Spotify's Business Plan
Spotify was founded in 2006 and initially launched in October of 2008. It provides both a free service as well as a premium, ad-free version to search for music, create playlists, and generally listen to music.
Since it is relatively cheap, with a free version and a $5/month student option without ads, and access to millions of songs, it attracts users in great quantities. As of this month, there were over 200 million monthly users as well as nearly 100 million paying users.
Unlike some online song companies, it provides its entire catalogue of music to its userbase rather than provide songs or albums for individual purchase. To provide compensation to to the artists and record companies that have music on the service, Spotify provides about 70% of its revenue to the artists (through right's holders).
By 2010, Spotify was bringing in more money than any other provider to record labels in Sweden. In 2019, they had put over $5B into the music industry, with contracts to pay a least $2B over the next two years. Despite this, Spotify is not yet profitable. As with many online companies that provide free services, it appears that they intend to continue collecting data on the listening habits, among other factors, of their users and utilize it to sell more valuable marketing to advertisers.
In terms of non-monetary costs to users, then, it takes away the privacy in some aspects of each regular Spotify user's habits. In terms of the marginal cost, after the initial subscription has been purchased, it follows that only the cost of privacy remains and is far lesser for these users than the marginal utility of listening to any song they want at any time.
The many rounds of funding that Spotify has gone through, additionally, just allow it to last long enough with the royalty costs to artists in order to gather enough data and be able to fully utilize it to sell much higher value advertisements from marketers.
Sehgal, Kabir (2018-01-26). "Spotify and Apple Music should become record labels so musicians can make a fair living". CNBC. Retrieved 2018-11-21.
"Shareholder Letter Q4 2018" (PDF). spotify.com.
Geere, Duncan (29 October 2010). "Spotify now top-tier music revenue source in Sweden". Wired. Condé Nast. Archived from the original on 30 October 2010. Retrieved 22 January 2017.
Since it is relatively cheap, with a free version and a $5/month student option without ads, and access to millions of songs, it attracts users in great quantities. As of this month, there were over 200 million monthly users as well as nearly 100 million paying users.
Unlike some online song companies, it provides its entire catalogue of music to its userbase rather than provide songs or albums for individual purchase. To provide compensation to to the artists and record companies that have music on the service, Spotify provides about 70% of its revenue to the artists (through right's holders).
By 2010, Spotify was bringing in more money than any other provider to record labels in Sweden. In 2019, they had put over $5B into the music industry, with contracts to pay a least $2B over the next two years. Despite this, Spotify is not yet profitable. As with many online companies that provide free services, it appears that they intend to continue collecting data on the listening habits, among other factors, of their users and utilize it to sell more valuable marketing to advertisers.
In terms of non-monetary costs to users, then, it takes away the privacy in some aspects of each regular Spotify user's habits. In terms of the marginal cost, after the initial subscription has been purchased, it follows that only the cost of privacy remains and is far lesser for these users than the marginal utility of listening to any song they want at any time.
The many rounds of funding that Spotify has gone through, additionally, just allow it to last long enough with the royalty costs to artists in order to gather enough data and be able to fully utilize it to sell much higher value advertisements from marketers.
Sources:
Sehgal, Kabir (2018-01-26). "Spotify and Apple Music should become record labels so musicians can make a fair living". CNBC. Retrieved 2018-11-21.
"Shareholder Letter Q4 2018" (PDF). spotify.com.
Geere, Duncan (29 October 2010). "Spotify now top-tier music revenue source in Sweden". Wired. Condé Nast. Archived from the original on 30 October 2010. Retrieved 22 January 2017.
Great post, Naya! I found it interesting that despite Spotify reaching its quarterly goals, shares fell over 7%. Spotify has a difficult business model because it has to licence all of its songs. Unlike Napster, Spotify has to pay the record labels in order for its users to listen. Record companies are becoming more aggressive in cashing in on these streaming services. Labels sued Pandora for airing songs recorded pre-1970, something unprecedented. The legal issues for Spotify are only going to get worse as Congress recently passed a new Music Modernization Act which will allow some companies to copyright music for 144 years. Do you think copyrights should be allowed to last this long, or that eventually art should be allowed to be consumed for free?
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I definitely think that copyrights should not last as long as 144 years. The primary idea behind copyrighting, interestingly, is to "promote the progress of science and useful arts, that is, knowledge." This is of course done by allowing creators the exclusive rights to (financially) benefit from their works. Especially since the bulk of sales happen right when something is released, and taper off over time, having such a long copyright length does not make any sense. Granted, companies such as record labels provide services to artists and take a sizable portion of the profits, however even so it certainly does not take 144 years for a copyright to go beyond its main purpose--to further the progress of the arts.
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Awesome post Naya. This is especially interesting to me after watching the documentary about Napster. I wonder where they got their inspiration from -- was it Napster? What are Spotify's main competitors and how are they different than Spotify? I also wonder if there's any other business models that continue to keep the music industry alive rather than just SaaS.
ReplyDeleteI think some of the inspiration, although maybe indirectly through other products/services that flowed form Napster, definitely came from Napster. It's interesting to see just how much Napster was able to influence the huge music industry. I wonder what it would look like if they hadn't affected the market so much--I'm sure someone would have taken more advantage of the internet but it could look entirely different. With the low cost of the subscription model, it's really hard to compete outside of specific reasons people would have for going outside of that (e.g. like having physical copies, or being able to back up their music themselves), which is certainly not a majority.
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