Spotify Business Model

The end of 2023 saw Spotify having to cut 17% of its workforce, and for most of 2023 and beyond, there were more than a few reports that they were barely in profit - regardless of the fact they were making a reported €65 million profit.

So, what is going on with the Spotify business model?

Spotify’s early years

Spotify launched two years after the initial domain was registered in 2006, responding to people wanting access to music - but without it being pirated or running the risk of coming with a virus when downloaded via peer-to-peer networks.

The beta test version was released in 2007, and like many businesses at the end of its first year, it was running at a loss - to the tune of 16 million kronor. The first few months of 2008 saw the roll-out of ads, testing different models to see what users responded to.

Between February 2008 and July, they expanded that beta test to more and more users, and finally, in October 2008, Spotify was launched in France, Spain, the UK, and, of course, Scandinavia.

Interestingly enough, the free version was initially invite-only, while anyone could use the premium subscription. And while that has been around for many years, people still struggle with choosing free or paid Spotify subscriptions.

It took two years and six months from when it was founded to launch, and at launch time, they also revealed that they had secured multiple licensing deals.

But it still took multiple funding rounds to help them meet their original vision and mission statement - and the jury is out on whether they’ve even met it yet.

Vision statement: “We envision a cultural platform where professional creators can break free of their medium’s constraints and where everyone can enjoy an immersive artistic experience that enables us to empathize with each other and to feel part of a greater whole.”

Mission statement: “Our mission is to unlock the potential of human creativity—by giving a million creative artists the opportunity to live off their art and billions of fans the opportunity to enjoy and be inspired by it.”

Spotify’s first exclusive

A milestone in any music streaming company - because exclusive can pull thousands, if not millions, of subscribers in a short period. Spotify’s first exclusive, and one that put them on the map for many, was John Legend’s album Revolver - which was released on Spotify two weeks before general public release and had bonus tracks, too.

Every piece of their history matters when it comes to their business model because it helps clarify the steps taken, what they felt was the right move, and how important it was as they grew into what they are now. John Legend is a music industry titan in his own right - so to get an exclusive showed that Spotify meant business and was a place where listeners could find big names.

Key components of the Spotify monetization strategy

Spotify has always been considered a Freemium model business. Freemium business models are seen across things like apps and games. There are a limited number of functions for free, and the trade-off is that you have to listen to adverts. With games and apps, though, the adverts can be less invasive, and in some cases, the adverts themselves are gamified.

With Spotify, though, you’ll need to listen to the advert before and after the tracks you want to listen to. Fine for some, but not for others.

The free model is usually enough to get people to try the service, and over time, with limited functions and adverts - many people choose to upgrade - which is where the subscription revenue model kicks in.

The premium subscription is where Spotify makes most of its streaming revenue. Investopedia reported that in 2021, this was the breakdown:

Premium subscriptions comprised 88% of the revenue, while the ad-supported service accounted for the last 12%, which broke down into 95% of the profit coming from the premium services and just 5% coming from the ad-supported service.

Here are the Q4 predictions in Spotify’s own Shareholder Deck for Q3 2023.

Source: Shareholders Deck 2023 Page 22.

Where does the Spotify Audience Network fit into it?

Spotify has its own ad management program that is available to businesses that want to target a specific audience type.

They also offer a bespoke ad experience for brands to have something more unique. The Spotify Advertising platform has several products:

• Video Ads
• Podcast Ads
• Audio Ads
• Audience Network

The Spotify Audience Network offers all businesses (no matter the size) the same access to audience-based podcast buying. Brands select their target audience and buy podcast ads. It is a substantial network since the Spotify podcast network now has The Ringer, Parcast, Gimlet, Spotify Studios, Megaphone publishers, and new podcasters on Anchor.

In 2021, Spotify announced the Spotify Audience Network and said it was a better way to connect brands and listeners - and it put the brands in the driving seat with a range of tools.

Using the algorithm and listener metrics, Spotify is in a unique position to ensure that adverts match the taste and profile of the listeners - which is a substantial thing for advertisers.

The AI-powered context matching of the Spotify Audience Network is the technology that massively benefits all three components of the advertisement: the brand, the podcast host, and the audience. It means that the adverts that are delivered are as close to perfect as they can be.

Statista reported that in 2022, Spotify generated 1.5 billion dollars in advertising revenue, and with those calculations, an estimated 2.2 billion will be reached by 2027. Spotify ad revenue forecast 2027 | Statista.

A lot of the success of the subscription models and the advertisement model comes down to how Spotify works with personalization, curation, and algorithms.

How Spotify’s algorithm keeps users happy

Part of Spotify’s growth is that it is known for being an all-around robust option; the price is competitive, and as a platform, it is praised for having some of the best-curated playlists and delivering users a huge amount of value for that subscription price.

It is not without fault, though; there are things like the royalties they pay artists, which is often cause for concern - and has seen many people leave the platform and head to Tidal - who are known for paying a higher rate.

And while many users are more than happy to keep seeing their most loved music on their mixes, there have been more than a few articles written about how it could actually be harming the industry, too.

The Financial Times, in 2019, wrote an article titled How Spotify’s Algorithms Are Ruining Music. There are a couple of quotes here, but the entire article is worth reading.

Spotify actually makes people into more conservative listeners, a process aided by its algorithms, which steer you towards music similar to your most frequent listening.

“Digital music is like grains of sand or something at the beach — like, it just goes as far as you can see,” says music distributor Jimmy Johnson in Ways of Hearing. “And there’s no reason to think that any of those grains of sand is any better than any of the others. You would never build a shelf to store your grains of sand.”

He makes a good point, too, because Spotify has changed how we listen to music. But it is exactly that change that millions of subscribers are enjoying. They don’t have space for 400 records, CDs, or even digital music files - because space is a premium.

What is more, the price of the subscription means they don’t need to save and buy a new drop; for a single payment, they get access to everything their favorite artist has ever created - and every other artist, too.

So, while the algorithm isn’t everyone's favorite thing, it has played a significant role in the enjoyment of the platform.

The overarching big sweep of the Daily Mixes, Made For You, and any other recommendations is an AI learning model that analyses data like any other learning model. The recommendations come from a combination of metadata from the artists and audio signals like energy, valence, and danceability.

And if you are wondering what a song looks like through the audio analysis, here it is:

And you can check that for any song you like (so long as it is in the Spotify catalog).

Now, the text analysis comes into play, the web-crawled data and a lyrical analysis happens - the model is looking for clues now as to where the track would fit. Also, the user-generated playlists are now also used.

A lot of information, but only one part of the puzzle. The next is the user taste profiles.

Taste profiles are created through active and explicit feedback: likes, shares, skips, follows, and playlist ads. And implicit feedback, track playthrough, repeat listens, and session length.
Explicit feedback here has a heavier weight.

For those who love Spotify Wrapped - you’re seeing a lot of the metrics used right there.

Here is some of the information that builds your personal taste profile:

• Demographic & geolocation profile
• Temporal patterns
• Popularity and diversity preferences
• Genre, mood, style, and era preferences
• Saved songs and albums & followed artists
• Most-played and preferred songs and artists

It breaks down even further to predict what you will listen to on a Monday morning Vs a Saturday afternoon.

All of that information, plus some extras, are complied in order to make Spotify one of the most robust options when it comes to your customized options like:

• Personalized search results
• Personalized browse section
• Playlist suggestions & enhanced playlist feature
• Artist/song radio and autoplay features
• Personalized editorial playlists
• Special personalized playlists (Your Time Capsule, On Repeat, Repeat Rewind, etc.)
• Artist / Decade / Mood / Genre Mix playlists
• Your Daily Mix playlists
• Discover Weekly & Release Radar playlists

The goal is user retention, time on the platform, and user satisfaction.

And that is how Spotify knows what you need - exactly when you need it.

How does Spotify measure success - what are their key metrics?

What is the true measure of success for a company like Spotify? Recently, an overhaul of its staff shows that it is focusing on being more streamlined, cutting ‘bloat,’ and returning to its roots. But when it comes to their KPIs, here is what they are looking at:

• MAU - Monthly Active Users - Spotify, like other streaming platforms, tracks the number of users each month. It is indicative of their growth and reach.
• Subscriber Retention - how many people canceled their subscription, and how many stayed?
• Content Engagement - how did users interact with their content? Skips, saves, plays, playlist saves.
• Premium Subscribers - tracking the premium subscribers shows how successful they are in converting free users.
• Ad-Supported Users - tracking the amount of users who are using the ‘free’ ad-supported version. The ad-supported accounts matter because it is the size of the potential Spotify Audience Network.
• Podcasts - how many listens, downloads, engagement, and general consumption.
• Listening Hours - the amount of hours people listen is a good indicator of engagement and user activity.

Every second of data builds the machine that is Spotify - and all of this information is used for several things - including how much they pay their artists. Perhaps one of the biggest issues for Spotify, despite its popularity with music lovers, is that they are very well known for simply not paying enough to the artists on the platform.

In their own breakdown of how they pay artists, this is what they say:

” The royalty payments that artists receive might vary according to differences in how their music is streamed or the agreements they have with labels or distributors.”

However, they have announced recently that they will be improving how they pay their artists. They have mentioned they want to put an extra $1 billion towards emerging and professional artists. And for that, they will address these issues:

• Payments lost in the system - specifically lower payments
• A crackdown on ‘noise’ - looking at whale sounds, brown noise, white noise, and a few others that have no artist merit but can see high revenue from artificially short tracks.
• Artificial streaming - investment is going into detecting, preventing, and removing artificial streaming.

With these improvements and an increase in the subscription price, Spotify could pay artists more by the end of 2024.

Innovate and Adapt

With many music streaming services available now, to stand out, you need to do something special - and make noise about it. Tidal did with MQA (regardless of how people feel about it, it still gets coverage and listeners), Deezer heavily invests in their music discovery, and innovations like Flow and SongCatcher are a testament to that.

Apple Music is every part of an Apple product and is integrated into the device ecosystem, with lossless offerings. Qobuz - though often left out - has a strong reputation for incredible audio quality - enough to rival Tidal.

Amazon Music has a simple single-device subscription for those who have an Alexa. It makes a cheap way to listen, plus their subscription is cheaper for Amazon Prime users. YouTube Music blurs into YouTube and offers engaging video and music combinations.

So, with all of that on offer, what makes Spotify stand out?

Well, Spotify is good at everything, which is a bonus, but they are great at letting their users be super social and leaning heavily into personalized playlists. They give you more of what you enjoy every day, multiple times a day. They offer cool ways to interact, like Spotify Wrapped. Other platforms offer roundups, but there is something about the Spotify Wrapped that users love. Not only are they convenient for most, but they also make use of the data they collect in a fun way.

Here are just a few innovations that come from Spotify:

• Accenture and Spotify created a Spotify Premium subscription as a work perk.
• Spotify has its own Hack weeks and works on things like energy efficiency, climate footprint calculator, and even a C02 tour calculator for artists.
• They recently partnered with WPP for a global ads integration (the first partnership of its kind)
• They created billboard ads using listening data to promote themselves.
• The Freemium model helped stop music piracy from becoming so prevalent.
• Spotify is big on open source and sharing their R&D: Spotify.R&D.
• Podcasts have been big, too, with Anchor, now known as Spotify for Podcasters.
• Audiobooks are now becoming part of the deal regarding subscriptions, with a free 15 hours included.
• The Spotify Audience Network is great for brands; Spotify is putting its data to work here.

And those are just a few. Spotify not only looks at trends but creates them - and that is one of the reasons that they stand out.

The future of Spotify

Right now, the future of Spotify is in flux, with another mass redundancy in swing, letting go of 17% of their workforce in a bid to go back to their roots and become more streamlined and productive. At the same time, they also put a freeze on hiring - and rightfully so.

That is a big indication of how they see their own future. They want to cut back on big expenses and act more like a start-up. But after a reported $500 million loss in the last two years, it might not be enough to save them completely. With the price increase that hit subscribers, they also lost a huge number of paying account holders to the competition, not to mention a couple of controversial decisions regarding some podcasts and exclusive rights.

But perhaps the most significant factor that Spotify faces is that no matter how many great partnerships they get, another big profitable company doesn’t anchor them. YouTube Music has Google, Apple Music has Apple, and Amazon Music has Amazon. They can take a loss because they have a range of other products.

The price hike for users did give Spotify the first profit in over a year, so it is a step in the right direction. But it can’t happen often, so what is a potential option? Becoming their own record label.

Spotify could cut out one of the biggest costs - paying record labels - and instead create its own. That idea is not without fault, though, because other streaming services would do the same thing, and the kickback from both artists and record labels could see a mass exodus of albums, tracks, and artists.

So, what is realistic? Well, the price increase was the first step, the second was the mass redundancies, and the third? Well, most likely big investments in their AI, which we saw announced by Google in a Bard presentation in May of 2023, doubling down on creating personalized playlists, and more user features that are just fun.

Spotify is just one option for users, and some people find it isn’t the right one for them - only after building playlists! But if you’re ready to jump ship from Spotify and transfer playlists to another streaming service, FreeYourMusic has the answer. Move your first 100 tracks for free, and test out one of the other great music streaming services on offer.