What’s going on at Spotify?

In case you haven’t noticed, Spotify have been in the headlines a lot lately. So I’ve taken it upon myself to break down everything I know/can find about the company to make it slightly easier for us all understand!

If you have anymore information please mention in the comments, it’s what they’re there for. 🙂

 

“Well, let’s start with the big picture – the music industry is growing again,” (Ek, D. 2016)

Spotify will be 12 years old next year, what originally began as a small streaming company’s way to put an end to piracy problems in Sweden, has since become one of the most important music companies worldwide.

In the last 3-4 years, the company has significantly changed the way music is consumed and sold. The last two years (2016/17) have been their biggest years in growth and expansion so far. The company has been valued at over 8 billion in 2016 making it “Europe’s biggest tech listing since the market launch of German e-commerce investor Rocket Internet in 2014”  (Shanley Reuters, M. 2016).

The ownership of the business, the history of the company and the company’s use of technology and new media.

Since the late 1990s people have been getting their music for free, this is because of the creation of file sharing websites. (LimeWire Napster etc.) This essay will not be looking at the history of piracy as it is now a known controversy within the music industry. However, it is important to note that Piracy rates were significantly high in Sweden in the mid-2000s. Daniel Ek the founder of Spotify wanted to create a platform where music could have value again.
Streaming developed based on the idea of podcasting, “making it available to your iPod or other similar portable music device at a time suitable to you” (Harrison, A. 2014 p.188). It grew in popularity as it was the best legal option for people to get free music.

Streaming services “are now simply better than any hassle of an illegal download service and come without the risk, so people are willing to invest” (Peterson, H. 2016). Henrik Pontén of Legal Alliance explains “We see a trend reversal. Until now, we have seen a huge increase in file sharing, but we do not see anymore” (translated from Swedish)(Pontén, H. 2016).

The Recording Industry Association of America reported that in the USA the industry gained $7.7 billion with $3.9 billion earned from streaming alone. This is an increase of 11.4% since 2015 and has been “the industry’s highest sales figure since 2009 and its best percentage gain since 1998.” Not only this, streaming figures have jumped up 69% from 2015-2016 and had the majority sales in the USA. (Sisario, B. 2017)

The business plan of the company

Spotify gives its users access to their music libraries in 60 markets worldwide, users can use this on any device with an internet connection. Their profits largely depend on the licensing deals they have with the three major labels UMG, Warner and Sony Music. (Shanley Reuters, M. 2016)

Spotify operates under a freemium model, providing basic streaming services for free, paid for by adverts between songs. Spotify also offers a premium subscription, these customers can freely listen to the music without adverts and can download the music onto their devices, premium also provides better quality audio for the listener (Spotify, 2017).

The company’s goal is to eventually have only paying subscribers. They are achieving this by offering one month premium membership for free, student and family plan options to their lower tiered subscribers. The family plan option was brought in as they had lost customers to Apple Music and Google Play who already provided a family plan. (Dillet, R. 2016)

A company that markets free access to their product is a good marketing strategy. It provides the opportunity for customers to try the product first hand without paying (Wanetick, D. 2015). Spotify provide free trials of their premium tier for one month to non-paying customers to display the benefits of paying 9.99 a month. The freemium model does work well in this sense, as once the customer is signed up to Spotify they generally will stay with the company and with Spotify advertising and showing the benefits of premium a large majority of these customers will chose the higher tier.

 

Legal and copyright issues relevant to the company

There is difficulty to find a balance with a model that works financially with the consumer and the copyright owner. Taylor Swift removed her music from Spotify as she does not think that music should be free. She argues that there has to be a value put on music again and streaming and piracy have devalued music significantly (Linchi, J. 2014). The major labels and some artists contend that only premium customers should have access to the music as the royalties are much higher for the artists and labels from the subscribers on this tier.

Spotify says that profits and royalties are split, paying 60% to master owner, 10% to publishing owners, 30% for themselves. Therefore, payment depends on who owns the songwriting royalties and who owns the master recording. Essentially putting the blame on publishers and labels for taking a large portion of the artist’s royalties. Spotify distributes roughly 70% of all the revenue back to the rights holders. This means the labels, publishers, distributors and artists (Spotify).

In 2015 the US monthly minimum wage was $1,260. A signed artist on Spotify will need 1,117,021 streams to earn minimum wage, however an unsigned artist needs only 180,000 streams to achieve this wage (Dredge, S. 2015). This was created in 2015, it should be noted that these figures are said to have shrunk a little since, with insiders suggesting that a pay per-stream estimate is now closer to $0.005 (Jones, R. 2017).

Why are they so successful?

“I’m not saying we don’t think about the competition – of course we do, it would be crazy not to. But we think about them more in terms of how to make Spotify so easy, so fun, and so relevant for our users that whether you wait on lines for every new Apple device, get your groceries from Amazon Prime, or use every Google mail and workplace app, you still want to listen to music on Spotify because it’s the best experience there is.” (Ed, D. 2016)

Spotify has the largest amount of subscribers out all the streaming companies.
They were the pioneering music streaming company and they put a large amount of work into building a brand that is remembered as the app where you get your music from.

Spotify playlists are not just popular features on the app Spotify have created a unique opportunity to choose what people are listening. PR companies and labels are pitching for a spot on official Spotify playlists.
Playlists are chosen by staff who’s primary focus is to create playlists for every situation possible. A band can be broken in an hour if they are put on the right playlist. Usually a new band would be put on a smaller playlist, if they pass skip rate test they will generally be filtered upwards to a larger playlist. The skip rate is a tool that measures when/ if listeners skip a song after a certain amount of time, if this happens frequently the song will be taken off the playlist.
Playlisting has created an interesting phenomenon in that a single song is more important than the album. Pop artists in particular tend to be releasing a large number of songs rather than a put together album.

The management and staffing structure

The first music player was launched in 2008. Since then Spotify has a team of over 1600 people in 19 offices over 19 cities. (Spotify, 2017) The company works using a squad approach, which is the idea of splitting the company into autonomous squads often used in tech companies. These squads are self-organising teams that cross function between each other. Each squad has a specific mission, for example; to make Spotify the best streaming service for customers and then this is broken down into short term goals which will change every quarter. There are no executive decisions made each squad has its own responsibility for their product (Kniberg, H. 2014).

Spotify itself is designed like a web browser rather than an app. This means that squads can release the products they have been building when they want to without interfering with the app. To ensure this runs smoothly new releases (updates) happen at set times (once a week or once every 3 weeks) so when a product is ready to be released they are added to the ‘release train’ (Kniberg, H. 2014).

 

How the company is positioned in relation to current developments in the industry

The majority of current developments in the music industry are directly affected by Spotify. Most recently Universal Music Group have been the first major label to sign a new multi-year global licensing deal with Spotify. It is said that similar licensing deals will be set up very soon with Sony Music Group and Warner Music group (Singleton, M. 2017). This new licensing deal agrees to lower the revenue share of Spotify pay-outs. According to The New York Times 3 people who had been briefed on these new deals explained how this new deal means that Universals rates drop to 52% from 55% (Sisario, B. 2017).  In return all artists signed to UMG can choose if they want to premier their albums for two weeks on Spotify premium before they are released worldwide. This means paying subscribers will get to listen exclusively to new music. UMG have been trying to negotiate this deal with Spotify for some time as it means a higher royalty rate for their artists. This new licensing deal is said to be a major step forward for Spotify to attempt an IPO, Spotify needs to lower its revenue share (Jones, R. 2017).

Merlin the global digital rights agency soon followed on the 20th of April this year to renegotiate their multi-year licensing deal with Spotify. They have also won the right to window their artists. The labels represented by Merlin include Domino, Beggars Group, Entertainment One (Music Business Worldwide, 2017).

Spotify plans to go public in 2018, although some sources say it could be as early as September 2017. The company is valued at $8.5 billion and are reported to be planning to list their shares directly, “without raising any new capital” (Beurkle, T. 2017).

Though Spotify is losing money, the need for large amounts of cash is becoming less urgent. The new licensing deal with Universal Music would lower Spotify’s large revenue share and thus will bring profits up (Beurkle, T. 2017).
The first company to invest in Spotify was Northzone in 2008. Their other investors include Creandum, DST Global and Accel Partners. Northzone is said to be the “second-biggest shareholder after the founders”. Since the speculation that Spotify would be going public is has been said that Spotify is a possible “acquisition target” for tech giants Facebook or Google. (M, Shanley, Reuters. 2016)

The company’s competitors

There is an increasing number of music streaming services that are trying to knock Spotify off the top spot. These include Google Play, Apple Music, Deezer, Tidal and Amazon Music. None of which have gained half the amount of users that Spotify has.

Apple Music, is following quite closely if you take into consideration that they only launched in 2015. With this they have a larger music archive of roughly 40 million songs to Spotifys 30 million (Digital Trends, 2017).
The new licensing deal with UMG puts Spotify in the forefront as they have lowered their revenue shares something Apple hasn’t been able to do. (yet?)

In 2016 streaming went exclusive.  Both Apple Music and Tidal tried to take Spotifys users and bring them onto their services. They did this by hosting exclusive releases on their own platforms. These exclusives, helped Apple and Tidal generate millions of new customers,which created more competition for Spotify. Universal banned all of their artists to sign exclusivity deals with any streaming company and Spotify responded by explaining how “We think exclusives are bad for artists and bad for fans”. Tidal also streams with a higher quality sound that the basic Spotify membership but is twice the price. The company is not growing in the same way as Spotify and is said to have 1 million paying subscribers however this figure has not been confirmed. Tidal do have  a larger artist backing, since the royalty rate is higher. They also premier some very large exclusives as it is owned by Jay-Z s Beyonce’s Lemonade for example.

Amazon have released Alexa, Although Alexa is compatible with Spotify they offer this bundled with Amazon Music for $3.99 a month. More than half the price of Spotify, not only this but the UX for Amazon Music means that you can ask Alexa to play “the song that includes the lyrics xxx” and it is designed that it should play this song. Making the listeners experience easier and more enjoyable.

Although now that Spotify have renewed their licensing deal with UMG and Merlin it puts them back into power even if exclusivity and windowing was something they never wanted.

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3 Comments

    1. If an artist is signed to a label the majority of these royalties will go to the label first then to the publisher and then to the artist. Because they need to be paid too! If someone is unsigned they have fewer people to pay so in order to make this money fewer streams are needed.

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