Yes, Spotify is about to turn 10. The streaming service may have launched eight years ago in 2008, but the company was incorporated in 2006, taking two years to strike its first full set of licensing deals.
Its progress since then is marked by a series of figures: 100 million active users; 30 million subscribers; launches in 58 countries; more than $3bn of payouts to music rightsholders; more than $1.5bn of equity funding and another $1bn of debt financing; and one right royal dust-up with Taylor Swift.
So what next? As Spotify prepares to enter its second decade, we take a look at the company’s big opportunities – and the challenges that could stop it reaching 20.
FREEMIUM FIGHTS SHIFT FOCUS
The industry seemed unfazed recently when Music Ally revealed that Spotify’s last set of licensing deals with at least two major labels have expired, leaving it in a rolling month-to-month arrangement until new agreements are finalised.
Not ideal at a time of heightened competition in the streaming market, and with the clock ticking ever more loudly for Spotify’s long-awaited IPO.
That said, such rolling agreements between licensing deals are hardly unknown in the digital music world, and with Spotify’s main licensors also among its shareholders, there is no prospect of plug-pulling in the foreseeable future.
A year ago, it seemed as if Spotify’s next set of licensing renewals would herald a crackdown on its free tier, under a perceived assault from the very top of Universal Music Group, egged on by Apple as it prepared to launch its subscription-only offering into the streaming market.
That pressure has eased now due to a combination of growth – Spotify added 10 million paying customers in the nine-month period between June 2015 and March 2016 – and the anti-free lobby finding a bigger foe to target: YouTube.
“YouTube is still growing, and growing so fast. I’m optimistic in a way about getting the streaming services licensed, but we saw this bigger problem out there: is streaming subscription-supported, is it ad-supported?” musician David Lowery told Music Ally in March.
“You can’t really fairly address that question without addressing YouTube. I don’t think you can really say to Spotify ‘You have to get rid of free, ad-supported streaming’ while YouTube has free, ad-supported streaming.”
For all the current noise around safe-harbour modernisation, YouTube isn’t losing free, ad-supported streaming any time soon, and the pressure on Spotify to further restrict its free tier has receded accordingly.
That is not to say there will not be changes. Spotify’s longstanding policy of not allowing albums to be restricted to its subscribers only, for example, is up for discussion.
Spotify still believes making all the music available across both its premium and free tiers is the best way to drive conversions, but the company is making it clear behind the scenes that this belief is not religious in its fervour. Quiet, limited tests of tier-windowing may be on the agenda.
“There are pros and cons to windowing content, but Spotify could make nice with a lot of the music industry if it were to be more flexible in this regard,” one industry source tells Music Ally.
Some observers would like to see Spotify voluntarily experiment with more restrictions on its free tier, even if pressure from the labels to do so has eased.
“Spotify needs to be more draconian in its free offer,” says Catie Dear, head of entertainment at media agency the7stars, citing research suggesting that many of Spotify’s non-paying users still aren’t aware of premium perks like offline listening, which might persuade them to upgrade.
“Limiting the free tier to an introductory offer would be a drastic move but one that would likely have a massive impact,” says Dear.
“Now that Spotify is established as the market leader and its main competitors aren’t offering stand-alone free tiers, it has the opportunity to force users to pay. It could take a leaf from Netflix which has amassed 81 million paying subscribers in a shorter product lifetime.”
THE ECHO NEST AS SECRET WEAPON
Spotify does not have the deep cash reserves of an Apple, Google or Amazon, but it does have a secret weapon that it spent €49.7m on in March 2014: The Echo Nest. The Boston-based music-intelligence company and the team of developers built around it since that acquisition feel increasingly like Spotify’s clearest competitive advantage.
The music industry thinks of ‘exclusives’ as one streaming service getting the latest Kanye or Beyoncé album before its rivals, but for Spotify, there’s also the exclusive access to the algorithms of The Echo Nest and the brains that developed them.
Features like Discover Weekly and Fresh Finds can be unique selling points as much as any individual album – particularly when it comes to reducing the number of subscribers who churn over to rival services.
There is evidence that Spotify is planning to leverage this advantage, with product manager Matt Ogle recently hinting at plans for even more Discover Weekly-style personalised playlists in the near future.
“Playlists are the atomic unit of Spotify. We’ve got over two billion of them, so obviously we’ve got a pretty robust system for storing and serving them. However, as robust as that system is, it was designed for user playlists,” Ogle told us in March.
“It was not designed for ‘Let’s set 75m of them to all get updated in a ten-hour window on Sunday night!’. So behind the scenes, we’re going ‘Alright, if we want to have 20 personalised playlists in a given week, what sort of a system would we need under the hood?’ What would we build so that you could just seamlessly serve that?”
In a streaming world with playlists as ‘atomic units’ and where personalisation is growing ever more important, The Echo Nest is looking like €49.7m well spent for Spotify. It may not be richer than some of those rivals, but it can work hard to be smarter.
IT’S ALL ABOUT THE ARTISTS
When artists complain about any streaming service, their ire tends to focus on one thing: payouts. It’s understandable – royalty cheques are what pay the bills – but it’s also a challenge for every streaming service to redouble their efforts to create value for artists in other ways.
Spotify is no exception. Despite its frequent role as a lightning rod for artists’ streaming complaints, the company has actually done more than its rivals to experiment in this area. Yet it is also true that there is plenty more it could and should be doing in the coming months and years.
“Full-stack music” is a buzzphrase for the music/tech world in 2016, but Spotify was one of the first streaming services to integrate ticketing and merchandise into its platform – even if the latter was restricted to artist profiles.
Spotify has also been one of the most pro-active streaming platforms when it comes to analytics, alongside SoundCloud and YouTube. When external data partners Musicmetric and Next Big Sound were bought by rivals, Spotify built a team to make its own Fan Insights tool.
It’s been warmly received by managers for features like its greater city-level data to help plan tours, and the way it looks beyond pure listener numbers to help them understand different classes of ‘superfan’. Spotify’s challenge now is to build on these experiments to deliver the full-stack dream.
The recent deepening of its partnership with Songkick shows its recognition that more can be done with ticketing, although many industry sources that Music Ally spoke to in the research for this feature would like to see that partnership become an acquisition – giving Songkick the stability to innovate around live in the same way that The Echo Nest has around personalisation.
There is also an opportunity for Spotify to become the next big marketing platform for musicians too. How soon can it turn its experiments with targeted emails offering ticket pre-sales to superfans into a self-serve platform for all artists to use? And how can it ensure that doesn’t turn into a spamfest for users?
What can Spotify do with its underused Inbox messaging feature? That has the potential to become a new channel for artists to communicate with fans, as an alternative to the declining organic reach of posts on Facebook.
And how can Spotify forge closer links with crowdfunding / direct-to-fan platforms like Kickstarter, PledgeMusic and Patreon? Could it even buy one of the latter two – public-benefit corporation Kickstarter is out of reach – or build its own equivalent?
Spotify now has a dedicated artist-services product team, and while Fan Insights was the first fruits of that initiative, there is huge potential for more to come – spurred by competition from the likes of Pandora with its artist marketing platform (AMP) and similar shift towards full-stack dynamics.
WRITERS AND COPYRIGHTERS
It’s not just artists who could benefit from deeper access to Spotify’s data vaults. Catie Dear at the7stars thinks that the company could now open up more to the advertising world, which may bolster that much-maligned free tier.
“For advertisers, Spotify needs to provide access to its data – Spotify has invested heavily in artist dashboards and high profile partnerships with the likes of The Echo Nest, but this isn’t something advertisers have been able to take advantage of so far,” says Dear.
“The data would be of value both for informing campaigns and ideally for advertisers to buy media against – limited genre targeting just doesn’t cut it in today’s hyper-targeted world.”
A more pressing task, though, is to convince songwriters that Spotify is a platform with their best interests at heart. For all the headaches of the US copyright licensing system – and the availability on the publishing side of the accurate data required to make it run smoothly – getting slapped with a pair of class-action songwriter lawsuits recently was a wake-up call for Spotify, and its rivals.
David Lowery and Melissa Ferrick’s lawsuits are dragging plenty of skeletons out of the music industry’s closets, and Spotify is clutching some of the bones with a guilty look on its face. Signing publishers up to its NMPA-brokered settlement and resolving the lawsuits is the immediate challenge, but further down the road this could become an opportunity for Spotify.
The company is creating its own publishing administration system, ambitiously stating that “we want to fix the global problem of bad publishing data once and for all”. Succeeding where the music industry’s attempts to create a global repertoire database have failed would be a welcome development, and also an extremely disruptive one depending what Spotify chooses to do with its database.
Kept to itself, it might be a competitive advantage as rivals – YouTube excepted, since it already has the most comprehensive publishing rights database in the industry – scramble to find their own solutions.
But more than one observer is wondering whether Spotify might open-source its database instead, and what that might mean for the wider publishing sector. Not least in the areas where payouts have historically been assigned based on claimed market share rather than accurate stream reporting of what has actually been played.
AN ORIGINAL CONTENT BOOM IS COMING
Another key question for Spotify in its second decade as a company concerns original content. Specifically video, although it has also been experimenting with radio-style shows – branded ‘In Residence’ and hosted by the likes of Jungle, The Staves, Rob Da Bank and Metal Hammer – and bespoke mixes created for its mobile app’s Running feature.
Video is a big opportunity for Spotify, but also a big opportunity to get its strategy horribly wrong, wasting lots of money without engaging many users.
When Spotify added video in 2015, it was hard to divine a strategy beyond ‘The Kids like watching videos on YouTube, so we’ll put some YouTube-style videos in our app so that The Kids will watch them there’. Then burying it all several taps down in the app (Browse —> Shows —> Video Shows), which was hardly a vote of confidence.
There is surely more to come, especially since Spotify hired former VH1 president Tom Calderone as its new head of content partnerships earlier this year. His role extends beyond simply ‘sorting out Spotify’s video strategy’, but his experience in the traditional music/TV programming world will hopefully bump this area up the company’s priorities.
What IS original video content on Spotify? Is it music documentaries – why shouldn’t feature-length documentaries like Amy (on Amy Winehouse) and Montage of Heck (on Kurt Cobain) be something that Spotify invests in? A music-skewed equivalent to Netflix Originals? “It should spend $100m on creating a studio for Spotify Originals,” one industry source backing this strategy told Music Ally.
Or is original video on Spotify more about short-form content: some kind of Snapchat-meets-Periscope platform for artists to vlog and live-stream to their fans within Spotify for example? Could it even incorporate user-generated clips – Dubsmash or Musical.ly (the UGC app, not us) as acquisition targets?
Every music-streaming service is currently thinking hard about how video fits into its offering. Apple Music and Google Play have experimented with commissioning original content, while Vevo is well-placed for its own push into this area with TV-style formats rather than just live performances.
Update: Spotify has since announced a slate of original music-focused shows to launch later this year.
MORE EXPERIMENTS: PRICING AND APIS
We’ll get to Spotify’s headaches about deep-pocketed rivals soon, but its best hopes rely on not letting up the pace of its experiments and risk-taking: the culture that yielded Discover Weekly from an internal hack day.
Look at the number of new, significant product features rolled out by Spotify since the launch of Apple Music in June 2015, in comparison to the latter service’s development, and Spotify comes out very well. It needs to continue in that vein.
Some of the opportunities to experiment play to its strengths. APIs, for example. Spotify is already a platform for other developers and music startups to build upon, from DJ apps like Pacemaker and Serato Pyro to discovery apps like Lost Music.
Apple Music, SoundCloud and Deezer are all in the mix as streaming platforms for developers to build upon, so the competition should spur Spotify to keep developing this aspect of its business. If ubiquity is its aim, openness of its platform is the game.
Then there’s extending Spotify into other companies’ platforms, with messaging apps the current area of interest. It already has an integration with Facebook Messenger to encourage the latter’s users to share songs and listen to those shared in return.
Figuring out how best to live within that and other messaging apps is an important task for Spotify (again, spurred by the fact that its main rivals will be forging their own partnerships), and whether it’s social sharing or music-recommending chatbots, there is plenty of potential.
Some experiments will be trickier, or at least will depend on Spotify’s ability to sell its licensors on their merits. Pricing, most obviously.
Spotify is the epitome of the £9.99-a-month model that has become the template for streaming subscriptions, but many of the industry sources that talked to Music Ally for this feature would like to see it break the mould beyond its existing student discounts and three-month premium trials.
“The £9.99 per month rigid pricing has deprived Spotify of the opportunity to grow faster,” says one source. “Offering different subscription tiers (such as those curated by genre for a smaller monthly fee) would be a good fan-facing innovation,” suggests another observer. “Not all music fans want access to every song in the world.”
Another source warns Spotify off throttling its free tier to drive conversions, suggesting that playing with its pricing would be a better way forward.
“If Spotify started to restrict free too much than I would expect a large number of users to drop off and go to YouTube (or one of the other free streaming platforms),” they say.
“In terms of what Spotify can do, I think they only have one option – play around with pricing in between free and paid and see how that impacts conversion. Convincing the labels to let them try this is another matter entirely.”
MONEYBAGS RIVALS AWAIT IMPLOSION
For all the positives about Spotify and the opportunities to develop its service that lie ahead, it’s hard not to return to some uncomfortable truths about the company and its prospects for surviving another decade.
Spotify has been making heavy losses that have increased year-on-year. It is now loaded with $1bn of debt financing on top of its $1.5bn+ of traditional VC funding. And its biggest rivals in the years ahead will be the world’s largest and richest technology companies – Apple, Google and Amazon.
Update: Spotify’s 2015 financial results reveal it recorded a net loss of €173.1m that year.
The Spotify view, as voiced by CEO Daniel Ek in June 2015, is that Spotify can be better than those companies’ streaming services because it is dedicated to music, rather than running music-streaming as a sideline to a hardware / advertising / e-commerce business.
“We don’t really do anything else other than selling music, so we’re the most aligned with the music industry,” said Ek. “We don’t have the search box that we’re making money from, or the hardware that we’re making money from.”
The alternative view is that it’s exactly that money that could squash Spotify. “When all is said and done, Spotify is VC-funded whilst Apple has the largest cash reserves on the planet,” says one source. “Although Spotify has just raised a large amount of capital, it’s dwarfed by the resources the other businesses have at their disposal,” agrees another.
“Spotify has nowhere near the capacity to operate a loss-making operation that Apple, Google and Amazon have. In an environment where royalty prices are ever-increasing, Spotify can easily be outspent,” adds another observer.
Industry lawyer Chris Castle, who has been a prominent critic of Spotify on his Music Technology Policy blog, links this challenge with Spotify’s long-awaited IPO, for which the recent debt-financing round has set clear deadlines with its clauses dictating how the investors will benefit if Spotify does not go public according to its schedule.
Castle says he is “struggling to understand how Spotify intends to have anything left” from an IPO involving $1bn of convertible loans among other obligations, given the current financial climate and market conditions.
“In a stock market that is tied at the hip to the price of oil, if you’re like me and think oil will stay lower longer, I don’t see the kind of bubbly ‘greater fool’ conditions ideal for producing a Spotify IPO,” says Castle. “If I’m right, Apple and Amazon certainly know this, too, so they just need to sit back and wait until Spotify implodes.”
SWIMMING WITH THE SHARKS
Other sources come back to the basic economics of music-streaming in its current form, and Spotify’s role in setting that template for the wider industry.
“It has succumbed to a licensing model which leaves far too narrow a margin for distributors of digital music and which ultimately has a deleterious effect on the wider distributors operating in the music industry. Any service which pays out 80% of its revenue to rights holders will find it difficult to survive in the long term,” says one industry source.
“Coupled with an overall drive by the industry to vilify platforms and obtain higher returns from technology giants whose businesses are perceived to be damaging, the investment community is increasingly skittish when considering whether to back digital music startups.”
These are rather bleak notes to finish on for a tenth birthday celebration, and it’s important to note that within the industry there are a lot of people hoping that Spotify overcomes these business challenges to provide strong competition for the tech giants in the long term. And no, those aren’t just people with equity stakes in the company.
For product development, Spotify is currently the smartest, most inventive player in the music-streaming market, increasing the pace of its experimentation and taking more risks as it grows, which is unusual. From original video content to artist-marketing tools, it has huge potential. It needs to do the right thing regarding its missing mechanical licences, but in doing that it can also help to drive the music industry forward.
Yet even with all that funding (and debt); with those revenues rolling in from 30 million subscribers; and with THAT looming IPO, Spotify is a medium-sized fish in a sea of bigger sharks.
A strong, competitive Spotify will be a good thing for this industry in the decade to come, but figuring out how to enable that is a big challenge now for its licensors, not just for Spotify. Surviving for 10 years so far is an impressive achievement; surviving for another 10 will be even tougher.
This feature was originally published in the Music Ally Report, which is part of our premium research service. Click here to sign up for a trial.
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