BIMM15 Music Business Studies Case Study: Spotify

Word count: 1604

Introduction

Spotify is a music streaming service that offers their users to stream recorded. With over 24 million active users and more than six million paying customers,1 Spotify is a success story of modern music business taking advantage of a quickly evolving market. Not only has this company garnered international success by utilizing the recent changes in the music business, but also has itself helped alter the landscape of music sales. This case study will explore Spotifys history from its inception until now, while looking into the companys business
1

Spotify. (2013). Information. Available:http://press.spotify.com/uk/information/. Last accessed 27th May 2013

strategy in a hope to discover how and why it has achieved such success. History Spotify was started in 2006 in Stockholm, Sweden by Martin Lorentzon and David Ek, two men with previous experience in Internet companies.2 After extensive research and the development of the Spotify application, Spotify went live on the 7th of October 2008. At this point Spotify was available to any paying customers, however non-paying customers would have to receive an invitation in order to join the service. For the next two years Spotify would go back and forth between using invite only models and fully open registrations for free subscription, due to the company not being able to handle the sheer number of customers subscribing in open registrations and the release of
2

Bases. (2012). Daniel Ek ~ Co-founder, Spotify. Available:http://bases.stanford.edu/etl/danielek. Last accessed 26th May 2013.

their mobile service.3 In May 2010, Spotify released two new account types called Spotify Unlimited and Spotify Open. Spotify Open was their solution to their invite only plan for their free service, offering customers a limited service for free with open registrations. In 2011 Spotify made the decision to restrict users of their free service to an even greater extent, placing a limit on the number of times any user could listen to the same song while also reducing the amount of listening time allowed for free users from twenty hours to just ten in a move that predictably angered many of Spotifys free users.4 This was the same year that Spotify launched its US service, two years later and the
3

Spotify. (2009). Back to invites for a while in the UK. Available:https://www.spotify.com/uk/blog/archives/2009/09/10/back-toinvites-for-a-while-in-the-uk/. Last accessed 26th May 2013
4

afront. (2011). Spotify Europe Aligns for US Launch. Available:http://pansentient.com/2011/04/spotify-europe-aligns-for-uslaunch/. Last accessed 27th May 2013

company has released its product in 28 countries worldwide with over twenty million songs licensed for use.5 Business Model Spotify is perhaps one of todays most famous proprietor of the freemium business model. This means that they run a service that offers its product to customers for free, but offers extra features to paying customers. Since the beginning of the Internet age, freemium business models have become much more commonplace than in the past, since the Web has allowed businesses to offer products and services to literally billions of potential customers instantly. In Spotifys case, they now offer just three different services or tariffs to UK customers: Free, Premium and Unlimited. The free service offers use of the Spotify application for free with restrictions
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Spotify. (2013). Information. Available:http://press.spotify.com/uk/information/. Last accessed 27th May 2013

such as a ten-hour cap on listening time per month, while also using advertising to generate extra revenue. The Unlimited option offers the full service minus adverts with no listening restrictions. Premium offers customers the same service as Unlimited, but with additional features such as the ability to download and listen to music from Spotifys library while offline and on devices other than computers such as smartphones. The pricing for these models is free, 4.99 and 9.99 respectively.6 These are the options available to consumers and are indicative of the freemium style business model, since the basic version is free for anyone to use, with incentives added to upgrade to a paid version. Surprisingly, for such a widely recognized brand, Spotify does not currently have enough
6

Spotify. (2013). Premium. Available:https://www.spotify.com/uk/#premium. Last accessed 27th May 2013.

revenue to generate a yearly profit. While this may be a common issue for new businesses, you would not expect it of what is currently such a large company operating in so many territories. In fact, not only does Spotify not make profit, in 2010 the company made a loss of over 43 million. This can be seen in the Statement of Income included in the appendices. We can see from this statement that Spotify made a healthy revenue of 63 million, (thats more than 500% increase on the previous year), but had extremely high cost of sales, (over 64 million). Cost of sales is essentially another way of saying licensing costs, so we can extrapolate from this that, while Spotify may seem externally like a hugely profitable and popular company, the cost of actually licensing the music that they offer to customers is so high that Spotify would have to increase and diversify their revenue streams constantly while they add more music to

their library in order to keep up with the costs involved in licensing so much music. However we can also see from this statement the extreme growth of the company from 2009 to 2010 and the way that this growth has positively affected Spotifys margins of loss, from a gross loss of 7.5 million in 2009 to 1.6 million in 2010. So it would seem that Spotifys choice of the freemium business model is an intelligent one considering the fact that they are currently concerned more with the overall growth of their brand than making money in the short-term. Now we have seen just how much of Spotifys revenue goes to the costs of licensing, (over 100%) lets take a look at where that money goes once it leaves the company. How Spotify Pays Artists The method Spotify uses to break down its royalty payments seems complex at first, but on examination is actually relatively simple. First we

must note that Spotify takes 70% of its total revenue per month as the base number for its payment to artists. Then we must consider the popularity of the specific artist being payed. Essentially Spotify offers the same percentage of that 70% of revenue as the percentage of total streams of a certain song in that month. Put simply: We aggregate all of this revenue from these two streams, and distribute back 70% in royalties based on a pro rata share in accordance with the popularity of a piece of music. For example, if one of your songs has been streamed 1% of the total number of streams in a month, you will get 1% of the 70% of royalties we pay out to rights holders7 This is all well and good when put in simple terms, however it is difficult to interpret an actual
7

MTT. (2013). How Does Spotify Pay Artists? An Answer that Makes Sense!. Available: http://www.musicthinktank.com/mtt-open/how-does-spotifypay-artists-an-answer-that-makes-sense.html. Last accessed 27th May 2013.

monetary figure from these percentages. Luckily a website called musicthinktank.com has put together a hypothetical example based on actual numbers. $244, 000, 000/ 12 = $20,333,333 per month (Revenue for the month) 70% of 20,333,333 = $14,233,333.1 (Amount of dollars Spotify pays out to rights holders) 13,000,000,000/ 12 = 1,083,333,333.333333 per month (combined number of monthly streams) 20 streams X 100/ 1,083,333,333.333333 = 0.00000184615% (artists percentage of monthly streams) 0.00000184615% X 14,233,333.1 = 0.26276867902 (artists royalties) 0.26276867902/ 20 = $0.01313843395 (artists per stream royalties)8
8

MTT. (2013). How Does Spotify Pay Artists? An Answer that Makes

These figures clearly show that Spotify fairly distributes a huge portion of its monthly revenue to the rights holders of the music that it offers on its service, however the actual amount paid out to artists can seem extremely small compared to other mediums such as radio or television. This has been a source of controversy ever since Spotify released their application and on first glance does seem strange and unfair, however when the actual number of listeners per stream is taken into account, i.e. generally one listener per stream, it starts to make more sense when compared to these mediums which would be playing their content to an audience of potentially millions with a single play of a track. Spotifys Vision and Ethos David Ek has described his vision for Spotify as a
Sense!. Available: http://www.musicthinktank.com/mtt-open/how-does-spotifypay-artists-an-answer-that-makes-sense.html. Last accessed 27th May 2013.

way to be able to listen to what music you want, whenever you want, wherever you want.9 With their Premium service, Spotify has achieved this goal, since listeners can now listen to any song on the Spotify library offline on a plethora of devices. It may seem at first that, since Spotify has made a loss in previous years, the ethos of the company is not profit driven. I would disagree with this point of view, because I believe that Spotify has chosen the freemium model as a basis for growth to pull customers into the service, then converting as many people as possible into paying customers by interrupting users of their free service with annoying advertisements.10 While Spotify may allow customers around the world to enjoy
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Service, T. (2009). Spotify, What the Daniel Ek's going on?. Available:http://www.guardian.co.uk/music/tomserviceblog/2009/jun/26/spot ify-daniel-ek-music. Last accessed 27th May 2013.
10

Gobry, P. (2011). How Spotify's Business Works. Available:http://www.businessinsider.com/how-spotifys-business-works2011-10. Last accessed 27th May 2013.

streaming music for free at the expense of immediate profit, the growth of the business indicates that within a few years time, Spotify will be making huge profit and will become a giant money maker in the music industry. Conclusion In conclusion, Spotify have been growing as a company in leaps and bounds since the release of the Spotify apps release by an extremely intelligent use of the freemium business model that they employ to enlarge their customer base, which they then strive to convert to paying customers by limiting free services. Spotify pays its artists fairly, albeit in a non-traditional way, and will soon become an extremely profitable company in its own right.

Appendix

Spotifys Statement of Income for 2010:

Accessed at: http://www.businessinsider.com/howspotifys-business-works-2011-10

Bibliography Refences (In alphabetical order)

afront. (2011). Spotify Europe Aligns for US Launch. Available:http://pansentient.com/2011/04/spotify-europe-aligns-for-uslaunch/. Last accessed 27th May 2013 Bases. (2012). Daniel Ek ~ Co-founder, Spotify. Available:http://bases.stanford.edu/etl/danielek. Last accessed 26th May 2013. Gobry, P. (2011). How Spotify's Business Works. Available:http://www.businessinsider.com/how-spotifys-business-works2011-10. Last accessed 27th May 2013. MTT. (2013). How Does Spotify Pay Artists? An Answer that Makes Sense!. Available: http://www.musicthinktank.com/mtt-open/how-does-spotifypay-artists-an-answer-that-makes-sense.html. Last accessed 27th May 2013. Service, T. (2009). Spotify, What the Daniel Ek's going on?. Available:http://www.guardian.co.uk/music/tomserviceblog/2009/jun/26/spot ify-daniel-ek-music. Last accessed 27th May 2013. Spotify. (2009). Back to invites for a while in the UK. Available:https://www.spotify.com/uk/blog/archives/2009/09/10/back-toinvites-for-a-while-in-the-uk/. Last accessed 26th May 2013 Spotify. (2013). Information. Available:http://press.spotify.com/uk/information/. Last accessed 27th May 2013 Spotify. (2013). Premium. Available:https://www.spotify.com/uk/#premium. Last accessed 27th May 2013.