Case Study 5: Spotify Streaming Develops New Revenue Models

Spotify™ is a streaming music service originally developed in 2006 in Sweden and launched in
2008. Spotify Ltd now operates as the parent company in London, while Spotify AB manages
research and development in Stockholm.
This case study about the online music subscription service illustrates how different elements of
the mix can be varied online. It also highlights success factors for developing an online marketing
strategy.
At the time of writing, Spotify was valued at more than $23 billion as it filed for stock market
listing. It has over 159 million users and 71 million premium members who pay for services, which
raised over $5 billion in revenue (Young, 2018).

Context
Spotify was not the first online entrant to online music services, but it was an innovator in marketing
approaches, technology and subscription options that have enabled it to become a market leader in
music subscription. In 1999, Napster™ launched the first widely used service – ‘free’ peer-to-peer
(P2P) music-sharing channel. This innovative approach to sharing music became subject to legal
challenges from major record companies, and Napster lost revenues on music sales and was
eventually forced to close. This was not the end of sharing digital music for Napster as the brand
was purchased and it has had several owners such as Roxio, Best Buy and then became part of the
Rhapsody music services, in direct competition to Spotify in Europe as its US operation was shut
down. The importance of Napster today is perhaps that it demonstrated to the world what was
possible in terms of sharing digital music. Figure 5.9, shows the growth in revenue for streaming
in the music industry. Spotify has grown into a significant global brand and is driving market
growth by focusing on delivering more personalised music playlists, e.g. Spotify.me and
mytimecapsule (Guditch, 2017).

Revenue model and value proposition

Spotify operates a freemium model, with the majority of its users streaming music to their mobiles
or desktop via apps or web browsers. Free subscribers get ads between tracks, which are part of the
Spotify revenue model. Users of the free service encounter audio ads every five or six songs, or
approximately three minutes of advertising for every hour of listening.
Spotify Premium users pay a fixed monthly fee to get additional features (Figure 5.9), including
offline listening and no interruptions from ads.

Figure 5.9 Changes in retail revenue in the US music industry

Source: https://www.recode.net/2018/2/28/17064460/spotify-ipo-charts-music-streaming-daniel-ek
The Wikipedia entry for Spotify has charted the growth of Spotify:

In November 2011 more than 2.5 million paying subscribers signed up to its service. This followed
500,000 premium users signing up since its partnership with Facebook’s ‘Open Graph’, which
allows people to share the tracks they were listening to with friends. It also launched in the United
States in 2011.
In August 2012 there were four million paying Spotify subscribers responsible for at least €20
million per month in revenue.

By March 2013, Spotify had grown to six million paying customers globally (a figure that
remained in December 2013) and 24 million total active users.

By May 2014, Spotify had grown to ten million paying customers and 30 million free users.

By January 2015, Spotify had grown to 15 million paying customers and 45 million free users.

By January 2018, Spotify had 30 million songs in its catalogue, 140 million active users each
month and over 70 million premium customers (Wikipedia, 2018).
Through licensing the service to other businesses there are further opportunities for revenue. For
example, in January 2015, PlayStation® announced that Spotify would power its new music service
called PlayStation® Music.
In 2017, Spotify introduced ‘Secret Genius’, which provided a way of highlighting songwriters and
producers and ‘Show credits’, giving details of these individuals. This initiative provides
opportunities to drive sales and enable fans to build connections that could lead to future sales
(Spotify, 2018).
The company pays roughly 70 per cent of its revenue for royalties to artists and companies that
hold the rights to the music. Spotify pays artists and labels per streamed track. In the past, artists
have questioned the value that Spotify returns, with some major global artists such as Taylor Swift
and AC/DC withdrawing some or all of their music from the platform. However, after a three-year
boycott, Taylor Swift made her whole back catalogue available on Spotify (Sweney, 2017) and for
many other less well-known artists it provides a way to reach new audiences through
recommendations and playlists, and gain royalties from listeners they would previously not have
received any revenue from. Spotify makes the case that it aims to regenerate lost value by
converting music fans from these poorly monetised formats (e.g. illegal download services) to the
paid streaming format, which produces far more value per listener.

Value proposition
In addition to the core music listening service, Spotify has developed other features to add to the
value of the service, which have also given opportunities to spread awareness of the site through
co-marketing.
Spotify claims that its users are highly engaged, with the average multiplatform user spending 146
minutes a day using the service. Between 2013 and 2014 the share of users listening on mobile
tripled, although more than 50 per cent of sessions are still on desktop. In 2017, the introduction of
the ‘Rise’ program, in conjunction with the new awards ceremony, aims to encourage emerging
artists and highlight excellent talent.

Advertising
Spotify has developed a range of innovative advertising formats to build its revenue, mainly from
its free subscribers. Spotify uses data-driven analytics to help determine its ad spend and target
markets; users’ data insights identify behaviour, which then inform the ads, the content and the
messages that promotional tools and media can use. For example, the ‘2018 Goals’ campaign used
Spotify users’ habits to create humorous resolutions and personal aims and presented these using
billboards. The campaign worked really well as it tapped into music lovers’ psyche, and the music
we listen to is part of who we are (Nudd, 2017).
Other examples include:

• Audio Ad. A cross-platform, unavoidable format comprised of an audio spot, cover art and
clickable campaign name.
• Display. Leaderboard ads in the Spotify player are served when the user is interacting with
Spotify.
• Homepage Takeover. Block out a full day for your brand on our Homepage.
• Branded Playlist. Custom user-generated playlists with brand logo, custom text and optional
link to your campaign.
• Sponsored Session. Users choose to watch a video to receive a 30-minute, ad-free session.
• Video Takeover. Sponsor the ad break experience with video and display.
• Advertiser Page. A microsite seamlessly integrated into the Spotify player. The Advertiser
Page can contain practically any content you’d find on a webpage, including videos, clickable
images, blogs, news, links and comments.
A campaign run on Spotify was for the launch of the BMW 320i for which an ‘American Road
Trip’ campaign was developed. A branded app on Spotify enabled users to select from one of five
iconic American road trips. Based on their selection, a custom playlist was generated featuring
songs and artists from regions along the selected route. A BMW video was served during playlist
generation and the final playlist was sharable via social media. The campaign resulted in more than
14,000 playlists being created.

Competition
Spotify faces competition from existing online music services such as Apple Music™, but given
that this is an evolving marketplace, other major competitors can be expected. For example, Google
launched Google Play Music™ subscription service via YouTube, and Apple purchased the
Beats™ subscription service earlier in the year. Amazon also now offers Prime Music™
subscription to customers who are in its loyalty programme.

Marketing
Unlike in the ‘dot.com era’ when startups with global aspirations launched using TV campaigns,
Spotify’s growth has taken a more modest approach, relying on word of mouth, PR and co-
marketing rather than big ad budgets.
The launch of Spotify in the US used private ‘Beta’ invites to create a buzz, as those with access
shared their use of it in social media (and through word of mouth).
The music streaming service went live in October 2008, and it kept its free service as invitation
only – something that had been in place while it was in the final stages of development prior to
public launch.
The invitation-only element was a vital part of the platform’s rise. Not only did it help manage the
growth level of Spotify, but it also helped create a viral element to the service, with users each
having five invites at first to share with their friends.
Spotify has used co-marketing and partnerships with publishers to increase its reach by embedding
different formats of widgets on other sites. For example, Drowned In Sound has a monthly playlist
that it embeds within its blog, which encourages its readers to engage with Spotify. Other
partnership services enable festivals and charities to engage their audience through Spotify playlists.
To grow its audience beyond its traditional younger audience, Spotify today invests more in
campaigns. In 2013 it launched a multiplatform campaign, with a 30-second ad spot during the
season premiere of NBC’s The Voice. Sixty-second versions of the commercial aired in The
Tonight Show with Jay Leno and Late Night with Jimmy Fallon.
In 2014 Spotify launched a ‘Music takes You Back’ ad(www.youtube.com/watch?v=BaDe9Pgkpl4)
in the UK and US, which featured in cinema, digital signage and online. It centres around three
videos that showcase three different people’s stories through the medium of Spotify, Facebook,
text messages, Skype and Instagram. Its aim is to show how Spotify can bring people together
through its integration with social media. Spotify decided not to use TV, creating 75- to 90-second
videos rather than the typical 30-second TV ad break slots.