Under the influence of my group of friends, I joined and started using Spotify in 2016 as a ‘standard’ user. Everyone became ‘premium’ users within weeks and enjoyed ad-free music, offline playlists, weekly playlist suggestions and more perks that only paid-subscribers are entitled to.
Soon enough, my fear of missing out on these additional features made me click on the ‘subscribe’ button and from then on, the ways in which I normally consume and share music on a daily basis have altered in many ways.
As a big fan of classical and contemporary music as well as being a loyal user of Spotify, I could not help but decide to choose Spotify as the online platform to provide an in-depth critical analysis on for the purpose of this essay.
In this essay, I will provide evidence and discuss the important role that the online platform has played in revolutionising users’ internet and music consumption in the past decade. I will analyse the transformative effects that it has had in our economic, political, social and cultural spheres on a larger scale and prove that despite controversies of it being labelled as a disruptive platform, Spotify has in fact revived the music industry, allowing artists and companies to ‘capture value lost to piracy’.
What is Spotify?
Spotify is a music streaming service originally developed in 2006 in Sweden and launched in 2008. Since its launch, Spotify has been recognised for its ability to enable millions of consumers to ‘find the right music for every moment’ and listen via their mobile devices or desktop.
It utilizes a so-called freemium model to capture value from the consumer side of the two-sided platform; Whilst consumers can pay for the premium version for $9.99 per month and have full, online and offline on-demand access to the library with no interruptions, they can also choose to subscribe to the free version where they have limited access to playlists when their devices are disconnected to the internet and also have advertisements in between every 5-6 tracks.
It is also an important platform that aims to help independent and start-up artists to share their work worldwide, as one of Spotify’s mission is to ‘unlock the potential of human creativity by giving a million creative artists the opportunity to live off their art’.
Whilst the majority of artists praised the service for its ability to deliver a legal alternative to piracy, other artists such as Taylor Swift and The Black Keys claimed that it has cannibalized their album sales (Swanson, 2013). Thus, the economics behind the pay-per-play model remains to be complex and unclear as musicians, songwriters and artists continuously question its profitability.
10 years of Spotify
In the past decade, Spotify has uncontestably played a significant role in the digitization of music with the introduction of the streaming model that it encompasses.
Therefore, it is rather important to take a brief look at the major technological advancements in relation to the history of music digitalisation in order to situate and fully understand the transformative effects that Spotify has made within the industry.
- 1983 – Introduction of compact disc enabled music to be stored digitally.
- Early 1990’s – MP3 allowed music to become portable as files could be sent via email and downloaded,
- 1999 – Napster – the first large-scale peer to peer service was introduced, allowing people to access any music of their choice for free. It was soon shut down for copyright infringement. However, the impacts of Napster can still be felt as consumers upheld high expectations of the availability and affordability of music since then.
- 2001 – Apple launched the first generation iPod in which allowed users to access their music tracks in a convenient, stylish and relatively inexpensive way.
- 2005 – Pandora was launched as an Internet radio station. It enabled a customizable radio experience as each user’s station would play music that are similar to their initial selection.
- Between 2007 and 2010 – Various on-demand music subscription services were introduced, including Spotify, Rdio, MOG and more.
These new services, Spotify in particular solved a big problem; It not only enabled users access to files on different platforms via the cloud music storage rather than having to store them onto their hard drives, but also granted users free and legal access to millions of music tracks as a response to the growing piracy problem that the industry was facing.
To boost the popularity of the platform, Spotify was originally a free invitation-only service whereby users would have to each send 5 invites to their friends at first. It also had a paid service as well which was not so popular amongst its consumers initially.
10 years from the launch of Spotify, it now has over 150 million active users and over 50 million subscribers who pay $10 a month for premium features. Chief Executive and Co-Founder Daniel Ek says they will continue to improve the world, ‘one song at a time’.
How did Spotify survive without profiting?
With the initial objective of disrupting the music industry, two Swedish entrepreneurs Daniel Ek and Martin Lorentzon came up with the idea of a free, ad-based model and hence founded Spotify in 2006.
However, despite of it being undoubtedly the driving force of a turnaround in the music industry, Spotify has surprisingly not profited since its launch primarily due to the large licensing payments to record labels and has in fact relied heavily on the partnership deals with Warner, Universal and Sony.
As aforementioned, Spotify operates a freemium model whereby the advertisements in between music tracks that subscribers get when they subscribe for free are part of the Spotify revenue model.
Whilst advertising only makes up for 10 per cent of sales, Spotify has continuously sought out for new opportunities as alternative sources of revenues, such as offering sponsored playlists, utilizing big data and cloud servers and more (Belk, 2013).
The following video offers a detailed explanation as to how the unique business model has saved Spotify in the past decade.
Video from https://www.youtube.com/watch?v=F9sbMVkdCcY explaining the business model that has made Spotify survive even without making any profits. All rights reserved.
Spotify: 1, Other competitors: 0
With its first-mover advantages, Swanson describes Spotify as the ‘fastest growing music streaming service in the world’ and is labelled as one of the pioneers of digital streaming (2013). An annual report by the International Federation of the Phonographic Industry (IFPI) revealed that the music streaming market grew by 60.4 per cent in 2016, in which Spotify has control over 44 per cent of the subscribers.
Spotify would not have succeeded and survived until today if it wasn’t for the support of record labels like Universal Music, Sony Entertainment and Warner Music Group. Spotify presented itself as a partner who could ‘help the industry recover’ and has negotiated deals with these large companies in order to allow streaming of a vast range of music on its platform.
Other partnerships that Spotify has leveraged on in order to achieve growth and compete against its rivals not only include the artists themselves, but also with companies like Uber, Coca-Cola, Starbucks and more.
The most notable example would be its partnership with Facebook, whereby the design of the partnership offered mutual benefits for both parties – Spotify offered its shareable streaming music content in return for Facebook’s main asset which is its users.
On another note, Spotify has also faced competition from major online music services such as iTunes, Pandora, and Tidal, and given the evolving nature of the industry, there will no doubt be other competitors expected in the near future.
The structure of its business and position within its social ecology can be seen in the diagram below:
So did Spotify transform our lives in a good or bad way?
Altering consumers’ ways of listening to music
Daniel Ek claimed that Spotify’s success depended on the recognition of the evolving consumer behaviours as he states, ‘fans wanted all the world’s music for free, immediately. So all we did was build a better experience’. The interactive streaming service allows consumers to search and choose which song to play, hence resulting in consumers to become more accustomed to being able to access music anywhere and anytime they wish to at an affordable rate, or even for free.
Furthermore, the algorithm in which Spotify operates within greatly influences the types of music that the consumers listen to through methods such as machine learning and collaborative filtering.
Through such means, Spotify creates ‘weekly discover playlists’ for each user to explore and find new artists and songs to listen to. This feature of unparalleled accessibility has led to a rise in consumers’ demand for new and different music.
Artists and record labels adopting new business models
Spotify was arguably one of the many factors that led to the decline in CD sales in which raised many questions in relation to the profitability and suitability of the service being the future of music distribution.
In response, many record labels have now altered their approach as they now adopt a model where they would release an album for sale on CD and iTunes, but would not make it available to free streaming services like Spotify until after initial sales have peaked a month or so later (Cubbison, 2014).
On the other hand, independent artists claim that despite the many opportunities and revenue streams that the platform offers, it is impossible for them to make a living from streaming and a freemium model of music distribution. They reveal that each click is only worth a fraction of a penny which is then divided among Spotify, record labels, and then finally the artists and songwriters involved.
But in spite of the negative perceptions that artists and labels uphold in relation to the platform, Spotify does essentially give independent artists the opportunity to reach out to new fans in different countries, experiment with novel marketing methods and enables record labels to showcase their artists all in one platform.
Monetization of the music industry
Sisario notes that after a 15-year decline, revenues from recorded music began to improve sharply around 2015 alongside the introduction of Spotify and other streaming services.
Not only has Spotify revived the music industry in the midst of piracy issues, its business model has also transformed the ways in which music tracks are paid for and commodified; rather than paying for a physical copy like a CD or a download, the success of a track is now calculated by the number of clicks it receives on the platform.
Wallach reveals that part of the reason why an artist seems to make a lot less on the platform is due to the fact that interactive service payments continue to occur over the lifetime of an artist. Rather than receiving a one-time payment via a purchase of a CD for example, the artist will continue to receive a small percentage of payment every time one of their tracks are being played.
Although it is an unconventional way of thinking and requires a long-term investment from independent artists, the economics of Spotify evidently conforms in a similar way to the economics that have always existed in the music business.
Value of consumer data
The success of Spotify gave light to the important role that consumer data analytics plays in today’s world filled with big data and cloud services.
The access and utilisation of consumer behaviours such as the length, repetition, genre, device and other factors that are involved in music listening could potentially hold interesting patterns and information for related companies like record labels and other partnering businesses (Hoven, 2015).
The following video unveils the ways in which user data is utilised by Spotify.
It is clear that Spotify has made transformative impacts in economic, political social and cultural terms. It has not only protected consumers from issues such as piracy and influenced the ways in which we purchase and listen to music in our daily lives, Spotify has also changed the ways in which independent artists and record labels distribute their work across the globe. Not only did Spotify revive the music industry in the past decade, the innovative streaming model that it encompasses will continue to help the industry thrive the future.
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