Spotify's Clout

By Spencer Ritchie from Berklee’s Music Business Journal, thembj.org.

In the last four months three new streaming platforms were launched: Apple Music, Tidal, and Google Play Music. Others, among them YouTube, Deezer, and Rdio, still compete for market share. The Freemium camp, with Spotify, Google Play Music, and Pandora, collects revenue from advertising & subscriptions. The Premium camp, with Apple Music and Tidal, produces receipts exclusively from paid memberships. Spotify is the very embodiment of Freemium, and the release of Apple Music will undoubtedly be a big challenge—coming, as it does, from the largest company in the world, with a remarkable market cap of more than $700 billion.

Thus, if Spotify is to remain an industry leader, it must continue to innovate, excite and connect with users better. Its strength lies in free streaming, content based marketing, sponsored sessions, and video takeovers. Social media integration will have to be at least as good as Apple Music and iTunes, while its discovery and recommendation feature must grow to the level of their own outstanding user-to-user curated content. But Spotify will also need to more authentically replicate the experience of owning a physical music collection rather than merely treating its music as accompaniment to its users’ daily activities.

Finances and Potential

The bar has become higher. Having recently raised over $500 million in venture funding, Spotify is currently worth $8.5 billion and is one of the most valuable European startups. There seems to be no trepidation among its investors, who are voting with their pockets, presumably on the belief that the company will continue to expand its subscriber base. It already boasts fifty five million free users and twenty million paid users and, in anticipation of Apple Music’s launch, it has introduced new features, including video, more playlist curation, and better user-targeted ads. 10 per cent of Spotify’s revenues come from ads and 90 per cent is from subscriptions, and the majority of its users do not pay for the service. This should differentiate it from Apple because, except for the free trial period of three months, Apple will eschew Freemium altogether. Spotify investors feel they can chip away too at the much larger terrestrial radio market. Terrestrial radio’s business model has depended on advertisements to sponsor music, news, and talk since its inception, almost a century ago. It may now afford Spotify a tremendous opportunity, i.e. a slice of the pie of the $46 billion it generates in revenue per year, which is substantially more than the current $3.3 billion that music streaming brings.

There have been other developments too. In May, Spotify released its Running App. The app monitors a user’s running pace and musical tastes, and provides a personalized soundtrack that matches the beats per minute of the exercise to a song. This application is only one of Spotify’s latest moves to target music and brand communication to consumers based on activities other than just listening to music. The service claims that reaching out to users as they commute, workout, work, and relax over the weekend, keeps their base engaged over more than 148 minutes a day across all desktop and mobile interfaces. If confirmed, this statistic would more than double user time spent on music in the pre-web era of the early to late ‘nineties.

Spotify also appears to do well with advertising. It segments markets, identifies users as birds of the same feather, and its ads are less intrusive than similar online radio ads and Pandora. Video takeovers, sponsored sessions and market to user interactions are also gentler on the user experience, while the recent introduction of playlist targeting has given brands the opportunity to pinpoint and design their messages based on the moods and activities self-identified by its users in more than a billion and a half playlists. In fact, Spotify founder and CEO Daniel Ek has emphasized that the future of Spotify lies in content based marketing.

Apple Music

For Spotify, Apple Music will now be the big elephant in the room. Upon installation of IOS 8.4 and/or the latest version of iTunes, Apple users automatically shift to Apple Music. A library of over thirty million tracks is seamlessly integrated into their iTunes library with a comprehensive music interface that enables curated playlists and access to Beats One radio. Yet, as mentioned above, Spotify investors have not been cowed by this event, and may even believe that Apple’s only truly competitive advantages is coming pre-installed on mobile and desktop devices of their making.

An area of concern may be the increased payment of Apple to content holders that Spotify may not currently match. Out of every subscription dollar made, come September Apple will pay on average 73 cents to record labels and their publishers (for use of their master recordings and the requisite mechanicals and sound recording performance rights in Europe). This is 3 cents more than Spotify and will no doubt please everyone down the supply line of recorded music, especially talent. In the PR war with artists, Apple is right now doing better than Spotify who is unlikely to relax its payment terms when it is in the red: last year, it again failed to break even and sustained losses of about $200 million. Apple, of course, is less exposed to recorded music than Spotify. According to analysts, Apple Music’s revenue has been estimated to amount to less than one percent of Apple’s gross revenue in 2016, so recorded music might well become Apple’s loss leader for its iPhone sales and other devices.

Still, economics aside, Apple will have to prove itself with Apple Music. Right now, Spotify has the advantage in user created content. As mentioned, it runs over 1.5 billion playlists, some of them professionally curated. And marketers, for instance, salivate at the knowledge that there are currently nearly half a million playlists containing the word ‘barbeque’.

However, to remain atop the streaming world, Spotify will have to leverage this user created content into a stronger recommendation engine. Early downloads of Apple Music suggest Apple is doing well here. Still, cannibalizing Spotify users by Apple cannot be seamless for, upon switching away from Spotify, those users will automatically lose their playlists (speaking well for Apple, though, is the fact that the large number of Apple users with playlists on iTunes account can add tracks from the streaming platform to their already existent playlists as if they were paid iTunes downloads).

Dreaming On

An element currently lacking in the world of music streaming that Spotify could capitalize on is providing a more comprehensive streaming platform for the music lover, not just the casual fan. The music itself could be put on a higher pedestal without detracting from Spotify’s focus on lifestyle. Ideally, this would also encompass the supply of audio accessories such as the album artwork, track credits, lyrics, album booklets, behind the scenes access, and other illustrations of the process of creation. Companies like PledgeMusic, with a specialized focus on artists’ so-called ‘megafans’ are making their mark already. Apple Music itself seems to acknowledge that the connection between the user and the artist is paramount; its new service, Connect, seems intent on paving a better user-artist highway. Spotify, on the other hand, continues to improve the user-to-user platform.

But it would be hard to downplay Spotify’s current focus. The intersection between music and social media, for instance, is critical in business today. Spotify currently offers a far more social way to stream music than Apple does. Users have the ability to collaborate on playlists across Spotify’s interface, but not in Apple Music. Additionally, following friends, musicians and tastemakers on Spotify is far easier. Spotify users can easily see what one another listen to, either through Spotify itself or Facebook and other social media websites. The only truly social aspect of Apple Music is its Connect feature, which (currently) weakly connects artists to fans. Following one’s favorite artists on Facebook and Twitter is still more productive. There is no user-to-user social network in Apple Music.

So, in spite of all the noise about Apple Music, it is not unreasonable to expect an uptake in Spotify usage at the end of Apple’s free trial period. Apple may not care much for the economic success of music subscriptions per se, but its presence, as a reliable seller, will surely consolidate the market for the bulk buying of recorded music. It may inadvertently stoke demand as well for Spotify, its famous Freemium rival. This would definitely move purchases away from the single song system born with iTunes. Spotify, of course, will need to convert free users into paying subscribers at a higher rate than it is doing now. But for artists and their labels, big and small, these should be welcome developments.

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Sources

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Spotify's Clout