Spotify Business Model and How does Spotify Make Money

Spotify Business Model and How does Spotify Make Money – Unicorn Economy

Spotify Business Model
Spotify Business Model

About Spotify, Founders, Funders and Facts

Spotify is a music powerhouse from Sweden.  The streams include music (labels and private artists), podcasts, and videos. Spotify also provides digital rights management (DRM) – protected content from record labels & media companies.  As of 2016, Spotify boasts of more than 100 million active users and about half a billion registered users. As of 2016, Spotify has 40 million paying subscribers worldwide. Spotify Technology S.A. is the parent company, registered in Luxembourg and owns all the subsidiaries that operate out of entire geography that Spotify is available. Spotify AB is one of the subs that handles entire R&D in Stockholm.

Spotify Founders : Daniel Ek, Martin Lorentzon – Read on about Daniel : He founded his first company at the age of 14, Tradera (this was acquired by Ebay), and later on Advertigo, in 2006, sold the company to TradeDoubler.   Also in 2006, Ek was the CEO of μTorrent (yes, you read that right!).   Then μTorrent was sold to BitTorrent.

Spotify Funding : About $2.56 Billion at last Valuation of $9 Billion.  This money includes $1 Billion of Debt + $0.5 Billion convertible notes and the rest as equity investment by Accel, Founders Fund, Goldman Sachs.

Spotify Business Model

How Spotify Makes Money
How Spotify Makes Money

Spotify Business Model is a three pronged revenue approach.

Basically a Freemium Business Model Example, it makes money from advertising as well as paid subscriptions to hear streams of endless music.  Also, new artists can promote their art work on Spotify’s platform from where Spotify also gets a cut on selling rights, streaming their work.

Spotify Business Model via Streaming Content

Spotify business model is dependent on buying and curating more and more content, thus as of 2016, Spotify provides access to over 30 million songs, and more music being added approximately every day.   There are all types of apps, TV, Desktop, Mobile, Tablets etc.

This is exactly similar to NetFlix Business Model which is reliant on spending more and more on the content.

This music is basically free to stream on any device, but comes with ads being displayed, you can subscribe to the app for a per month / year, per device basis and enjoy uninterrupted ad-free music.

Every time that you stream a piece of content (via the paid route), three people get paid : The artist, The Publisher (intermediary through whom spotify accepts artist albums) and Spotify.

Following plans are offered by Spotify in US:

  1. Spotify Student : One Login – $4.99 Per month
  2. Spotify Family : 6 Logins – $14.99 Per month

Problem with Spotify Business Model

Basically, Spotify Business Model is in deep trouble, last revenue they posted was about $2.15 Billion out of which $1.92 Billion was paid subscription service (paid by 40 million subscribers and rest of them are free which are being served ads) and the rest of the money came from advertising income to the free users.

You have to understand one thing here – no one, yes no one wants to pay for content and that is the whole piracy saga that has the motto of freeing content from every one’s clutches, please understand, I am not in favor of privacy but I am pointing out a sentiment that people generally don’t want to pay for audio / digital content.

Spotify, as the rest of the music streaming industry, faces criticism from artists claiming they are not being fairly compensated for their work as downloaded music sales decline and online streaming increases. Physical or Downloaded sales pay a fixed price per song or album but Spotify pays artists based on their “market share” i.e. if total streaming revenue was $1000 for 1000 songs of 1000 artists and albums, and your song was played only once, then after removing the entire publisher commission and spotify commission, lets say that value is $700 the rest of the $300 will be divided in the 1000 artists in the proportion of the number of times their song was played which is 1 out of 1000 in this case so that artist will be paid 30 cents. Spotify has been reported paying the artist on average US$0.006 to US$0.008 per stream.

I feel Spotify is benefiting the digital content business by migrating “users away from piracy” and “making sure they generate royalties for longer period of time rather than just one time download” by encouraging users to use their premium service.

How does Spotify Make Money
How does Spotify Make Money

How does Spotify Make Money

Spotify makes Money from different revenue lines:  Streaming for Paid Versions, APIs, Advertisements.

Streaming is explained as above.  Below we explore the Advertising methodology in detail.

How does Spotify Make Money via Advertisements

Spotify is the king when it comes to curating the advertisements, it does not sell much of ads (10% of its top line) but the way they can target and re-target the consumer in such a way that very less platforms can – using audio medium, the stickiest of the mediums.

Yes, Audio is the stickiest of the medium when it comes to advertisements, has immense recall and top of the mind association always.

They call this “Spotify for Brands“.

Re-targeting is available in the forms of :

  1. What mood they are in? – Based on their current playlist and the song that they are listening, after the song is played, they push 5-8 sec ad.  This is known to them via their acquisition of EchoNest (It is the primary crawler that identifies the nature of the song via audio playback and review gathering)
  2. Genre
  3. Location
  4. Gender
  5. App OS

Primary messaging – the first time the brand advertises to the user and Re-Messaging depending on the fluctuations in listening behavior.

They claim that they have an engagement of 150 mins in a day per user.  That is huge.

How does Spotify Make Money via API for third Party Apps

Websites, blogs, and 3rd-party apps (iOS, Android) and other tools including hardware support Spotify via API or SDK.  Community resources include Facebook, Twitter, SoundHound, Genius, bots and other user forums, and tools to display lyrics and notify users about new releases.

Spotify makes money from this model in two ways:

  1. They may charge the person interested in buying the API or SDK access to build their apps and hardware (I have no proof to find this – but I guess)
  2. The integrations also lead to users paying for the service from which Spotify makes money via subscriptions.

That’s it!

Disclaimer : Spotify Business Model and How does Spotify Make Money are views of the author only without any outside intervention or influence.  Use discretion while using the information without validating.

Unicorn Economy
Unicorn Economy is your answer to all startup related queries with respect to business strategy, business model analysis and consulting. One stop stop for business plan and financial model development.

2 Comments

  1. The analysis was great, despite of the revenue model and financial earning they are suffering from a great loss. Ouch.

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