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1 SPOTIFY: FACE THE MUSIC SPOTIFY: FACE THE MUSIC BMB 515: Berklee Online Music Business Structure and Strategies Dr. Chandler Coyle

2 SPOTIFY: FACE THE MUSIC Abstract Technology has completely revolutionized the production, distribution, and consumption of music. It has made it easier for musicians to produce, compose, record, and collaborate music with other artists and reach global audiences. Advancements in technologies have also paved the way for digital music services. Digital music has been around since the end of the 20th century. Even before Napster’s downfall in 2000, online music existed in the music industry. However, the launch of Spotify in 2008 has made it clear that streaming would be the future of digital music. Not long after Pandora and Spotify’s success, other companies such as Amazon, TIDAL, and Apple Music entered the streaming market to provide global audiences with a more convenient and affordable way to enjoy music. Regardless of the growing competition, Spotify continued to be one of the most popular and leading music streaming services in the global streaming market. However, as successful as Spotify is, the company has faced financial challenges throughout its business life cycle. This paper will center on how Spotify remains successful despite the continuous growth of new competition entering the music streaming industry. It will also go into detail regarding issues arising from the company’s business model and touch on the future of Spotify.

3 SPOTIFY: FACE THE MUSIC Spotify: Face The Music Music streaming services have transformed all aspects of the music business. According to the RIAA, streaming accounts for over 80% of total music revenues in 2021 (Wilson, 2022). As physical sales and digital downloads slowly decrease, streaming is now the dominant form of music distribution and consumption. Music streaming services like Spotify have made it much easier for individuals to access music. The platform helps artists reach a wider audience range and allows individuals worldwide to enjoy millions of music, podcasts, and audiobooks. Today, Spotify is considered one of the biggest music streaming platforms, with more than 500 million active users in over 180 markets worldwide (Spotify, 2024). Nevertheless, despite rising user growth, Spotify has yet to be able to post a yearly profit throughout its business cycle. To have a better understanding of how Spotify continues to be the leading music streaming service in the global market even after struggling to make a profit, in this paper, our team will discuss why Spotify is successful and what features they have that make it have a competitive advantage against other competitors. Furthermore, we dive into why Spotify has not been able to generate a profit and the importance of music labels in the music industry. Lastly, we will discuss the future of Spotify and the various opportunities to help the company maintain its position and power in the music streaming industry. Spotify’s Success and Competition Changing The Streaming Game Before Spotify, two of the most popular ways to digitally listen to music included Pandora and iTunes . While these two were well-known and flourishing amongst the public, they had limitations. Pandora did not allow you to pick which songs you wanted to listen to and instead made customized radio stations. iTunes (before it became Apple Music ) required users to

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4 SPOTIFY: FACE THE MUSIC purchase songs and albums individually (Alonso, 2023). One of the many reasons why Spotify has been so successful is because it is an app that offers the same service as illegal music-sharing sites like Napster, but legally. Daniel Ek and Martin Lorentzon built Spotify with the intention of making it feel as if listeners had all the world’s music at their fingertips. The Platform On its "About" page, Spotify immediately self-describes as a platform that has "revolutionized music listening forever" (Spotify, n.d.). In the digital business industry, a platform is defined as a product or service that enables other products and services (Gartner Glossary, n.d.). Spotify serves as a place for artists to share music and for listeners to discover and consume audio content (music, audiobooks, and podcasts). It provides the underlying structure for audio to be uploaded, searched, and enjoyed but does not play a role in creating most of its content. As of spring 2023, Spotify had over 517 million active users listening to content on the site across 184 markets, with a concentration in the European Union and North America (Sukhanova, 2023). To upload music to Spotify, one needs to work with a distributor, who then has the ability to submit the songs to be streamed on the platform (Peleg, 2023). However, as of 2022, there were over 8 million artists that had uploaded to Spotify, but over 2/3rd had released less than ten tracks, and 80% had less than ten monthly listeners (Ingham, 2022), raising questions about how much the platform does or does not moderate which content qualifies for publication. Special Features & Advantages Spotify is famous for its convenience and accessibility when streaming music on the go. Their two rules are that you can access any song you want to listen to at a given moment and

5 SPOTIFY: FACE THE MUSIC legally do so (Alonso, 2023). Spotify is different from other streaming services like Amazon Music and Apple Music because it offers a free service with advertisements and a premium service. Competitors run solely on a premium service and rely on their users to pay each month, while Spotify has a free and paid subscription tier. This is important to users who prefer not to pay a monthly fee and listen to ads instead. Other features that Spotify offers include “Made For You” playlists, car mode, sleep timers, and so much more (Mehrotra, 2023). Some of these features can and have been mimicked by other streaming apps. For example, at the end of every year, Spotify takes the data from its listeners to make “Spotify Wrapped.” The premise of this feature is to showcase which artists, genres, and songs you have listened to the most throughout the year. Apple Music has a similar feature called “Apple Replay,” but many users have said that Spotify’s model is more interactive because it includes information and graphics related to factors like personality and location (Isenberg, 2023). These are just a few of the unique features Spotify utilizes as it constantly makes changes and updates to the app in hopes of expanding its huge following and competing with other music streaming programs. Spotify Wrapped 2023 featured its own version of tarot cards to describe common personality types associated with listening habits.

6 SPOTIFY: FACE THE MUSIC Is Digital Streaming Becoming a Commodity? Music's history as a commodity - or something to be purchased for a price - has a complicated history over time, as formats changed from physical products to be held and collected to digital files that could be pirated or streamed on a platform such as Spotify. As the music format changed, so did the price associated with each song, leading to today's situation where artists typically get fractions of a penny per stream, leading some to argue that streaming has turned music into a "disposable commodity" (Krohn-Grimberghe, 2020). Others argue that the commodity offered by Spotify is not the digital music itself, but rather the subscription costs that one pays, meaning access to the platform itself is a commodity, but the songs are not (Fleisher, 2017). Across digital music, streaming platforms are not defined by what music is available on them but more by the cost of their subscriptions and their associated features. Winner-Take-All Industry Since streaming platforms have widely the same access to music catalogs, differentiation of user experiences and costs will keep streaming music from becoming a winner-take-all industry. As culture and music taste become more niche-driven, it can be expected that different types of audio consumers will be attracted to different user experiences and features on different platforms. As communication and community features on apps are improved, who is on the app with you will matter more, driving continued competition across streaming platforms.

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7 SPOTIFY: FACE THE MUSIC Spotify’s Business Model Profitability Despite Spotify’s popularity and dominance in the music streaming industry, the company has struggled to generate profit. Spotify operates on two distinctive business models – freemium and premium. The freemium model allows users to access a limited number of songs at no cost with the support of ads. Users who do not wish to be interrupted by commercials can pay a monthly fee to become premium subscribers. While Spotify generates revenue for its free services by delivering advertising impressions, 90% of its revenue derives from the premium subscription fees. Unlike the basic service, the premium subscription allows listeners to stream high-quality music and podcasts– online and offline – without interruptions. The company offers its users four premium subscription plans – individual, duo, family, and student – with different

8 SPOTIFY: FACE THE MUSIC prices to accommodate different listeners. Although Spotify generates revenue primarily from subscriptions, the company has not been able to create any profit when compared to its expenses. As shown above, since 2014, Spotify has not generated a profit until 2021. Even so, the company has faced a tremendous operating loss in 2022 (Vroom, Boquet & Deshmane, 2021, p.10; Spotify Technology S.A., 2022). The issue solely arises from the significant growth in sales & marketing expenses for advertising costs and the increase in free users. The purpose of the ad-support service is to convert free users to paying users to generate higher revenue and profit. While the model successfully entices free users to become premium subscribers with additional features, more than half of the active users are using the ad-supported service with limited features. Regardless of the fact that the number of Spotify’s free users surpassed its premium subscribers, the premium service is much more profitable than the ad-supported service as it generates almost nine times more revenue than free users from 2014 to 2022. Unlike premium revenues that earn revenue from a monthly fixed cost – with the consideration of royalty payments to record labels, music publishers, and other copyrighted owners in order of the stream content -the advertising revenue depends on the number of times individuals have been in contact with the commercials on Spotify. In other words, even if the free users are growing faster than paid subscribers, the premium service is still more profitable. Conversion The low revenue generated from the freemium model, high expenses incurred, and the rise of intense competition in the music streaming industry all contribute to profitability challenges. While Spotify’s primary goal of the free service is to entice new users and push more free users towards its premium service with incentives for additional features and unlimited music, it has been a challenge. Many free users may not want to switch to Premium services

9 SPOTIFY: FACE THE MUSIC because they must pay a subscription fee to listen to songs – online and offline – without the interruption of 15- to 30-second ads between each song when they can already listen to their favorite songs for free. Therefore, Spotify must think of new ideas to entice more free users to upgrade their plan. One way Spotify can drive its free users to become premium subscribers is by limiting the number of songs free users can stream a day. Even though free users have commercials, limited catalog access, and can only play music online, they still have access to over 80 million songs. Thus, limiting the number of music free users can listen to can push them towards adopting Premium, where they can stream endless songs, podcasts, and audiobooks without worrying about restrictions and interruptions. Spotify can also motivate free users by offering them a 2-month Premium free trial to become new premium subscribers. Spotify currently offers a 1-month free trial for new subscribers, but free users are more likely to accept the 2-month trial and pay the subscription fee when they experience the incredible features of the Premium. Spotify should also add new features that are exclusively for premium members. Offering premium subscribers special features that only they are entitled to can make it more attractive to free users to switch to Premium to have the features. Music Labels Music labels are critical in the music industry. Whether it is major labels or small independent labels, they produce, publish, manufacture, distribute, and promote the recordings of affiliated musicians (Davis et al., n.d.). Moreover, they work closely with music streaming services, media outlets, and other industry professionals to grow artists' brands and reputations and distribute their music to a broader range of audiences. Labels are extremely powerful in the music industry because they own music rights to most of the music in the world. As Billboard's senior writer, Dan Rys (as cited in Aniftos, 2023) said, "[Labels are] the ones who can get you

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10 SPOTIFY: FACE THE MUSIC placement on streaming services." They provide artists with advanced funds and resources to record, produce, distribute, market their music, and go on tours. In return, they may attain ownership of the artists' master recordings to generate revenues from the music sales, streaming royalties, tours, merchandise, and any other ways the artists use its brand to make revenue. In addition, these music labels also own and operate a diverse array of sectors. For instance, Sony Corporation is a music record that also offers games & network services, entertainment, electronics, and many more. In fact, the labels are the most powerful distributors of music and talent in the industry. Even though five of the major labels went down to three over the years, the three major record labels – Universal Music Group, Sony Music Entertainment, and Warner Music Group – produce and own almost 70% of the recorded music in the global market (Vroom, Boquet & Deshmane, 2021, p.15). With multinational conglomerates and subsidiaries worldwide and significant ownership stakes in various streaming, media, technology, and communication industries, they have control over how their artist's music will be produced, licensed, distributed, and consumed. Of course, the growth of independent artists may cause music labels to lose power, but with massive connections and networks around the world and the diverse services that they offer, it is nearly impossible for major labels to lose their power in the music industry. Spotify’s Future Spotify Podcast Services In 2019, Spotify CEO - Daniel Ek - uncovered the company’s latest strategy to expand into “less music” and focus on non-music, audio-related content. At the time, audio was only a fraction of the size of the video market, and innovative thinkers like Ek believed in its potential to evolve into a “more immersive experience” (Vroom, Boquet, & Deshmane, 2021, p.17).

11 SPOTIFY: FACE THE MUSIC Podcasts were the first step for Spotify to capitalize off the audio market’s prospective breakthrough into the mainstream. Between 2019 and 2021, Spotify continuously bought a plethora of podcast companies throughout the value chain, solidifying their stake in the new development and expanding their catalogs in non-music audio content. Ek explained that as the company invested more in podcast capabilities and content, engagement from new and existing users on the app increased. In 2020, it was reported that 25% of active monthly listeners listened to podcast content on Spotify (Vroom, Boquet, & Deshmane, 2021, p.18). The features included in Spotify’s podcast systems allow users to enjoy exclusive and non-exclusive content on demand for free, which is only available to paid subscribers in terms of the company’s music content. Moreover, Vroom, Boquet, & Deshmane (2021) reported that the company has given podcast publishers even more creative control as they allow publishers to individually set up paid subscriptions, splitting the revenue 95/5 with Spotify (p.18). With the amount of freedom given to both users and creators, Spotify has created an attractive alternative for podcast listeners who also appreciate having their music in the same bundle. It has been recorded that there are over 424 million podcast listeners worldwide as of 2023, which is a notable 149.2 million increase since 2019. By the end of the year, the industry is expected to account for 22% of all internet users. Today, Spotify has over 41 million podcast users (28.6% of the market), making it the second platform with the highest number of podcast listeners worldwide after Apple Podcasts. The primary source of revenue for the podcast industry comes from advertisements, thus increasing revenue and the economy in general as podcasting increases viewership. Spotify increased its podcast ad revenue by 49% last year and reached a total of $286.5 million in ad revenue (Carter, 2023). With those numbers alone, it is easy to see

12 SPOTIFY: FACE THE MUSIC the current success and projected success of Spotify’s podcast audio gamble and understand Daniel Ek’s business decision to include it within Spotify’s services. Business Opportunities & Live Music In terms of expanding its business opportunities, Spotify has already begun acquiring outside resources, as mentioned with the multiple podcast companies, but also with live, interactive audio content by purchasing companies like Betty Labs (Vroom, Boquet, & Deshmane, 2021, p.18). This acquisition has further broadened Spotify’s business prospects and opened their horizontal diversification by allowing them to potentially enter the industry of live sports broadcasting through Betty Labs’ Locker Room app and gain more users. Additionally, the company began selling tickets for Spotify exclusive live broadcasted performances of famous artists in 2021 (Vroom, Boquet, & Deshmane, 2021, p.18), furthering profits from opportunities other than streaming and podcasts. In regards to monetizing or clarifying user data to their advantage, Spotify has recently acquired podcast technology companies - Podsights and Chartable - in 2022 (Spotify, 2022). Those two companies give Spotify the capabilities to measure the scale of podcast advertising accurately and use audience insight tools to let publishers grow their podcast audiences. This business model of taking initiatives to assist podcast publishers in growing their potential revenue directly works in Spotify’s favor in growing their podcast engagement and profits as well. Furthermore, Spotify could offer a high premium service through the artist's platform to fully monetize and sell the data they get from users’ listening habits, which they use to develop company services and products, to record labels/ artists in order to potentially help them understand and predict their target markets.

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13 SPOTIFY: FACE THE MUSIC Another service Spotify could introduce and monetize could be a potential music festival. Spotify could offer a Lollapalooza-styled music festival filled with top streamed artists from the app, creating a new incentive for artists to work harder in gaining listeners, as well as creating another revenue avenue for the company, knowing fans will be willing to pay for live performances of their most listened to artists. The company already offers ticket sales for live broadcast performances, so this idea is the next step for the company in terms of live music. Spotify’s Future Outlook Despite the significant increases in Spotify’s user count and expanding business model, the company is preparing for dramatic shifts to support itself. On December 4th, 2023, Daniel Ek announced the cut of 17% of Spotify’s employees due to a “gap between the financial goal state and the current operational costs.” Recent economic growth reduction and capital expense increases have forced the CEO to go the route of “right-sizing” the company to prepare for a more “lean structured” business model that is “relentlessly resourceful” in order to align with their future goals of becoming the world’s leading audio company. Due to the existence of lower-cost capital in 2020 and 2021, the company was able to take advantage of the pandemic situation and invest in “team expansion, content enhancement, marketing, and new verticals,” which helped the company increase its output during the 2022 and 2023 years. However, the metrics suggest that despite the increase in productivity, it was at the cost of efficiency and that the high output was linked to having access to more resources (Ek, 2023). Spotify’s decision to reduce its current workforce is the next step for the company to head towards a more efficient model by updating how it works. The ingenuity and creativity that started the company are the two values that will lead it back on track to its core principles of resourcefulness and on to the

14 SPOTIFY: FACE THE MUSIC next phase (Ek, 2023). By working towards a leaner structure, the company hopes to invest more strategically in its business and gain greater opportunities for success. Conclusion Spotify has fundamentally changed the music industry. It has allowed artists to distribute and promote their music at a global scale for listeners to enjoy at the palm of their hands. Although Spotify has been struggling to generate a profit from its business models, the company is constantly growing. The number of active users and free users in Spotify's freemium model is exceptionally high. However, as valuable as music is for everyone to enjoy, artists' creative talents, hard work, efforts, and time to create songs also has value. Spotify should experiment to find the best strategy to enhance the value of its Premium service and its overall service to provide individuals with millions of music, podcasts, and audiobooks. Regardless, Spotify has a bright future ahead. With the constant innovation, improvements, and acquisition of opportunities, there is no doubt that the company will maintain a competitive advantage and continue to be one of the most popular and leading music streaming services in the global streaming market.

15 SPOTIFY: FACE THE MUSIC References Alonso, T. (2023, February 23). Strategy study: how Spotify became the standard in convenience and accessibility . www.cascade.app. https://www.cascade.app/studies/how-spotify- became-the-standard Aniftos, R. (2023). Billboard explains: what role do record labels play. Billboard. https://www.billboard.com/music/music-news/record-labels-billboard-explains- 1235296400/ Carter, P. (2023, October 30). The podcast industry: Audio Content’s immense profitability . globalEDGE Blog: The Podcast Industry: Audio Content’s Immense Profitability >> globalEDGE: Your source for Global Business Knowledge. https://globaledge.msu.edu/blog/post/57327/the-podcast-industry-audio-contents- imme#:~:text=There%20were%20more%20than%20424,22%25%20of%20all %20internet%20users . Davis, M. et al. (n.d.). What is a record label? Exploration: Copyright Administration. https://exploration.io/what-is-a-record-label/#:~:text=Essentially%2C%20record %20labels%20work%20to,sell%20their%20products%20and%20artists . Ek, D. (2023, December 4). An update on December 2023 organizational changes . Spotify. https://newsroom.spotify.com/2023-12-04/an-update-on-december-2023-organizational- changes/ Fleisher, Rasmus. (October, 2017). If the song has no price, is it still a commodity?: rethinking the commodification of digital music. Culture Unbound Journal of Current Cultural Research 9 (2):146-162.

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16 SPOTIFY: FACE THE MUSIC https://www.researchgate.net/publication/320738890_If_the_Song_has_No_Price_is_it_ Still_a_Commodity_Rethinking_the_Commodification_of_Digital_Music . Gartner Glossary. (n.d.). Platform (digital business). Gartner Glossary. https://www.gartner.com/en/information-technology/glossary/platform-digital-business . Ingham, Tim. (April 25, 2022). Nearly 80% of artists on Spotify have fewer than 50 monthly listeners. Music Business Worldwide. https://www.musicbusinessworldwide.com/over- 75-of-artists-on-spotify-have-fewer-than-50-monthly-listeners/ . Isenberg, Meara. (November 29, 2023). Spotify’s 2023 Wrapped Brings Some More Personality to Your Streaming Habits . (n.d.). CNET. https://www.cnet.com/tech/services-and- software/spotifys-2023-wrapped-brings-some-more-personality-to-your-streaming-habits/ Krohn-Grimberghe, Lukas. (September 15, 2020). Has music become a disposable commodity? WQXR. https://www.wqxr.org/story/technology-music/ . Mehrotra, S. (2023, July 23). 10 hidden Spotify features you probably didn’t know existed . ScreenRant. https://screenrant.com/best-hidden-spotify-features/#play-spotify-39-s- hidden-snake-game Peleg, Nadav. (December 4, 2023). How to upload music to Spotify as an artist. SoundCampaign. https://soundcamps.com/blog/how-to-upload-music-to-spotify-as-an- artist/ .’ Spotify. (2022, February 16). Spotify acquires Podsights and Chartable to advance podcast measurement for Advertisers and insights for publishers . Newsroom.

17 SPOTIFY: FACE THE MUSIC https://newsroom.spotify.com/2022-02-16/spotify-acquires-podsights-and-chartable-to- advance-podcast-measurement-for-advertisers-and-insights-for-publishers/ Spotify. (2024). About Spotify. Spotify. https://newsroom.spotify.com/company-info/ . Spotify Technology S. A. (2022). Form 20-F. United States Securities and Exchange Commission. https://s29.q4cdn.com/175625835/files/doc_financials/2022/ar/b283934e- 7a7c-4da6-8749-856dfa4c36e6.pdf Sukhanova, Kate. (May 23, 2023). Spotify statistics 2024: user demographics, growth rate, and revenue breakdown. TechReport. https://techreport.com/statistics/spotify/ . Vroom, G., Boquet, I. S. & Deshmane, A. (2021). Spotify: face the music (update 2021). Harvard Business Publishing Education: IESE Business School-University of Navarra. https://hbsp.harvard.edu/download?url=%2Fcourses%2F1058971%2Fitems%2FIES869- PDF-ENG%2Fcontent&metadata=e30%3D Wilson, J. (2022). The age of digital; music executive reacts to the impact of digitalization in the music industry. Forbes. https://www.forbes.com/sites/joshwilson/2022/09/14/the-age-of- digital-music-executive-reacts-to-the-impact-of-digitalization-in-the-music-industry/? sh=35dbf788537

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