Music industry has evolved in terms of distribution of latest music. Gone are the days when music was distributed in plastic cassettes or CDs. It was a struggle to carry big music players too. Then came the digital era and the new MP3 players. This led to more compact music players that were easy to carry. However, they too failed to include the benefits that today’s music streaming services provide. Spotify business model is one of the most successful music streaming service in the world.
Piracy is a big issue when it comes to music distribution. An affordable music streaming service can help to end this. Hence, different music streaming services such as Spotify and Apple Music captured huge chunks of market share. They made on-demand audio available to the market at affordable subscription fees.
Spotify reported 271 million active monthly users in February 2020. Out of the 271 million, there were 124 million paying users. The growth of the company is phenomenal and its popularity has made it a definite choice among the consumers.
This might come as a surprise but Spotify was launched back in 2008. Spotify has become mainstream in recent times. Back in the old days, it was easier to pirate audio. However, with recent advancements, it is a lot more difficult to pirate music.
Moreover, Spotify brings a lot of ease of use and value for money. Hence, it is popular among so many people.
What is the Spotify Business Model?
Spotify is an on demand media streaming platform that is available on various operating systems. It was started back in 2008 in Sweden. Legally, it is domiciled in Luxembourg, but it has its headquarters in Stockholm, Sweden.
In recent times, Spotify has helped to decrease piracy substantially. It adopts a freemium business model to attract new customers. Anybody can use Spotify to stream media. However, to have an ad-free experience and extra features such as offline play etc. you need to subscribe to Spotify Premium. We will talk about it more in the next paragraphs.
The first half of 2016 saw a steep increase of 57% in the revenue of audio streaming services. On the other hand, revenue generated from physical albums (17%) and downloads (14%) saw a decline.
Spotify has more than just music available on its platform. You can listen to podcasts as well.
How Does the Spotify Business Model Work?
The Spotify app is available across all popular operating systems. Moreover, you can access the web player from their website as well. It is similar to a SAAS. Music is stored in servers managed by Spotify. Users stream the music from those servers. However, users can choose to download music to their devices for offline playback as well.
The music streaming service saves an encrypted copy of recently played music temporarily on the user’s device for a no-delay playback at all times. Constant access of the Spotify server by millions of users at the same time could potentially cause congestion in the network.
On the business side of things, Spotify has a contract with major labels and music distributors which pay royalties to the artists that put up their music on the streaming platform. Artists have often criticized the obscure royalty payment plan of Spotify.
Taylor Swift lashed out at Spotify for unfair payments. Artists are paid on the basis of streams as a proportion of total songs streamed. Moreover, not all artists and labels get the same royalty fees. The royalty payouts depend on the artists and the deals that were signed. It can depend on the country in which the music was streamed and the value of currency in that country. Verge reported that an artist can make between $0.006 and $0.0084 per stream.
Different Spotify Subscriptions
Spotify is available in various options. The most basic option is the free version. Anyone can use the free version. Spotify is a freemium service. It provides a free feature to lure the customer in to getting the monthly or yearly subscription. Users can access all the content that is available on app. However, this version comes with certain limitations such as advertisements, no offline playback, music on shuffle only, and lower bitrate of music.
The premium option is available at $9.99 per month. There are no limitations in Spotify Premium. Hence, this is the best way to have the Spotify experience.
This is the economical version of the premium for users who live on the same address. Up to six users can use Spotify Premium if they opt for the $14.99 per month Spotify family.
How Does Spotify Business Model Make Money?
Spotify makes money through advertisements and subscriptions.
The subscription comes at $9.99 per month and has free 30 day trial. This version is ad-free and allows for offline playback in HD. Moreover, students can subscribe to Spotify Premium for half the fee. This decision helped to attract more users.
This subscription is offered at $14.99 per month. This subscription is popular among families or roommates who love together. It allows them to equally divide the cost (approximately $2.5 per person) of the subscription.
Revenue from advertisements
Like most companies out there, Spotify makes money from different banner ads placed on its website and app. However, Spotify has special audio ads that helps to target more customers. Advertisements are a crucial aspect of the revenue model.
- Sponsored Playlists: Companies can exclusively sponsor a top-owned Spotify playlist.
- Branded Moments: This ad option allows companies to involve their audience in real-time moments. Brands can create a connection by getting in touch with the right person at the right time of the day. For example, a sports company can get in touch with a person when they hit the gym or play any sports.
- Sponsored Sessions: Brands give uninterrupted listening experience to users in exchange for a video view.
- Audio and Video Ads: This ad can be as long as 30 seconds. They are played after 15 minutes of music playback. After a song ends, a video ad plays.
- Display Ads: Clickable images that appear in the Spotify client.