How Spotify Grew To 50 Million Users

25/2/2015
HowSpotifyGrewto50MillionUsers
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How Spotify Turned Free Music into a

$10+ Billion Valuation
Spotify is a truly remarkable growth story. In just six years
the company is valued at more than $10 billion and has
more than 50 million users, 12.5 million of which pay for
the service. But how did the company get to where it is
today and what is its growth engine? We dive deep into
Spotifys story to uncover the key elements that helped
them grow to incredible heights. Well look at:
Existing Growth Levers:

A best-of-breed product that beat out existing players
on every vector including: music catalogue, product
features, pricing model and user choice
A freemium business model that bridges the gap
between piracy and the pay-per-track model of iTunes
A massive US launch driven o the buzz of their
European growth and invite-only system
An exclusive deal with Facebook to be the default
music service of Facebook with their integration in
2011
Controversy between artists and the company over
royalty payments and catalogue availability
Future Growth Levers:

Continued international expansion and mobile growth
https://growthhackers.com/companies/spotify/
Create new distribution channels with partnerships
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Create new distribution channels with partnerships

and new platforms
Winning over artists as suppliers to the Spotify
ecosystem
Read on as we break down their unique and revolutionary
growth story.
Spotify founders Martin Lorentzon (left) and Daniel
Introduction
Spotify founders Martin Lorentzon and Daniel Ek met in
Sweden in 2005. On a Quora thread about the startups
early days, Ek explains:
We discussed a lot of ideas back and forth and spent

a lot of time hanging out in my apartment in a suburb
to Stockholm. We sat around my media htpc
machine quite a lot and thought that it was
cumbersome to get content, despite the technology
having been around (Napster) since at least 2000. I
think thats why we got stuck on the idea of Spotify. [1]
After a period of closed beta, Spotify ocially launched on

October 7, 2008, with $21.6 million in Series A funding
from Li Ka-shing, Creandum, Northzone, and Horizons
Ventures. In August of 2009, the company received
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another $50 million in Series B funding from Li Ka-shing,

Horizons Ventures, and Wellington Partners, followed by
$16.1 million in Series C funding from Founders Fund and
Sean Parker in February 2010. [2]
By September 2010, just shy of two years post-launch,
Spotifys catalog had grown to over 10 million tracks
closing the gap between Spotify and iTunes, whose
catalog at the time included 11 million tracks. [3] By March
of 2011just four months prior to the companys US
launchSpotify had grown to 6.67 million users, one
million of whom were paid subscribers. [4] By November of
that year, the number of paid subscribers had more than
doubled to 2.5 million. [5] Just one year later, in December
of 2012, the service had grown to 20 million users and 5
million paid subscribers. [6] In that time, three more
rounds of funding from investors such as Digital Sky
Technologies, Kleiner Perkins Caueld & Byers, Accel
Partners, 137 Ventures, AFSquare, The Coca-Cola
Company, Fidelity Ventures, Lakestar, Goldman Sachs, and
Technology Crossover Ventures, brought the company to
its current total of $537.8M in funding, [2] with the most
recent round at an estimated valuation of more than $4B.
[7][10] Since that last round in 2013, the company is likely at
or near the $10 billion valuation range. [66] The companys
most recently-released data, dated November 11, 2014,
puts Spotifys total user base at 50 million12.5 million of
whom are paid subscribers. [51]
Spotify user growth via Quartz

So how did the company that began in a tiny oce-cumapartment with a broken coee machine [4] grow into the
music industry disrupting giant that we know today?
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music industry disrupting giant that we know today?
Initial Traction / Early Growth

A Disruptive Product
As Kartik Ayyar explained on Quora just days after Spotify
launched in the United States, the value proposition is at
once fairly simple and quite profound: Almost all of the
music in the world at any time or place for only 10$ [sic] a
month. [14] Options for accessing music online were
limited prior to Spotifyconsumers could listen to
streaming services like Pandora, though they couldnt
actually pick their own songs, or they could purchase
tracks from iTunes. Other streaming services like MOG
and Rhapsody existed, but hadnt gained much traction
with consumers, due to a combination of the pricing
models, catalog of music and feature sets.
Spotify, by contrast, aimed to give users complete control
and access to any song, on demand, for just $10/month,
along with a free option that oered more than simple
radio-style streamingnot to mention the fact that it was
totally legal. Though other companies are now attempting
to oer the same servicemore on those in a bitSpotify
was one of the rst to oer this value proposition, and it
has been overwhelmingly integral to the companys
success as a truly disruptive force in the music market.
Discussing not only Spotify but music streaming services
in general, journalist Scott Timberg explains:
Its no coincidence that album sales peaked, at $14.9

billion, in 1999the year Napster ushered in the
digital era of music by eectively making all recorded
music free to anyone with an Internet connection. By
2009 album sales had fallen by more than half, to
$6.3 billion. For a while, digital music sales, chiey
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$6.3 billion. For a while, digital music sales, chiey

through iTunes, made up some of the dierence. But
after half a decade of consistent growth, downloads
of individual tracks declined for the rst time in 2013,
by 5.7 percent, and by 13 percent in the rst six
months of this year, according to Nielsen SoundScan.
Streaming music over the Internet via services like
Spotify, Rdio, and Pandora, by contrast, is up 42
percent between the rst half of 2013 and the rst
half of this year. [5]
Theres no denying that Spotify and services like it are

revolutionizing the way that people listen to music. Yet
unlike many streaming options, Spotify puts the control
rmly in the users hands, allowing them to select specic
songs and create playlists instead of roughly
approximating terrestrial radio by choosing an artist or
station and listening to or skipping whatever song comes
on, as is the case with Pandora and Last.fm. The fact that
Spotify is interactive certainly gives the service an edge
over some of its competitors, and this control is a big part
of the must-have nature of the product, driving the
companys growth.
Yet theres much more to the disruptive power of Spotify,
even if the everyday user doesnt fully leverage or grasp
the implications of these other features. For starters,
users can also upload local tracks to Spotify, which means
they dont have to leave their own libraries and playlists
behind in order to make the switch to Spotify
signicantly decreasing the friction of adoption. Thats one
less reason for users to open iTunes, or, as LinkedIns
Mario Sundar asserted on Quora in July 2011, Spotify is to
Apple iTunes as Google is to Newspapers. [14]
After focusing primarily on delivering on-demand
streaming, in late 2011 Spotify expanded to oer a
Pandora-style radio service that allows users to expand
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Pandora-style radio service that allows users to expand

any song, artist, album, or genre into a station and learns
from users tastes over time. [15] Thisin conjunction with
Spotifys Discover feature, which makes predictions about
which artists users will like based on what theyve listened
towent a long way toward helping Spotify to position
itself as not only a replacement for iTunes, but as
replacement for Pandora as well as pretty much any other
platform through with users previously accessed and
interacted with music. The combination of on-demand
streaming and discovery through both algorithmic and
editorial curation has helped round out the product for
music listeners of all types.
Spotify music discovery. Image via Mash

The company introduced a browser-based version of the
service in late 2012, making Spotify available to those who
for whatever reason couldnt download the desktop
programin particular, users on work or library
computers, or netbooks like the Chromebook for which
there is no desktop version. Finally, in late 2013 Spotify
made mobile streaming available to all users (it had
formerly been available to Premium subscribers only).
In addition to the product, Spotify made a big deal out of
the quality of its audio experience. While other online
services oered 64k AAC+ and/or 128kbps, Spotify
delivers three dierent bit rates, all the way up to 320
kbpsessentially the output of a CD. Long the bane of
audiophiles, this attention to the music experience as well
as the technology experience made Spotifys product oneof, if not the, best on the market. [67]
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These factors combine to increase accessibility and

decrease the time it takes for new Spotify users to reach
their aha moment with the service. Pretty soon, its more
than simply a music streaming serviceits the primary
way in which users interact with music.
The disruptive potential of Spotify was apparent very early
on. Just ve months after launch in the companys home
country of Sweden, Spotify had already generated more
revenue for Universal than iTunes. [3] By September 2010,
Spotifys music catalog had almost caught up with iTunes
the companies had 10 million and 11 million tracks,
respectively. At the time, however, iTunes had 160 million
users and Spotifystill negotiating the terms of a US
launch and thus yet to tap into the worlds largest music
markethad just 10 million.
Journalist Scott Timberg is not the only person to draw
parallels between Spotify and Napster, perhaps the most
disruptive force in the music market to date. Many,
including Napster co-founder and Spotify investor Sean
Parker, have claimed that Spotify is the logical conclusion
of peer-to-peer le sharing networks like Napster which
launched in the late 1990s.
At the Daily Beasts Innovators Summit in October of 2010,
Parker claimed, What Im trying to do with Spotify is nish
what I started at Napster, explaining that he had
dedicated the rest of his career to xing what [he] broke.
[17] Parker went on to say, however, that before the music
industry can truly recover, its critical they accept that the
war on piracy has been a failure. You have to be willing to
believe, he argued:
that somewhere between 4 and 10 trillion songs are

illegally downloaded every year, while only 4 billion or
so legal downloads happen per yearthats orders of
magnitude more illegal downloading. Once youre
willing to admit that, you then have to ask yourself,
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what are people willing to pay for? The answer is

convenience and accessibility. [17]
For Parker and many others, Spotify epitomizes both

convenience and accessibilityalmost all the music in the
world at any time and place for only $10 a month.
But Napster isnt the only le sharing network that Spotify
has been compared to. As Businessweeks Brendan
Greeley explained on the eve of the services US launch,
Spotify owes a more direct technical debt to le sharing:
The very technology that makes it so fast is borrowed
from techniques honed while sharing pirated les. [18] As
with the Swedish torrent giant The Pirate Bay, Spotify is
able to increase speed and lower the demand on central
servers by spreading les across several connections. As
Greeley explains:
Songs you listen to often on Spotify sit, encrypted, on

your hard drive. The application looks rst for these; if
it doesnt nd them, it pulls down 15 seconds of the
song from the closest server while it looks for copies
of the rest of the song on the hard drives of other
users near you. This is le sharing. [18]
Spotify and The Pirate Bay dont just share a country;

Mario Sundar agrees, they share an operating system. [14]
In many ways, Spotify is an embodiment of Andrew Chens
80/20 Rulethat is, products that copy the fundamentals
(80%) of a successful product and reinvent the remaining
20% can signicantly shorten the time it takes to nd
product/market t. [19] However, Chen asserts that the 20%
cant be secondary, tertiary product features, but should
be baked deeply into the core of the product
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be baked deeply into the core of the product

Something the end user can see and feel within the rst
30 seconds. [19]
Despite the fact that Spotify may share around 80% of its
characteristicsafter all, value proposition and operating
system are by no means minor characteristicswith
Napster and Pirate Bay, unlike those two, Spotify is legal,
and that distinction might be more signicant than it
seems (if thats possible). In order to grant users legal
access to the music that makes the service what it is,
Spotify had to to negotiate a fair deal with record
companies.
As ReadWrites John Mitchell explains, these deals
included unlimited free samples of music, frictionless
sharing among friends, and a future industry free of the
massive overhead of record manufacture and breakage,
old-school promotion, and the bottlenecks of regional
radio dominance. [20] Stillperhaps because Spotify didnt
initially oer terms with which they were happy, or maybe
because they were unwilling to accept Parkers assertion
that the war against piracy had indeed been lost
negotiations over a mutually benecial agreement
between Spotify and the four major US record companies
took quite a while.
When Spotify nally made it to the US, Ken Parks, chief
content ocer and managing director for Spotify North
America, claimed:
We have full catalogues from all the major labels and

a raft of independent labels including those
represented by Merlin, which means all of their artists
are being fairly compensated for their creativity every
time people enjoy music through Spotify.
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Parks went on to refer to the service as a better, simpler

alternative to piracy, reinforcing Sean Parkers widelyaccepted assertions. [21]
Freemium Business Model

In many markets, disrupting the pricing model allows new
entrants to shrink the existing market made up of legacy
players who charge a premium for a similar service. For
example, Encarta (and then Google and Wikipedia) shrunk
the encyclopedia market from a $1 billion market to
essentially zero. Encarta, $99 on CD compared to $1,000
for Encyclopedia Britannica, grew to $100 million in its
rst ve years as it shrunk the market. Its a powerful
growth opportunity for companies that can pull it o.
iTunes similarly shrunk the music market while taking a
massive chunk of cash from existing players like Tower
Records.
Whats interesting about freemium in music however, is
that is not just a market shrinking mechanism, but also a
potential growth mechanism, as it can act as a bridge
between piracy and legacy buying options. Before Spotify,
there was little other choice than pay-per-track, or CD, or
pirate music. But with Spotifys freemium version, people
who only pirated out of ease or economic necessity now
have another way to get music legally. Spotifys big bet
then is that it can increase the market of new listeners (or
return those lost to piracy) through a freemium pricing
model.
Consumers have certainly ocked to the idea. 37.5 million

of Spotifys 50 million users listen to an ad-supported
version of the product. In theory those 37.5 million would
otherwise be pirating music, listening on YouTube, or not
listening at all. Thats Spotifys argument anyway. Artists,
as well see later, are yet to be convinced. This unique
dynamic of freemium not just as a market shrinking
mechanism, but one that can also grow the market is the
big promise of Spotifys unique value proposition. Lets
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big promise of Spotifys unique value proposition. Lets

take a look at how the company architected a freemium
model in a tricky, rights-based market.
Initially the company oered three tiers of pricing, but
now there are just two:
Free Spotifys free tier is ad-supported, with skiprestricted shue and ready-made playlists available
on mobile and the ability to choose any song, any time
on tablets and computers.
Premium As with a free membership, paid
subscribers can listen to any song at any time, only
they can do so at a higher bitrate, via their mobile
devices, in oine mode, and without ads. A Premium
subscription costs $9.99 per month, though Spotify
oers a free 30-day trial along with a discounted $5
per month plan for students.
Furthermore, though streaming has always been
unlimited in the US, in some markets Spotify placed
streaming caps on free accounts after the rst six months
of use. Time limits were abolished for all users in January
of 2014. [59]
Of course, freemium comes at a big cost, especially with
royalties being paid for each song played. Spotify has
worked hard on its royalty payment model to help
mitigate the costs of freemium while compensating artists
fairly. In order to fully understand how hard freemium is
in this type of space, it helps to understand Spotifys
payment structure.
Approximately 30% of revenue is retained by the
company, while around 70% is split among rights holders
in accordance with the popularity of their music on the
service (though, as Spotify points out, it is up to the label
or publisher to divide royalties and accounts to each
artist, depending on their individual deals). [26]
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Royalty payouts by Spotify. Image via Sp

There is no xed per play rate for tracks on Spotify.
Instead, royalty payments are calculated according to
several factors, including: the country in which music is
being streamed, the number of paid Spotify users as a
percentage total users (a higher percentage of paid users
results in higher royalties), the relative premium pricing
and currency value in dierent countries, and the artists
royalty rate. Recently, Spotify explains, these variables
have led to an average per stream payout to rights
holders of between $0.006 and $0.0084 across our tiers
of service. They note, however, that per stream payout
generated by Premium subscribers is considerably
higher. [26]
Though the names of artists have been replaced with
descriptions, the chart below shows, in USD, actual royalty
payments for a range of albums for the month of July
2013.
Spotify royalty payouts by album typ
As with companies like Evernote and Dropbox, the

freemium business model has been an important factor in
Spotifys success, and the revenue in question is
generated by monthly subscription fees from Premium
users along with revenue from advertisements for Free
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users along with revenue from advertisements for Free

users. Still, Spotify would obviously prefer users pay
monthly subscription fees, and the company is is working
hard to convert free users into paying customers
including the aforementioned free trial and student rate,
along with running Premium ads within the free service
(though data as to the success of these eorts is
unavailable). According to a recent company blog post,
80% of Spotify subscribers began as free users. [51]
Billboards Glenn Peoples also points out that in 2013,
Spotify grew subscription revenue 42% in the United
Kingdomyet another indicator of a strong free-to-paid
conversion mechanism. [58]
As for its free tier, Spotify currently runs six types of ads
audio, display, billboard, homepage takeover, advertiser
page, and branded playlist. [27] Though Spotify has always
used some form of freemium, the fact that free
memberships were initially invitation only when the
service rst launched certainly served as incentive for
users to purchased paid plans. Currently, Spotify only
oers just two tiers of serviceFree and Premium. Free
users experience limited mobile capabilities, and there is
a student discount available for Premium services.
European Launch: Building Anticipation

through Invitation-Only Free Accounts
But long before Spotify launched in the US in 2011, the
company gained signicant traction throughout Europe.
Spotify ocially launched in the UK, Germany, France,
Italy, Spain, Finland, Norway, and Sweden in October of
2008, [43] but the service had been operating in closed beta
for over a yeara move which served to not only control
costs and the early user experience, but also to increase
the hype and anticipation surrounding the new service.
Many of Spotifys beta testers were inuencers and tech

reporters, and their praise of the service further
heightened the anticipation. Upon ocial European public
launch, these beta accounts were immediately
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launch, these beta accounts were immediately

transitioned to free Spotify accounts, and access to paid
Spotify accounts was also made instantly available, while
invitations for free accounts, were gradually released into
the wild over the next several months. Their scarcity
further served to build anticipation among Spotifys target
market. [11]
It wasnt until February of 2009 that Spotify tried oering
no-invitation-required free accounts in the UK. Spotifys
Andres Sehr explains via the company blog:
Were taking our rst baby step to open up Spotify to

a larger audience today. Up until now weve kept a
close eye on controlling our user growth with
invitations so that we dont run into any problems and
to ensure that everyone gets a really good music
experience when they signup, so far so good. [12]
Sehr claim that if growth happened too quickly, the

invitation-only system may be temporarily reinstated. In
September this proved to be the case, as signups swelled
in the days following the launch of Spotifys mobile service
and invitations were temporarily reinstated. [13] By the time
Spotify had nished up negotiating with record labels and
was ready to launch in the States, the service had already
grown to more than 6.67 million users, 1 million of whom
were paid subscribers.
From Europe to the US
Anticipation of the services arrival to the US began

building long before Spotify was available Stateside, and
this anticipation created huge potential energy for the
product launch in the States to ramp growth dramatically.
Just as they had in Europe, Spotify leveraged this
momentum to their benet, gaining press attention from
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momentum to their benet, gaining press attention from

places TechCrunch, Lifehacker, and Mashablesources
of, as Andrew Dumont of Moz puts it, those coveted,
tech-loving early adoptersas well as outlets such as
MTV and Rolling Stone for music fans. [53]
Referring to Spotify as the best music app on the planet,
journalist and beta tester Eliot Van Buskirk explained in
early 2009:
Those who have tried Spotify know its like a magical

version of iTunes in which youve already bought
every song in the worldand its free to use if you can
put up with a 20-second ad every half an hour. [22]
It wasnt just inuencers and beta testers who got to try

Spotify early. Those outside Western Europe came up with
several inventive, backdoor ways of accessing Spotify, the
most common of which involved using a UK-based proxy
server and a London zip code to trick the service. [23]
Spotify was in such demandnot just in the US, but
across the globethat blog posts, forum threads, and
entire websites were devoted to such workarounds, like
LifeHackers How to Get Spotify Free Without an Invite.
Though the company initially claimed that Spotify would
be made available in the United States sometime in 2010,
negotiations with the four major record labels proved to
take a bit longer. In the fall of 2010, Wired UKs Duncan
Geere explained:
Some have speculated that if Spotify ever does

launch over the pond, those negotiations will have
yielded a severely cut-down version without a free,
ad-supported option and with fewer benets for
people who subscribe. [3]
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people who subscribe. [3]
Though the wait for Spotifys US launch was the

unintentional result of drawn out negotiations with record
labels, it nevertheless served to increase anticipation.
Spotify nally launched paid and invite-only free accounts
in the US on July 14, 2011, [24] and US users piled onto the
site to subscribe or sign up for an invitation:
Spotify.com trac growth. Image via Moz.

Initially, Spotify oered three tiersFree, Unlimited, and
Premium. Ad-supported Free accounts were invite only
and featured unlimited desktop listening for the rst six
months, after which users were limited to 20 hours of
streaming per month. Capitalizing on the anticipation that
had been building up to that point, both paid plans were
immediately available to users who didnt want to hear
ads or couldnt wait for invitations to become available.
The (no longer available) Unlimited plan cost just $4.99
and included everything in the free plan but lacked ads
and a streaming limit. The Premium plan cost $9.99 and
included everything in the other plans, along with mobile
access to Spotify via iPhone or Android app and the ability
to download content for oine access. [24]
Early praise for Spotify came from celebrities like Ashton
Kutcher, Britney Spears, Trent Reznor, and Talib Kweli. [53]
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Talib Kweli Greene
Follow
@TalibKweli
Music is about to be fun again! Join me at

Spotify spotify.com/us/talibkweli/
9:13 AM 14 Jul 2011
56 RETWEETS 13 FAVORITES
Britney Spears
Follow
@britneyspears
Rainy day in NOLA but nice to be home. Just

posted my fav playlists on Spotify. Even
posted my boys favorite songs
bit.ly/JJPrestonMix Brit
4:29 PM 14 Jul 2011
JJ & Prestons Dance Mix:

A playlist on Spotify
Spotify @Spotify
ashton kutcher
Follow
@aplusk
What a relief, now that it's legal in he US, I can

finally come out of the closet about my
#Spotify addiction.
12:23 PM 14 Jul 2011
As part of the launch, Spotify also partnered with several

large brandsincluding Coca-Cola, Chevrolet, Motorola,
Reebok, Sonos, and The Dailyto extend their reach and
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Reebok, Sonos, and The Dailyto extend their reach and

distribute the limited invitations to their free plan. [25] One
particularly popular promotion involved social media
inuence ranking service Klout. On launch day, there was
so much interest in the Klout-Spotify promotion that both
Klout and Spotify almost crashed. The service was forced
to temporarily stop issuing invitations, as Klout CEO Joe
Fernandez explained:
Spotify asked us to pause giving invites for the rest of

the day as they were seeing issues on their side also
and we both want to maintain a top notch experience
for the users. We should have more codes going out
in the morning tomorrow but its a pretty uid
distribution and we are working extremely closely
with Spotify to ensure a steady ramp. [19]
It seems that not just the US, but in every country where
Spotify launched, the private beta period, along with the
resulting scarcity of Spotify invitations (whether merely a
marketing tactic or a legitimate result of concerns over the
service crashing) generated buzz and increased demand
among potential users. Just as sites were devoted to
accessing Spotify before it was available in certain
countries, in the wake of the US launch there were plenty
of blog posts and forum threads outlining the various
means of getting a Spotify invite code without having to
wait. Within a year, the company had gained more than 3
million US users, 20% of whom were paid subscribers. [54]
Social: Discovery and Sharing
Yet another way in which Spotify is similar to earlier le

sharing programs is its attitude toward sharing and
discovery. In September 2011 at Facebooks f8 developers
conferenceat which Spotify CEO Daniel Ek was a
speakerthe social network announced a new
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speakerthe social network announced a new

partnership Spotify, among other media companies, that
would allow these companies to publish listening, reading,
and viewing activity to users Timelines. Though now this
kind of activity is just considered the way people share
music, at the time it was totally novel. The chart below
illustrates the impact that the integration had on Spotifys
active users:
Spotify adds 1 million subscribers following f8. Image via AppD

Today, Spotify users can register for the service via an
email address or through Facebook connect, and once
registered, users can see their friends activity within the
appincluding what theyre listening to, who they follow,
and any public playlists theyve createas well as in the
Facebook News Feed if theyve chosen to share it.
For Ek, sharing is at the core of the music experience. As
he explained to Greeley, I want to replicate my rst
experience with piracy. As a teenager, he said, when he
found someone on Napster with similar music taste, he
would copy their entire librarywhen he discovered Ella
Fitzgerald this way, the world opened up. Ek goes on to
assert, Napster, as a service, worked for the consumer.
What eventually killed it was that it didnt work for the
people participating with the content. [18] Similarly, in a
statement following Spotifys US launch, Ek cited sharing
as one of the driving forces behind the service:
We believe that music is the most social thing there

is and thats why weve built the best social features
into Spotify for easy sharing and the ultimate in music
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into Spotify for easy sharing and the ultimate in music

discovery. Even if you arent a total music freak,
chances are you have a friend who is and whose taste
you admire. Im looking forward to connecting with
some of you in Spotify and discovering some cool
new tracks. [21]
As Airbnb Product Manager Gustaf Alstromer noted on

Quora in early 2010, one of the features that makes
Spotify so sharing-friendly is the fact that each track,
album, and playlist has a unique URL. Alstromer
explained:
[This] might sound like a minor detail, which it is not.

If everything is (technically) available to everyone the
way we listen to music changes. Spotify has created a
new way people share and send tracks, albums and
playlists to their friends and others. [14]
From the start, Spotify was built in a way that facilitates

the intrinsically social nature of music. Partnership with
the super-platform Facebook has only served to magnify
this element, helping it to drive Spotifys growth.
Spotify also oers users the option of automatically
publishing tracks to Last.fm, as well as sharing individual
tracks, artists, albums, and playlists via Twitter, Facebook,
Tumblr, private message, or embedding them into a blog
or website. Collaborative playlists allow friends to work
together to curate music for parties, road trips, and
everything in between.
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Spotifys social sharing features. Image via Spotify.

Spotify has worked to enhance social sharing and
discovery over the past couple years. Three more recently
added features are Messages, Following, and Browseall
of which debuted in 2013. Messages allows users to
engage in conversations within the service and, as with
Facebook, the Spotify inbox saves messages with each
friend as lifetime treads, chronicling all the music youve
ever shared. Messaging is available for desktop, web, and
mobile versions of the service, and it also works as a
simple messenger, allowing users to send compliments,
ask for recommendations, and have conversations.
Spotify switched from a system of subscribers to
followers in March of 2013. Users can follow friends,
artists, inuencers, celebrities, and organizations and
receive updates when artists they follow add music to
their catalogues.
Powered by Tunigo (which Spotify acquired for an

undisclosed amount in May of 2013), Browse allows users
to search for playlists made by friends, inuencers, and
other Spotify users based on a variety of factors including
genre and mood. According to the company blog post
announcing the feature, Browse oers music for every
moment and mood, along with all the latest album and
single releases from your favourite (or soon-to-be
favourite) artists, and a collection of our top lists. [40] As
Spotify product manager Miles Lennon explains:
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Spotify product manager Miles Lennon explains:
If its ve minutes before friends arrive and you think

shoot, I havent put together the music I need, youre
two clicks away from a playlist designed for having
friends over for dinner. [15]
As with the companys earlier addition of radio stations,

the Messaging, Follow, and Browse features represent
how Spotify is working to make other music services
obsolete. Lennon spells out the companys strategy:
Its important to have it all under one roof. Our

hypothesis is that the best discovery experience will
combine socialrecommendations from people you
trust, inuencers, and artists; intelligent
recommendation algorithms based on your listening
history and tastes; and human curation by experts
and millions of community members. The way we
move the needle is by satisfying more use cases. [15]
Spotify as Music Identity Layer: Acquisitions,

Apps, and APIs
In addition to the companys acquisition of Tunigo, in
March of 2014 Spotify acquired The Echo Nestthe
industrys top music personalization and discovery API
for around $100M. [41] The two companies had worked
closely in the years prior to the acquisition, as Ek explains:
We have a long relationship with the guys at Echo

Nest that stems back to 2007 before Spotify was even
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Nest that stems back to 2007 before Spotify was even

launched as a service publicly. Weve been working
together for a few years. We look at the world in the
same way. [38]
Echo Nest CEO Jim Lucchese agrees, explaining, Weve

both invested in platform approaches to music. To
combine those creates such a cool opportunity for
developers anywhere that music lives. [38] Lucchese goes
on to claim that combining The Echo Nests understanding
of music with Spotifys technology, platform, catalog, and
huge audience will allow both companies to connect more
people to music on a scale that wasnt possible otherwise.
As far as short-term applications go, Lucchese and Ek
claimed that Echo Nest technology would be implemented
in the months following the acquisition, and users could
expect instant improvements Spotifys radio algorithm,
discovery suggestions, and more.
Then in June of 2014, the company announced that music
discover data from Echo Nest had contributed to Spotifys
newly-released, expanded set of web APIs. Spotifys Web
API endpoints return metadata in JSON format about
artists, albums, and tracks directly from the Spotify
catalog. Subject to user authorization, the API also
provides access to user-related data such as playlists and
music saved in a Your Music library. In a statement
regarding the new APIs, the company claimed:
Spotify and subsidiary The Echo Nest are more

committed to the developer community than ever.
Our newly combined platform makes it simpler than
ever before to provide amazing music experiences on
the web, and these enhancements are just the
beginning. [12]
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As for longer-term, larger scale implementations like the

ones Ek and Lucchese mention in their announcement of
the acquisition, TechCrunchs Josh Constine speculates
about what those might look like:
Imagine being able to authenticate your Spotify

account in other apps the way you sign in with
Facebook today. But instead of bringing your social
graph and bio data, Spotify Connect would you let you
listen to full songs and your playlists on demand in
whatever app you wanted. Essentially, it would set
Spotifys app platform free from its green walls, and
let legal music bloom all over the Internet. [38]
In other words, The Echo Nest could help Spotify to

become, as Constine refers to it, the music identity
provider across the web and mobile the way Facebook
has become a social identity provider, arguing that an
API-centric Spotify could solve the music licensing
program for every developer. [38] Uber, the ridesharing
company, for example integrated Spotify into its app to
oer the streaming music service to its riders. [68] These
mobile SDKs serve as further evidence of Spotifys
commitment to the developer community and indicate
that Constines predictions might not be so far o.
Debuting in May of 2014, the integration of Algoriddims
iOS app djay with Spotify gives us a sneak peek into what
Spotify as music identity layer might look like. Prior to the
integration, djay users were limited to the music in their
personal collections. A Spotify Premium subscription (the
app comes with a 7 day free trial), however, now grants
them access to the 20 million tracks in Spotifys library as
well, along with Match and Automix Radiotwo new
features that leverage the Spotify integration. Match
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features
that leverage the Spotify integration. Match
recommends songs that would be a good t to play after
the current track. DJ and Algoriddim CEO Karim Morsy

said that prior to Spotifys Echo Nest acquisition, hed
believed this kind of technology could never be
automated. The second new feature, Automix Radio,
creates and entire mix, complete with transitions, based
on a single song. [39]
Spotifys ambitions as a platform hasnt been without its
bumps. The aforementioned APIs served to replace the
Spotify app ecosystem, which, originally launched with
much fanfare, is currently being phased out. Introduced in
2011, the Spotify Apps platform at one time hosted apps
such as Tunewiki and musiXmatch, both of which
provided lyrics; along with Pitchfork, Billboard Top Charts,
Last.fm, and Soundropwhich in June of 2012 became
the rst Spotify app to attract major funding with $3M in
Series A funding from Spotify investor Northzone. [42]
Formerly accessible through the Spotify desktop players
App Finder, the company announced in March of 2014
that they would no longer be taking Apps submissions [54]
and then in November of 2014 that they were killing the
App platform entirely, suggesting developers look into
their web API instead. [56]
Mobile
Spotify launched their mobile app for iOS and Android
devices in the fall of 2009. Initially, mobile access was
exclusively for Premium subscribers, but as of December
2013, limited mobile streaming became available for free
users as well. According to Spotify, the share of users
listening on mobile tripled between 2013 and 2014. [27]
Perhaps the potential ad revenue from free users on
mobile provided incentive for the company to make some
mobile access available, or the company wanted to give
free users a taste of limited mobile functionality in hopes
of converting them to paid.
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25/2/2015
Though free users cant play any song at any time on

mobile as they can on desktop, they are able to play
shued tracks from a specic artist or playlist, while paid
users have full mobile listening capability, along with the
option to save data by selecting playlists to download for
oine listening. As mobile grows, the constrained free
plan is likely a powerful conversion point to paid accounts
where users want the same control theyre used to on the
desktop version.
Controversy Spurs Awareness and Growth

One of the most common arguments in favor of Spotify is
that, as Sean Parker claimed, Spotify is getting people who
previously didnt pay for music to start paying. According
to studies done in Sweden, Norway, Denmark, the US, the
Netherlands, and the UKall of which are cited on
Spotifys page for Artiststhat may very well be the case.
[26]Still, many artists claim that, though legal, the revenue
generated by Spotify and services like it simply isnt
enough to live on.
David Byrne, formerly of Talking Heads, refers to the
royalties artists receive from streaming services as a
pittance, arguing that if artists have to rely almost
exclusively on the income from these services, theyll be
out of work within a year. [28] Echoing that sentiment,
Patrick Carney of the Black Keys claims, For a band that
makes a living selling music, [revenue from streaming]
isnt at a point where its feasible for us. [29]
Country singer-songwriter Rosanne Cash, who has
recorded 13 albums since the 1970s, told a House
subcommittee that she was paid $114 for 600,000 plays
on an unnamed streaming site. [30] Cash argues, Everyone
gets paid except the music creators. We are creating a
culture where content creators are a new servant class,
and paid as such. [31]
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25/2/2015
While the debate is long from settled about whether

Spotify adds value or destroys it for music creators, there
is no doubt that the controversy around it spurs
awareness of Spotify and acts as a growth driver for the
company. Every time a high-prole artist gets into a public
dust up with Spotify over royalties, the company has an
opportunity to make its case for the value they create for
listeners and artists, driving greater awareness and new
users in turn.
The most recent example of this mechanism was seen
with Taylor Swift, who a week before the launch of her
Billboard-topping album 1989, pulled her entire catalog of
music from the service. While obviously a critical loss for
Spotify, the company received a ton of exposure in
consumer publications, blogs, a TV news programs
around the world. The controversy creates a platform
where Spotify can put a ne point on its value proposition
to listeners.
Future Growth
Can Spotify Make Artists Happy?
This seems to be the essential question that will
determine the long term viability of Spotify. While Spotify
is clearly a bridging technology between piracy and paid,
will they be the long-term winner, or will they be usurped
by bigger players such as Google or Apple? Going back to
the encyclopedia example, Encarta won in the short term,
but was ultimately eliminated by services like Google and
Wikipedia. Similarly in the entertainment space, RedBox, a
video rental kiosk business, has won in the short term of
video rentals but faces increasing pressure from video on
demand services from cable providers and companies like
Netix and Amazon Prime Video.
In a recent thread on GrowthHackers.com, the community

discussed how to best grow Spotify, paying particular
attention to the current controversy between Spotify and
27/36
25/2/2015
attention to the current controversy between Spotify and

rights holders. After all, theres obviously more at play that
simply user acquisition. As Joseph Bentzel explained, its
not really a growth problem that Spotify is currently
experiencing, but a product/market t problem. He
explains:
Spotifys full productat its coreis really a form of

two-sided marketplace in which its producersi.e.
artists and writersbenet from providing their
oering via a paid and/or ad-sponsored revenue
model.
What Taylor Swift basically did was say that from the
producer perspective of the two-sided marketplace model
she didnt see value in participating anymore. Rather,
she saw channel conict between Spotifys model and her
other revenue generation channels. [50]
So while Spotify has clearly found product/market t on
one sidehence the 50 million people who currently use
the serviceif artists withhold their music, then the
system breaks down. Spotify must address the issues on
the producer side of the marketplace. Yet as Ek
explained in the wake of Swifts breakup with the
company, in a blog post entitled $2 Billion and Counting:
When I hear stories about artists and songwriters

who say theyve seen little or no money from
streaming and are naturally angry and frustrated, Im
really frustrated too. The music industry is changing
and were proud of our part in that change but lots
of problems that have plagued the industry since its
inception continue to exist. As I said, weve already
paid more than $2 billion in royalties to the music
industry and if that money is not owing to the
28/36
25/2/2015
industry and if that money is not owing to the

creative community in a timely and transparent way,
thats a big problem. We will do anything we can to
work with the industry to increase transparency,
improve speed of payments, and give artists the
opportunity to promote themselves and connect with
fans thats our responsibility as a leader in this
industry; and its the right thing to do. [51]
In other words, Spotify is doing all it can to ensure that

artists are compensated for their work, and if record
labels dont share, then its not their fault. Nevertheless, if
artists choose to remove their music because they arent
happy, it doesnt matter whose fault it is, because Spotify
and its userswill be the ones to suer.
International Expansion
As the company explains on their page for artists, despite
expanding to a total of 55 countries thus far, the company
plans to continue this rapid expansion around the world
in order to add millions more users quickly and in turn
enable us to pay even more out in royalties. [26] One such
expanding market is Canada. Though a launch date has
not been announced, the country is currently in a state of
anticipation similar to the pre-US launch, and a Spotify.ca
site is currently accepting requests for invitations. [36]
Spotify availability by country. Image via Spotify.

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25/2/2015
Platforms and Partnerships

One way to grow the Spotify user base is through new
partnerships and platforms. The company has released
SDKs for iOS and Android developers and has launched
high prole integrations with companies like Uber. Its not
hard to imagine Spotify shipping on Samsung or HTC
phones, Spotify on Xbox One, Spotify on PS4, Spotify on
Roku, Spotify in your BMW, and so on.
Starting in November of 2014, Uber began rolling out
something along these lines in London, Los Angeles,
Mexico City, Nashville, New York, San Francisco,
Singapore, Stockholm, Sydney and Toronto (with more
cities added in the following weeks). The car service now
allows its customers to remotely control the music that
plays through their rides speakers. To integrate the two
services, users connect their Spotify accounts from the
Uber Prole screen. After that, whenever they request a
ride from the Uber app and are matched with a musicenable dUber, a music bar will appear at the bottom of
the Uber app. Users tap the music bar and choose a song
from any of their Spotify playlists while waiting for the car
to arrive.
The Spotify + Uber partnership is available to Spotify
Premium users only, though Spotify does oer a free, nocredit-card-required week of Premium so that Uber
customers can try out the service. [62] By making these
integrations available only to premium subscribers,
Spotify may be able to drive not only user growth but
upgrade conversion to paid accounts.
Is Spotify Sustainable?
In May of 2014, Joshua Brustein of Businessweek cited a

report published by Generator Research the previous
November, claiming that the business model for
streaming music might be inherently unprotable.
According to Andrew Sheehy, the reports main author,
No current music subscription serviceincluding
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25/2/2015
No current music subscription serviceincluding

marquee brands like Pandora, Spotify, and Rhapsody
can ever be protable, even if they execute perfectly.
Brustein went on to claim that, according to a report
written by the rm PrivCo using Spotifys nancial
disclosures, the company had lost a total of $200M since it
was founded, though Spotify declined to comment. [33]
Despite these claims, plenty of streaming services are
attempting to make a go of it. In fact, an August 2014
article from Time.com cites 102 available music streaming
servicesthough they did count basic and premium
versions separately. [65] Nevertheless, thats still a ton of
competition for Spotify.
Conducted by Edison Research and Statista, the surveys
the main points of consideration were whether those
surveyed had heard of certain services and which ones
they had used within the past month. The chart below
represents that data:
Audio streaming consumption stats. Image vi

Yet in addition to competitors like Pandora and Rdio,
Spotify is now also faced with competition from wellfunded giants like Apple and Google, toward whom Ek is
particularly (and probably rightly) hostileclaiming in the
company blog post responding in detail to Swifts
departure, Our whole business is to maximize the value
of your music. We dont use music to drive sales of
hardware or software. [51]
The market for streaming radio is becoming increasingly
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25/2/2015
The market for streaming radio is becoming increasingly

crowded, with established servicessuch as Beats and
iTunesjoining forces and new servicessuch as
YouTubes music streaming serviceentering the fray left
and right. In particular, the launch of YouTubes service
could mean trouble for Spotify, since many see YouTube,
with its 1 billion visitors per month, and 4 billion music
video streams on Vevo alone, as the biggest streaming
music site on the planet. [52], [69]
In March of 2014, TechCrunch reported rumors that
Spotify might go public at some point in the fall of 2014.
That time has come and gone, though in February their
website had listed a job opening for an External Reporting
Specialist to prepare the company for SEC ling
standards. Set up all reports necessary to be SEC
compliant. Furthermore, there were reports that Spotify
received a $200M credit facility from Morgan Stanley,
Crdit Suisse, Deutsche Bank, and Goldman Sachs, which
TechCrunch perceived as a bid to to improve their
chances of being the underwriter when Spotify does go
public. [37]
Little more was heard regarding a Spotify IPO until August
of 2014, when the company relisted the same regulatory
lings expert position. In an email to Reuters, Spotify
director of communications Marni Greenberg armed,
This is the same role that was advertised back in
February, though she declined to explain why the
position was being re-listed or provide any further
comment. [49] Current speculation is that the company will
go public sometime in early 2015.
Theres no denying that Spotify has turned the music
market on its head, providing a value proposition
attractive enough to decrease digital piracy and convince
millions of people that music is worth paying for. Only
time will tell, however, whether that business model is
sustainable. Nevertheless, if Spotify does have intentions
of going public, revenue losses of $200M are certainly not
sustainableespecially in light of increasing competition
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25/2/2015
sustainableespecially in light of increasing competition

for paying users and artist dissatisfaction.
Written by:
Morgan Brown
You must be logged in to post a comment or ag a

post.
demetrius michael (@dem_z) January 9, 2015 at 9:38 am Link
People still use iTunes Radio? I guess distribution

matters.
6
Reply
Sean Ellis (@sean) January 8, 2015 at 5:51 pm Link
Excellent breakdown of the growth engine for

Spotify @morgan ! Id ask if you think they are
overvalued at a $10B+ valuation, but thats a gut
call. Instead, Ill ask if you had an opportunity to
invest a few thousand dollars at a $10B valuation,
would you take it? If not, is it because the
headroom for more growth is too limited or
because the risk of the model is too high, or a
combination of both? Curious what other people
think on this question too.
5
Reply
Morgan Brown (@morgan) January 9, 2015 at 9:04 am Link
Its a great question and hard to say really.

Pandora has a market cap of $3.4 billion and is
the leader in the online streaming space, so its
hard to say that the $10 billion is justied. And
at $10 billion, I think theyre probably too rich
for an acquisition, so the public market is the
only way to go for them (or an acquisition at a
big haircut on this value).
33/36
25/2/2015
big haircut on this value).

So, I probably wouldnt put money into them at
this point, but I probably wouldve a year ago.
3
Reply
Luis Albertson (@lalbertson) January 9, 2015 at 2:36 pm Link
Very insightful @morgan . I was considering

purchasing Spotify Stock If & When they go public.
This article has only strengthened my position.
3
Reply
benhoman (@benhoman) January 9, 2015 at 9:04 am Link
Another amazing growth study. I guess the growth

lesson here is, among others, build an awesome
product + perceived or real scarcity. (i.e. amazing
music player + invite system)
Do we think Spotifys scarcity is real or perceive?
Klout did have to limit their invites. But then again,
Im sure Spotifys founders saw what happened in
EU and gured it wouldnt hurt to do the same in
the US.
2
Reply
Sean Ellis (@sean) January 9, 2015 at 9:19 am Link
I also think a growth lesson here is that well

executed freemium can lead to strong customer
evangelism with low friction conversions. To
execute freemium well, they not only needed to
have this strong user evangelism, but needed to
have a signicant number of people upgrading
to premium. The stats that jumped out at me
from the study is that of the rst 3 million users
in the USA, 20% were on premium plans. And
that 80% of premium users start on a free plan.
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25/2/2015
that 80% of premium users start on a free plan.

In my experience, those are excellent freemium
numbers and make their growth model
sustainable (as long as they can keep artists
happy).
3
Reply
andrewgale (@agale) January 9, 2015 at 9:46 pm Link
Another epic post @morgan great work!

2
Reply
Matt Morgan (@mmorgan) January 9, 2015 at 12:15 pm Link
Awesome writeup @morgan .. So interesting

taking a critical look at these companies. Keep
making SB proud brotha..
1
Reply
Morgan Brown (@morgan) January 9, 2015 at 2:31 pm Link
Thanks @mmorgan! I appreciate it and thanks

for stopping by!
1
Reply
Matt Challberg (@mattchallberg) January 10, 2015 at 8:04 pm

Link
This is an amazing case study and extremely

detailed! @morgan do you think the majority of
their growth was from their unique
positioning/value proposition in the music space,
or due to marketing/growth strategies?
1
Reply
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25/2/2015
Morgan Brown (@morgan) January 12, 2015 at 11:16 am Link
Update: Spotify now has 60 million users and 15

million paid customers:
http://www.theverge.com/2015/1/12/7531261/spotifyhits-15-million-paid-subscribers-60-millionlisteners
1
Reply
Pol RAS (@polras) January 20, 2015 at 2:19 pm Link
great article @morgan !

1
Reply
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How Spotify Turned Free Music into a

Existing Growth Levers:

Future Growth Levers:

Create new distribution channels with partnerships

Create new distribution channels with partnerships

Spotify founders Martin Lorentzon (left) and Daniel

We discussed a lot of ideas back and forth and spent

After a period of closed beta, Spotify ocially launched on

another $50 million in Series B funding from Li Ka-shing,

Spotify user growth via Quartz

music industry disrupting giant that we know today?

Initial Traction / Early Growth

Its no coincidence that album sales peaked, at $14.9

$6.3 billion. For a while, digital music sales, chiey

$6.3 billion. For a while, digital music sales, chiey

Theres no denying that Spotify and services like it are

Pandora-style radio service that allows users to expand

Spotify music discovery. Image via Mash

These factors combine to increase accessibility and

that somewhere between 4 and 10 trillion songs are

what are people willing to pay for? The answer is

For Parker and many others, Spotify epitomizes both

Songs you listen to often on Spotify sit, encrypted, on

Spotify and The Pirate Bay dont just share a country;

be baked deeply into the core of the product

We have full catalogues from all the major labels and

Parks went on to refer to the service as a better, simpler

Freemium Business Model

Consumers have certainly ocked to the idea. 37.5 million

big promise of Spotifys unique value proposition. Lets

Royalty payouts by Spotify. Image via Sp

Spotify royalty payouts by album typ

As with companies like Evernote and Dropbox, the

users along with revenue from advertisements for Free

European Launch: Building Anticipation

Many of Spotifys beta testers were inuencers and tech

launch, these beta accounts were immediately

Were taking our rst baby step to open up Spotify to

Sehr claim that if growth happened too quickly, the

From Europe to the US

Anticipation of the services arrival to the US began

momentum to their benet, gaining press attention from

Those who have tried Spotify know its like a magical

It wasnt just inuencers and beta testers who got to try

Some have speculated that if Spotify ever does

people who subscribe. [3]

people who subscribe. [3]

Though the wait for Spotifys US launch was the

Spotify.com trac growth. Image via Moz.

Talib Kweli Greene

Music is about to be fun again! Join me at

Rainy day in NOLA but nice to be home. Just

JJ & Prestons Dance Mix:

680 RETWEETS 212 FAVORITES

What a relief, now that it's legal in he US, I can

As part of the launch, Spotify also partnered with several

Reebok, Sonos, and The Dailyto extend their reach and

Spotify asked us to pause giving invites for the rest of

Social: Discovery and Sharing

Yet another way in which Spotify is similar to earlier le

speakerthe social network announced a new