Just recently we’ve taken a look at some strategies Beats could take to steal the throne from Spotify, and to a lesser extent, the other music streaming services (Rdio, Deezer, Rhapsody, etc). Since we don’t discriminate on music services here, we will be doing the same strategy recommendation piece for Spotify. Spotify will not just sit idle when the Beats redesign goes live, and it will presumably retaliate through its own strategies. I don’t know, of course, but I would speculate that Beats is one of the major topics that gets discussed during management meetings at Spotify HQ. If it isn’t, Spotify is doing themselves a huge disservice, by shutting their eyes from impending competitive pressures.
Before we get into the strategies section, let’s take a brief glimpse at the data. Currently, Spotify is the largest on-demand streaming service, with 60M users, of which 15M are paying subscribers (20% pay-to-free ratio). By my calculations, Spotify has been growing users at a rate of 3.75% per month. This percentage was calculated by taking the user-growth numbers Spotify has provided every few months. It is impossible to say with certainty if this is a high or low rate of growth, since none of the competing music services provide enough data to compare them to each other. If you want to read the technical details of my calculations, this post from November is your destination. Otherwise, we can continue to the meat and potatoes of this analysis.
Strategies for Spotify
#1 Partnerships with music social networks
In my strategies for Beats piece, one of the strategies I recommended was exclusives. Beats could pay labels $X amount in royalties in exchange for being the exclusive streaming provider for an artists newest album (I advised the period to be a month to lock users into Beats). Spotify doesn’t have billions in cash like Apple does, which is why the exclusives strategy is not feasible. Instead, Spotify should partner with music social networks, specifically The Hype Machine and SoundCloud.
Spotify is great for major artists who are signed with music labels. In my experience, it’s very rare that I can’t find an artist I like on Spotify. Kendrick Lamar’s latest album, To Pimp A Butterfly, was ready to stream the day it was released. Barring few exceptions (I’m looking at you, Taylor Swift), popular artists always have their music available on Spotify. The same can’t be said about many indie artists and song remixes, which are often found on sites like Hypem and SoundCloud. Spotify should partner with these indie music social networks, and structure the deal in a mutually beneficial way. Spotify would gain many users who previously listened to indie music on Hypem/SoundCloud. In return, Spotify would pay Hypem/SoundCloud for the access to their data and music. To be fair, this deal would benefit Spotify much more than the indie social networks, but so goes the nature of business. Hypem is run lean, so it’s probably profitable. What it needs is more users, which Spotify can provide. SoundCloud, by all acounts, is losing money, despite have millions of registered users. Getting paid by Spotify could help them become profitable. Ideally, Spotify could purchase either Hypem or SoundCloud, but it is doubtful they have the cash for it.
These partnerships would also be a powerful competitive advantage to retaliate against the personalized playlists Beats offers. Unless Beats makes its own partnership with Hypem/SoundCloud (doubtful), Spotify would be the only streaming service to offer the type of indie music that’s only available on these music aggregators.
The music streaming business is a loss-leader. It is an offering that adds value to existing customers in order to keep them attached to your ecosystem. That’s what Google is doing with Google Music, Microsoft with Xbox Music, and now Apple with Beats. I can’t say with certainty since the data is unavailable, but I have strong suspicions that the above companies are actually losing money on operating their music streaming offerings. We know as a fact that Spotify is posting net losses, and will probably continue to do so in the foreseeable future. The tech giants can afford to lose money on streaming in order to strengthen their ecosystem, but Spotify and the other streaming services can’t. Even if Spotify does manage to operate at extreme efficiencies of scale and achieve profitability (big if), that income won’t be enough for a company of that size, especially if Spotify has plans to go public. What then, could Spotify do to become profitable?
Spotify has an incredible engineering culture, and the service experiences almost no downtime. Compared to competitors, Spotify streams songs the fastest: I’ve been using Spotify for the past two years and I have never experienced any stream-related problems. I can’t say the same for Beats/Rdio (I’ve not used the other streaming services). Spotify also has well designed apps, which are only getter better (early on, Spotify was not well designed, but lately I have been very impressed with the UX). These strengths can be used to enter a new market: audiobooks.
Essentially, Spotify will be diversifying its income streams by entering into a new market for audiobooks. While we again encounter the problem of a lack of data, this time on audiobook profitability, the nature of the business implies positive profit margins (unlike music streaming, a book won’t be bought twice). Spotify won’t be starting from the ground-up here, as their infrastructure is already set up, so it is likely that they can enter the audiobook business at a lower cost than music streaming through economies of scale and leverage.
In fact, there are already some audiobooks available on Spotify, but from what I found they mostly include public domain books (Pride and Prejudice, The Art of War, Romeo and Juliet). The Spotify app, however, is currently optimized for music listening rather than audiobooks, so listening to multi-hour audio streams is an obstreperous affair. Similar to how Facebook broke its main app into a web of focused applications (Facebook classic, messenger, groups, etc), Spotify should make a separate app specifically designed for audiobook listening. If that is seen as a big risk, I would advise to start with an app that provides only free, public domain books, since they’re already hosted on Spotify servers. If there is indeed demand for audiobooks, slowly add books from other publishers to eventually compete with Audible and iTunes.
Podcasts are another vertical Spotify could enter, especially if they partner with SoundCloud. SoundCloud, by the way, already hosts thousands of podcasts, and makes the process easy for both creators and listeners. Despite SoundCloud’s podcast features, there is still no comprehensive platform (monetization, hosting, dedicated apps, portal, listener data) for podcasts, despite many years of existence. What’s more in their favor is that podcast popularity is increasing, as internet connectivity and better apps make them simpler to find and consume. The good news for Spotify is that it doesn’t look like Apple has plans to host the podcasts - instead, iTunes is merely a portal to find them.
Even if the SoundCloud partnership is not possible, Spotify already has the expertise to host and make them available to listeners. Not a podcast per-say, but spoken-word comedy shows are already available on Spotify. All it needs to add now is a dedicated app, a better way to find podcasts, and most importantly, the ability to host them. Podcast creators (especially indie ones) would be willing to pay for the service, and it would serve as another outlet to help creators find new listeners.
Spotify should do its absolute best to become the go-to audio destination on desktop, mobile, and wearable devices. Competition in music streaming is already fierce and will only get more competitive when the rebranded Beats enters the market. Worse, the music streaming business is currently unprofitable. Huge companies can afford to subsidize their music offerings as an additional value-add for their ecosystem, but Spotify can’t. Spotify can try to turn the industry on its head and attempt to become profitable, but it will be swimming upstream against the Niagara Falls. That is why it should be leveraging its existing infrastructure and competitive strengths to enter the other audio markets, audiobooks and podcasts. The partnerships with SoundCloud and Hypem (especially SoundCloud) would not only boost the value of its music streaming service, but also help them enter the market for podcasts. Spotify already has data about its users. Now imagine if they could provide this data to podcast creators, which in turn can sell tailored ad spots to advertisers. Being a music streaming provider is not enough for Spotify to turn into a profitable business. Platforms make profitable businesses, and Spotify should try to become a comprehensive audio platform: music, audiobooks, and podcasts (The Spotify MAP).
If you have anything to add, or just want to share your meandering thoughts about what we covered, please comment below! I’m also active on Twitter, so don’t hesitate to reach me at @lsukernik.