Strategies for Spotify

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. 

#2 Audiobooks

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. 

#3 Podcasts

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. 

Coda

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). 

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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.

Strategies for Beats

It has been quite some time since I wrote about Spotify and Beats, so let’s briefly step aside from the automotive and tech posts and into music. Some fairly important news got lost in the Apple Watch shuffle last week — music labels aren’t willing to go below $9.99 per month for music streaming. The most interesting information is tucked away in the last paragraph of the Billboard article (emphasis mine):

There’s also an element of geopolitics at play. A weakened Spotify could help create a more powerful Apple subscription service. That would remove the comfortable, valuable counterweight to Apple that labels don’t have in the digital download space. There’s even some doubt that Apple is out to beat Spotify rather than grow the music subscription marketplace. “If they’re out to kill Spotify, it’s news to us,” says an industry source. "And it’s the last thing we want. We want Spotify to be a strong competitor.

Spotify is king when it comes to music streaming — it has around 15M paying subscribers, and 60M free users. Probably the most important variable to Spotify’s growth is that it allows you to use the desktop apps for free, which is always the preferred option. Spotify is available in most countries and practically on every platform. It was also one of the first entrants in the play-on-demand business (Pandora doesn’t allow for this), which undoubtedly gave it a first-mover advantage in terms of total users. 

Unlike what smartphones have become today, music streaming is a luxury that not every person needs. Therefore, the total market size for paid-for music streaming is quite limited. Although Spotify + Rdio + Deezer + Rhapsody have much more room to grow their paying subscribers, that growth is slowing down. The best way for Beats to grow is either to convert existing iTunes users into paying subscribers (a challenge made even harder if that user is already paying for a competing service), or to steal market share away from Spotify/Rdio/Deezer/Rhapsody. The best way to steal market share would be to offer Beats at a lower monthly price ($7.99), which reports suggest Apple has tried to do and failed. The music industry doesn’t want to make the same mistake as it did with iTunes, which allowed Apple to become a monopoly on music sales. The more competition exists, the more bargaining power the music labels have over steaming services. Since it is unlikely Apple will convince the labels to a lower price tier, Apple must find a different way to grow the Beats brand into the next iTunes. Here are some strategies I would advise Apple to partake with Beats (preferably more than one):

#1 Take the hit

Just because the music labels won’t go lower than $9.99 doesn’t mean Apple can’t. There is always the option of taking the difference ($9.99 - $7.99 = $2) as an expense, thereby subsidizing users. It’s doubtful that existing users of Spotify/Rdio/etc will be enticed purely by the features of Beats, which might be less expansive (compared to the competition) when Apple’s redesign of Beats goes live. A user of Spotify myself, I’ve been extremely impressed with the latest updates to their apps (ample gesture support, song lyrics, and the overall design aesthetic), and I can’t imagine the first version of Beats to be as fully fleshed out. Although features themselves won’t entice users to switch to Beats, a slightly lower price of $7.99 surely will. Finally, it’s worth pointing out that most of the existing streaming services offer a 50% student discount, effectively making the monthly price $4.99. I use this discount, and I know many other friends who do the same. Beats doesn’t currently offer any student discount, but they will have to if they want to reach the price-conscious college age audience. 

#2 Exclusives

There is a new Kanye West album coming out later this year. What if Beats were able to snag it as an exclusive for the first month, thus having it before all of the other streaming services get it. That would be a very powerful value proposition, and one only Apple can negotiate. Of course Kanye wouldn’t be the only artist Beats would have exclusive rights to — they should negotiate similar exclusivity rights for as many artists as possible. If you knew that your favorite artists new album will only be available on Beats for the first month, you sure as hell would consider switching to Beats. It should be noted that these type of deals are expensive and difficult to negotiate, but Apple has money, and money talks. 

#3 Preinstalled with hardware

Apple has complete control over the hardware and software of its products. Just as the the music app is bundled with all devices, so should Beats. The Beats app should come preinstalled on the iPhone, iPad, Mac, and the Apple Watch. This will serve two main purposes. First, it will cement the brand name. Most people aren’t as familiar with Beats music streaming as the Beats headphones, mostly because the service has done very little promoting of itself. Coming preinstalled with Apple hardware would certainly fix that. 

Deriving from this first benefit of being preinstalled on hardware is the second benefit — increased usage of Beats. If more people are aware of the Beats music service, it is logical to assume more people will use it. Where these users come from doesn’t matter; it may be those uninitiated to any music streaming service, or those switching from Spotify/Rdio/etc. 

#4 First-party advantages

As the software chieftain of its products, Apple can use API’s not available to 3rd party streaming services. You don’t need to search too hard to find miffed developers complaining online about their apps not being able to using the same API’s Apple uses in its apps. These API’s are locked from 3rd parties for safety and privacy reasons, but they allow for many functions regular apps simply cannot do. It’s still not clear how Spotify will work with the Apple Watch, but I imagine the limitations will be plentiful. For one, the Apple Watch comes with 8GB of storage, but only 2GB are available for storing photo’s and music, with the remaining 6GB used to store the OS. Perhaps the Spotify app will be limited to offline storing of only 2GB of music on the Watch. Meanwhile, the Beats app will allow for more, since it will be graced with Apple’s first-party stamp of approval. This is all conjecture, of couse, but you can bet that Apple will use 1st-party API’s to allow for more features that 3rd party apps can only dream of. 

Précis

I have many more ideas for what Apple should do with Beats to make it overtake the other streaming services, but we can leave that novella for a later time. The four strategies I have listed above are the most vital to the success of Beats. So vital, in fact, that I don’t think Beats will succeed unless at least two of the four options will be chosen. Realistically, options 3 and 4 will be implemented by Apple, mostly because they come with no additional costs. I do not think, however, they will be enough to convince people to switch to Beats. To steal market share from the other music streaming services, options 1 and/or 2 should be chosen. They will likely cost an additional few hundred million per year, but I think those costs will be indemnified by the goodwill they generate, and the influx of new, paying users. 

For next week, we will continue our automotive industry discussion by comparing the unit sales of the major automotive manufactures.

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If you have anything to add, or just want to share your meandering thoughts about what we covered, please comment below! I’m also very active on Twitter, so don’t hesitate to @lsukernik me!

How is Spotify Growing so Rapidly?

As I'm working on a deeper financial analysis of Spotify, I started pondering how Spotify plans to grow and differentiate itself from the other music streaming services. Based on their latest actions, it appears they are partnering with complementors (which are services that increase the value of Spotify), developing good cross-platform apps, and aggressively pricing and marketing their service.

Partnering with Complementors

There is very little platform lock-in with music streaming services. Anyone can sign up for Beats Music, use it for a few months, and then switch to Spotify. While the playlists you make on one service don't transfer to the one you switch to, it's not an issue for most users. People just want to stream particular artists and songs on demand, which all of the streaming services easily provide. Spotify is well aware of this issue, so its been smart to partner with complementors like Facebook and Uber (in addition to many more). For example, the partnership with Facebook allows you to log into your Spotify account and easily find what all of your Facebook friends are listening to. With this feature, you're able to find curated music choices from the people who matter the most in your life.

In addition to Facebook, Spotify also partnered with Uber last week, further increasing their supply of complementors. This latest partnership allows you to play all of your songs while in an Uber car. The goal here is to further increase the value-add of Spotify, as compared to their competitors.

Spotify also makes available a third-party API that allows application developers to tap into the Spotify music collection. Apps like Djay use this API to add extra features on top of the already existing Spotify service. The effect is to further lock-in users, by providing them with more value. This, of course, comes at a lower cost to Spotify, since they don't have to develop these third-party applications - they only have to build the API.

Cross-Platform Apps

This strategy needs very little explanation. Spotify wants to reach as many users as possible, so it builds applications on as many platforms as it can. It has apps on all of the major platforms (iOS, Android, Windows Phone, Mac OS X, Windows), including the web. If somebody wants to try it, Spotify made sure its service will be available anywhere.

Aggressive Pricing and Marketing

The price for music streaming services is an established $9.99 per month on all the major services. Spotify also offers family and student plans, however. The family plan is $10/month for the first family member, and is discounted to $5/month for additional members. This isn't a novel feature, but not all of the music services offer a family discount. Again, Spotify wants to appeal to as many users as possible.

There is also a student plan that goes for 50% off, or $4.99/month. The aim here is presumably to indoctrinate students, who will eventually graduate and switch to the full price plan. Students are also much more likely to download their music illegally, and having them pay discounted rates is much better than having them pay nothing. Lastly, Spotify must know how vital word of mouth is for younger audiences, which essentially provides free marketing.

It's no wonder why Spotify has been growing faster than their competition - they've been engaging in beneficial partnerships, providing access to all the major platforms, and pricing themselves aggressively. This doesn't mean that they will succeed in the long term, though, it just means they're currently doing well. Perhaps Taylor Swift was foolish to pull her music off Spotify after all?

iTunes or Beats?

It's been roughly half a year since Apple purchased Beats, and apart from a few updates to the Beats app, not much has been done that is visible from the outside. To be fair, integrating a huge team into an even larger company with a unique way doing things isn't easy. Apple had to let go 200 of the 700 person team, likely because teams at Apple tend to be small. 

Recently, however, it's been reported that the Beats brand will be subsumed into the iTunes brand, presumably as the iTunes music streaming service. If Apple goes this route, I think they will be forfeiting a lot of goodwill from the Beats brand. 

iTunes is a dinosaur, and it is seen as such by many music listeners. At University, I know very few people who still use iTunes, instead opting for streaming services like Spotify, Pandora, and Rdio. iTunes has an ancient business model, requiring you to buy and own songs and albums individually. People have long been transitioning away from owning music to leasing it, and iTunes is associated with the old world. Rebranding the new Beats music streaming service as iTunes streaming, or something similar, will diminish the goodwill the Beats purchase brought. It must be difficult for Apple to let go of the product that started the whole music revolution, but every product has a definite life span and should at times be euthanized. 

When the Beats purchase was announced, I was looking forward to it being the new iTunes. I still think this would be the best strategy for Apple. Rebrand iTunes as Beats, and make the new service primarily a music streaming service, while also offering music purchases for those who want it. Although Beats headphones are looked down upon within the tech community, most consumers love them because they look great and are represented by Dr. Dre (who is not an actual doctor). Similarly, the music streaming service should be pitched as the cool streaming service - one that has ties to the music industry. Apple has many contacts in the music business, and striking deals with musicians and labels to promote their music on Beats would be a winning strategy. Of course, the music industry doesn't want to bow to Apple as it did with iTunes, but Apple has the leverage to negotiate favorable contracts (Apple had 800 million accounts registered in April, most of which have credit cards attached).

Apple probably did this cost benefit analysis, and it still decided to go with iTunes as the brand for all of its music products. They decided to keep the iTunes name because it's such an established brand, which everybody has heard of. But this is precisely why iTunes should be rebranded to Beats. People know about iTunes, but it's no longer the cool new product from Apple. The brand can stick around for another few years, but this is a long term play, and Beats is a name that can possess the cool factor for the next decade. 

Taylor Swift v. Spotify

Preface: In an effort to write more often, I will start posting shorter pieces that do not require as much research and forethought as my previous ones. Although I will certainly post longer, more intricate articles, quick reflections will be more common on this blog. If it makes you happy, I suppose you may call it a link-blog type of thing. 

There’s been a ruckus in the music industry these last few years, but its hit full stride this week. Taylor Swift first pulled her latest album, and then all of her music, from the most popular music streaming service in the U.S, Spotify. She doesn’t think Spotify pays enough to musicians. Nor is she convinced music streaming is the answer to declining CD and MP3 sales. Oddly enough, she left her music on other streaming services like Beats Music and Rdio. Now I’m not a Swift fan, so I could not care less, but this is a sign of a disruption waiting to happen in the music business. Here’s a quote I read in the stories today that is worth reposting:

Mozart didn’t sell one fucking copy. (Philip Kaplan on Medium)

Musicians get to do a job they love, which cannot be said for the majority of us. Some even go as far as to say that the music they create is overvalued, while the delivery system is undervalued. I’m not saying I fully agree with Dustin Curtis, but there is surely a grain of truth in that. It is hard to say if the delivery mechanism, Spotify, deserves to keep more royalties than the musician who created the music. I don’t know what the answer is, but I do know things will change. The music industry has been profiting salubriously from CD sales, and then iTunes, but it’s obvious the music streaming business will not be as much so. It can’t afford to. My guess is that musicians will eventually cut out the middleman (the music labels) and deal directly with the delivery mechanism (the streaming services), but that may be too far off in the future. And it’s foolish to think the labels will let artists get away with that so easily. Whatever happens, it is worth pointing out that consumers are getting unprecedented value from streaming services, and the consumer almost always wins.