Spotify Business Model

The emergence of Music Streaming

The history of music streaming started in the 1990s with the digitisation of audio among which MP3 emerged as the most successful format. The earliest form of streaming was internet radio (from 1993) at low levels of penetration.

In 1999 Napster emerged leading to widespread music “sharing” circumventing copyrights and royalties of rights holders. At a time when piracy became a widespread problem for labels. Steve Jobs capitalised on the malaise of the labels with his iTunes Store (from about 2001) allowing the download of titles to the iPod for $0.99 (of which 30% went to Apple).

And while the iTunes store was the beginning of widespread digital access (via download) to music, it was not the same as streaming in terms of the technical infrastructure or the business model. iTunes was based on a transaction-based business model giving people access to music that they bought (via download to their device).

Music streaming as we denote it today started from the mid-2000s with mobile internet access reaching more people. Therefore 3 key underlying technologies were: (1) digitisation of music, (2) mobile devices that could play the music equipped with (3) broadband internet access for an increasing amount of the population.

Two of the early music streaming platforms were Pandora (2005) after pivoting to streaming and Spotify (2006).

Pandora’s value proposition was different in that they were a personalised “radio” streaming provider. Users could select artists they like and the algorithm would stream similar songs. But it did not give as much control as Spotify (who allowed selecting and listening to any song that was in the library).

In addition, Pandora did not have an ad-based Freemium layer. Spotify until today believes in the power of combining Freemium & Premium and that despite the financials of the ad-layer showing only slim margins. Spotify did not have to wait long for more competition to emerge. With Apple Music, YouTube Music and Amazon Music we have representatives from the largest digital tech players vying for subscribers with partly similar and partly different propositions.

As Spotify and the other streaming providers emerged, CD sales and transaction-based music downloads went down as seen in the chart.

CD sales were declining from the early 2000s due to the ability for people to be able to digitise their music and share it online and offline. iTunes, Spotify and the others present themselves as the legitimate successors of digital music and those that are breaking down barriers for artists to live from their creative work.

The chart indicates that music industry revenues were in a precipitous decline from 2000- 2014 and have started growing since the current streaming business model emerged. The 1999 revenues were reached only in 2022 (it would look worse when adjusted for inflation). Streaming is the largest current format. But with $68b it is still a long way behind the all-time revenues generated by CD $367b, Vinyl $128b and Cassette $122b but ahead of MP3-enabled downloads at $36b.

The rebound can certainly be credited to the fact that users prefer the convenient access to an almost limitless library at modest prices over sourcing their music through other ways (including not so legal, cheaper but far less convenient ways). Streaming combined with the business model of bundling in a single subscription price can certainly take a lion’s share of the credit for this.

Spotify Business Model overview

Spotify is based on a Platform Business Model in the vertical of Content & Media Digital Businesses with a focus on audio content streaming.

This prominently includes music but in recent years they have also made strides into podcasts, audiobooks as well as new “other forms of alternative and spoken word content”.

Their content assets include access to:

100 million music tracks
5 million podcast titles
350,000 audiobooks

These are mostly licensed assets (i.e. not owned by Spotify). Compare Netflix who own approximately 80% of the yearly new titles.

⇒ Spotify is NOT the Netflix of music

There are very fundamental differences between Netflix and Spotify in terms of business model. From a business model perspective these two companies are very, very different.

Platform Business Model / Two-sided Marketplace

Spotify is based on the Platform Business Model.

It is two-sided with creators on the supply side and users/consumers on the demand side.

Spotify calls their platform a two-sided marketplace. From a creator perspective, however, it is not a free marketplace where the supply side can set their own pricing.

By and large it is a revenue pool from which the creator side gets paid based on their streamshare (with many complicating variables factored in). Large labels have individual agreements that have additional terms that almost certainly are somewhat more beneficial than independents.

Spotify, Apple Music and YouTube Music have evolved from the Apple iTunes Music Store where titles were purchased in title/album-based transactions. In those early days the platform resembled more of a marketplace character (even though Apple’s Steve Jobs had also strongly controlled major aspects of it including - crucially - pricing aspects).

The new model is that of unlimited access to music titles for a single monthly access payment. Spotify can take major credit for popularising this model within music streaming.

For customers this makes for a cohesive set of value propositions.

Whereas for artists, the new model is far more complex in terms of being paid from a revenue pool as well as - to some extent - being dependent on Spotify’s recommender algos and other aspects.