In 2011, when Spotify launched its streaming music service in the U.S., the future of digital media lay squarely in the realm of advertising. Sure, everyone knew ad-based models—sometimes called “the Internet’s original sin”—had flaws. But companies like Google, Yahoo, and Facebook were able to grow very large, very quickly by attracting big audiences to their free services and selling ads. Spotify aimed to emulate that success, but with a different model that also included an odd consumer option: a subscription.
At the time, Pandora, the market leader in music streaming, had already positioned itself as the future of radio, going after the industry’s $17 billion advertising market. Spotify executives took aim for that same pool of money, calling advertising “a huge part of the company strategy.” Both companies offered a paid subscription option. Spotify’s main difference was the ability to play any music on-demand, where Pandora only offered radio-style playlists with limited options to skip songs.
No one could have foreseen the digital media world’s recent shift toward paid subscriptions, driven, in part, by the success of Netflix and newspapers like the New York Times. Consumers have grown increasingly comfortable with the idea of paying to access digital media that they once got for free. Venture capitalists are now more excited to invest in tools and platforms that enable subscriptions.
Likewise, no one foresaw the rise in anti-advertising sentiment. Ad blocker use continues to grow and advertising boycotts are now a frequently-deployed culture war tool. Ad fraud remains a problem. Even Facebook and Google, the successful digital advertising duopoly, now look like sinister privacy invaders due to their data-collecting sales operations. Rival tech executives, like Apple CEO Tim Cook, are weaponizing this anti advertising sentiment to slam competitors with advertising-based business models.
Lucky for Spotify, the company’s paid tier of subscriptions put it in a strong position to ride that shift. Of Spotify’s 157 million users, 71 million pay a monthly fee to subscribe. Only around 10 percent of the company’s revenue comes from ads. On Tuesday the company went public. Investors valued the company at more than $26 billion at market close.
The focus on subscriptions, combined with its hard-won relationships with the record labels, has saved Spotify from the fate of its many failed streaming music peers. That includes MOG, Turntable.fm, Muxtape, Imeem, Playground.fm, Myxer, Mixwit, Seeqpod, Grooveshark, and Skeemr. Pandora, which bought Rdio in 2015 in a distressed sale, endured takeover speculation for the last year, culminating with a bail-out investment from SiriusXM.
Spotify has long argued its service fights the music industry’s piracy problem by offering a convenient alternative. By doing so, it proved it was possible to convince a generation of users who grew up with Napster and Kazaa to pay for music for the first time. That shift is notable: Spotify subscribers who pay $10 a month, or $120 a year, to access the service are spending more on music than the average U.S. consumer did at the peak of the CD boom. (Detractors would argue that that money now gets spread across a lot more songs, therefore shorting artists.)
Spotify CEO Daniel Ek’s promise has been that Spotify can help return the music industry to growth. He’s delivered on that. Last year the industry experienced its first double-digit revenue growth since 1998.
But new challenges loom for the company. Spotify is not profitable. Plenty of artists and record labels that the company relies on continue to criticize its business model. And the company’s success has attracted competition. Apple, Google and Amazon all have competing subscription services which threaten Spotify’s leadership position. In that sense, Spotify will do well to remember the fate of Pandora—success is precarious.
Spotify’s Sleeper Power Grab
- Spotify eschewed the bankers and went public without a bells-and-whistles IPO.
- With its recommendation algorithms, Spotify doesn’t just influence what you listen to; it can make a hit.
-There’s a better way to listen. Here’s how to join the ranks of Spotify’s power users.