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January 17, 2018

SPOTIFY BUSINESS MODEL | HOW DOES SPOTIFY MAKE MONEY | STRATEGY AND INSIGHTS

Spotify Business Model explained. Business Strategy and Company insights

Humans love music. Growth in modern technology has changed the way in which we listen to music. Now, we resort to our mobile phones, Mp3 players, computers, and laptops to listen to music. This has given rise to the development of many websites, applications, and softwares to enhance this experience. One of the best websites out there, with over 140 million active users, is Spotify. Spotify is a service that allows one to stream music, videos and podcasts, online through their website or through their software application.

Spotify started its journey in 2006. It was founded by Daniel Ek and Martin Lorentzon at Spotify AB where they were a team. Daniel Ek was the CTO for Stardoll, while Martin co-founded TradeDoubler. The application went live for the public on 7 October, 2008. During the initial launch, only paid accounts were open for everyone. Free accounts were available only by invitation. Simultaneously, Spotify AB started making deals with much labels that were major. But 2008 was not a good year for the company. They faced a loss of $4.4 million. They then decided to open up free accounts for people in the UK on 10 February, 2009, but had to soon return to an invitation policy due to the rapid growth in registrations. Now Spotify is a SAAS that is, what is called a freemium service.

What is Spotify?

Spotify allows you to stream music, videos and podcasts for no charge on almost any operating system out there. Although it is a free service, it has certain limitations to the free subscription. So there is a premium version to this service that unlocks the limitations and gives you the full blown experience of this service. Spotify gives its users an excellent experience of listening to and sharing music with friends and family. They give out a weekly discover playlist, where according to your preferred songs, every monday they will make a playlist for you and show it to you at the top of your lists. You can share links of songs on spotify with your friends on other social and messaging platforms. Apart from this, Spotify displays the lyrics of the song you are listening to in the app. You can also know the story behind the lyrics and the song. Spotify Radio is a set up that is perfect for listening to your favourite music in a random mood. You can filter the station to the type of song, playlist or the artist you want to listen to. You can even make Spotify your one music player for all your music. It lets you import music from your device and listen to it on the app. It also lets you sort out how you want your music. You can filter your searches to make them more accurate. They have a Concerts feature that finds for you shows nearby, according to what kind of music you love listening to.

Exploring the Business Model Canvas of Spotify.

The business model of Spotify is really simple to understand. Even though it is a simple on it works out really well for the company. Let us take a look into that.

How does Spotify earn a revenue?

Spotify makes money just like how most other freemium services do. It gets its earning from mainly two sources: the premium subscriptions and advertisements.

Advertisements

Spotify gets a lot of users because of the value it provides. Due to the type of service it is, users tend to spend a lot of time on it. This kind of applications and websites draws a lot of attention to advertised cause of the many views they will get for their advertisement. Spotify does not only rely on the traditional banner type ads alone but uses audio advertisements to also to target their huge user base. Sponsored playlists are what allow brands to sponsor a playlist for a week. Sponsored Sessions lets brands connect with their audience for an uninterrupted session of listening of music. Spotify has something called Audio Ads that play every 15 mins and last about 30 seconds between songs. Display Ads are shown at the bottom of the app and are displayed for 30 seconds. Homepage Takeovers are skins in the background that are interactive and take the homepage of Spotify. Branded Playlists are for brands that can put up a playlist for users to listen. Video Takeovers are there for computers apps to be shown between songs. The advertisers and brands pay spotify money for hosting their content. There are so many ways by which they can advertise their brand. Spotify has done amazingly well in this aspect. They have given so many options to brands and so more can invest in their schemes.

Premium Subscriptions

Spotify has premium accounts available to be subscribed to by users in order to unlock certain features they would not get otherwise. They offer a 30 day free trial for users to test this premium service. Spotify charges $9.99 per month in order to get their users to test it. With Spotify premium, listening to music becomes ad free; you can play your music without internet connections. You can use Connect and play music on your speakers, in your car and through your TV even. It unlocks HD music for you as well. To actually have the best Spotify experience one must subscribe to the premium version of the software. Spotify Family is when an entire family gets the premium service as a package. They all must put in the exact same address and then join. They are allowed to have their own separate playlists and everything. Such premium features draw many people to opt for it once they have tried it.

Business Model Canvas of Spotify.

Business model canvas of Spotify explains the different aspects of a business model like customer segments, value propositions, channels, customer relations, revenue stream, key activities, key resources, key partners and cost structure.

Click the image to enlarge.

Spotify business model | How does Spotify make money?

Customer Segments: What is the type audience they target?

  • People that don’t like to pay for services.
  • Lovers of all kinds of music.
  • People studying.
  • Advertisers, due to all the attention the site gets.
  • Developers that want to get themselves out there.

Value Propositions: What does Spotify have in store for their users.

  • Practically free music anywhere anytime.
  • A huge storage of songs.
  • A personal touch to the experience.
  • Playlists and selected choices of liked music.
  • Different forms of advertisements.

Channels: How does Spotify reach out to its customers.

  • The website: Spotify.com
  • The web, mobile and desktop apps.
  • Available on almost all operating systems.
  • Can connect it from one system to the other and unto external equipments like speakers, smart watches and tabs.
  • Can play it on TV even.
  • Spotify Family lets an entire family use spotify under one payment.
  • The growing community of Spotify.
  • It notifies you of events you might like around you.
  • Uses billboards around major cities in the world.

Customer Relationships: What does Spotify do to maintain relationships with its customers.

  • The streaming is always online and available.
  • Special Spotify playlists that are customized to your liking.
  • The app is user friendly and automated.
  • The HD sound quality of the music.
  • Third party APIs.
  • The Spotify community.
  • The fanbase of the service makes the network.

Revenue Stream: How does Spotify earn revenue.

  • Spotify a uses a freemium business model and earns revenue through paid subscriptions of users that wish to upgrade to a premium version.
  • The other major stream of revenue is the advertisers that pay Spotify to host their ads.

Key Activities: What are the activities done by Spotify.

  • Maintaining the site.
  • Developing the app on various platforms.
  • The roadmap for the product.
  • Managing the huge library they have.
  • Marketing their product and what it offers.
  • Expanding their user base.
  • Negotiating for new contracts.
  • Content acquisitions.

Key Resources: What is making Spotify a success.

  • It has over 1600 employees.
  • The brand name it has made for itself.
  • The new innovative updates they keep making.
  • The progressive culture in the company.
  • The huge music collection it has.
  • The various contracts they have.
  • The features they offer to their users.
  • The 100 million monthly active users.
  • And the 50 million paying subscribers.
  • The Open Music Model it adops.
  • The right protection system it offers.
  • The customized content it gives its users.

Key Partners: Partners that help Spotify.

  • Record labels
  • Rights holders
  • Independent artists
  • Third party integrations
  • Internet services products
  • Cloud providers
  • Acquisitions

Cost Structures: What are the different kinds of costs that Spotify incurs?

  • Offices
  • Salaries
  • Licensing fees
  • Copyrights
  • IT operations
  • Product roadmap
  • Legal

 

The Future of Spotify

Spotify is currently the leader in the online music streaming industry. Its biggest rival Apple Music has 30 million paying users while Spotify has 50 million. Its other rivals are not even close. So Spotify is basically leading the future of the music streaming industry. In the past weeks Spotify announced that it might be going public and listing its shares in the New York Stock Exchange. But even though all of this is there, Spotify fails to earn much profits out of its operations, because they have to make payments for licensing to record labels. This is impeding their growth majorly.

How Spotify will use the blockchain technology?

Recently  Spotify had acquired Mediachain Labs, a startup that is based in Brooklyn. They are going to help Spotify with the issue of paying artists and right holders. They will connect the artists to the tracks on Spotify. This company is an expert in blockchain technology. This will, to some extent, solve this problem that Spotify is having with royalties. Mediachain Labs will manage the difference tracks the novel ones and their owners. They will keep in track who has to get paid and how much. This was all ease out the working of the staff and cut they’re outgoing costs. However, even with all of these changes, they’ve to come up with a way to make significant profits from their services in order to survive in the long run. If they figure this out, they have the ability to become a profit making giant.

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