised much more than it was looking for, with over $1 billion generated. Some of the more noteworthy investors include: Founders Fund, Goldman Sachs, Dragoneer Investment Group, TPG Capital and TPG growth (MacMillan, 2016).

Its Business Model

Unlike some of its competitors, Spotify sets itself apart by not maintaining its own rights to the songs in its catalog. Instead, it operates under short-term contracts with the three major record labels. Every time a song is streamed through Spotify, the rights holders receive $0.006 to $0.0084 for that particular song (Pollack, 2015). From that, the artists will receive a cut of about $0.001128 (Wong, 2016). It’s also worked in the past to further differentiate itself by forming exclusive streaming contracts with certain artists. Unfortunately, this practice has already begun catching on with the competition (Ciaccia, 2017).

That being said, Spotify is still able to capitalize on two key components that make it unique: Social Media and Play Lists.

Social Media – Much of Spotify’s appeal and success can be attributed, in large part, to the fact that it possesses qualities that make it very much a social media platform. Users are able to see what their peers are listening to, follow them, and gain followers of their own. Further evidence of its social nature can be seen in the aforementioned partnership it entered with Facebook in 2011 (Crook et al., 2015).

Playlists – Spotify was the first of its kind to grant users access to its massive audio library, giving them agency to create playlists of their own design. Unlike its main competitors – Apple Inc., Soundcloud, Pandora, etc. – Spotify’s members can access single tracks and full albums, making it possible to contour a playlist to fit their every need (Spotify.com).

Revenue Model

Spotify operates with two basic membership models. Users have the choice between a “free” membership, at the cost of sitting through advertisements every so often, and a subscription-based membership. According to its website, a Premium membership runs at $9.99 a month. It also offers a “premium family package,” which goes for $14.99 a month. In the Spring of 2014, it unveiled its “student rates,” offering a 50% discounted price off of its regular premium plan (Spotify.com). Yet as it stands, only about 36% of its overall users pay for a subscription.

Currently, Spotify is not a profitable company. In 2015, it saw an increase in its net loss by almost $200 million, despite generating $2 billion in revenue (Karp, 2016). A big problem it’s facing right now is that approximately 70% of its income is divvied up between multiple parties of interest. That number can be broken down further, with 55% going back to the record labels and artists, and 15% going to publishers and songwriters (Karp, 2016).

Uh Oh… Legal Troubles

Despite having paid $3 billion in royalties since its launch in 2008, Spotify has been slapped with two large class-action lawsuits, amounting to a combined $350 million in damages. Both were filed by artists who alleged Spotify had committed copyright-infringement (Karp, 2016).

In an effort to avoid future lawsuits, Spotify opted to maintain about $16 million on reserve with “unmatched works,” songs in its possession with no discernable owner. Starting in 2016, it agreed to give music publishers access to this database, so they could claim the songs they owned. The stipulation: the publishers would not sue them.

As per the agreement, the publishers were able collect the royalties they were entitled to, and Spotify even threw in a $5 million “bonus” to be divided among them as “incentive” for them to access this information (Karp, 2016).

Looking Ahead

Legal troubles aside, the future looks bright for Spotify. It has announced several innovations to look forward to in the coming years, including the introduction of both podcast and video support. It has also been working on new software designed specifically for runners, meant to track their pace and suggest songs to match the tempo (Crook et al., 2015). With all this to look forward to, it’s safe to say Spotify’s best years are yet to come.

 

 

Sources

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