[E4] Spotify: Daniel Ek's vision for creators
Helping creators monetize their work to advance humanity
Dear Reader,
This profile in Product | Strategy | Innovation provides insight into a founder and CEO whose company is disrupting and transforming a well-established industry while simultaneously competing with major technology platforms from Alphabet, Amazon and Apple. The music industry has been dominated for decades by major record labels who sign talent to commercialize and distribute their original work. The recording artist(s) and producer(s) only share in the revenue after all recording costs have been recovered. And then the record label keeps as much as 85% of the revenue while the recording artist(s) and producer(s) split what remains. This model created the Beatles, Rolling Stones, U2, Stevie Wonder, Madonna and many other recording artists and bands, but significantly limits the number of artists who can reach the market and scale with sustainable revenue to thrive.
Consumer interest has also moved away from buying music to consuming on-demand services for access to any music they want. The major global audio streaming service today was co-founded by Daniel Ek who also serves as its CEO. If you have used Spotify to listen to music or a podcast, you have at least experienced Daniel Ek’s vision for audio that could expand to other media for creators in the future.
We will explore the following in this profile after covering the relevant background:
Spotify is all-in on audio with a 3-sided marketplace (consumers, creators, advertisers) to provide both freemium (ad-supported) and premium (subscription-based) business models.
Spotify expands audio with podcasts (and maybe social audio with Clubhouse features if that format continues to gain traction).
Spotify’s platform services for creators disrupt traditional media with new and expanded services.
Background
Napster pioneered peer-to-peer file sharing in 1999 with a free service that was run on computers to store and share digital content on a local hard drive. Napster was heavily adopted to share music stored in the digital MP3 file format as a major disruptive force to the traditional model of record labels bundling music and selling albums and compact discs. But this angered record labels and triggered legal action since music purchased once by one person could be distributed to many people on the network without any additional revenue generated for the label. Napster was eventually shut down.
Apple launched the iTunes media player in 2001 to organize and play music MP3 files on a Mac computer. Apple launched the iPod later that year as portable music player that also integrated with iTunes on a computer. Apple further expanded use of iTunes and the iPod with a PC-version of iTunes for Windows computers. Apple then negotiated licensing deals with the major record labels to allow the purchase and sale of songs through a digital music marketplace. This iTunes Store was commercialized and started downloading purchased songs into iTunes in 2003. Some musicians did not like that individual songs could be purchased off an album for $0.99 vs. $11.99 for a whole album. Some bands held out signing with Apple to distribute their songs through iTunes for this and other reasons. The Beatles and their label EMI finally agreed to terms to distribute their music on the iTunes Store in 2010. Napster and Apple moved music in a new direction.
The full history of music streaming includes many chapters starting in 1993 with the Internet Underground Music Archive for unsigned artists. Pandora launched in 2005 with a free ad-supported model that included a $10 per month subscription option for uninterrupted streaming without ads. Daniel Ek and Martin Lorentzon founded Spotify in 2006, launched the streaming service in 2008 and entered the US market in 2011.
In 2019, Post Malone was the most streamed musician with 6.7 billion streams while 79% of overall music distribution revenue was generated by streaming in 2019. And global music streaming revenue in US dollars reached $11.4 billion in 2019. This is 4x the streaming revenue in 2015 with compounded annual growth of approximately 41%. If that growth holds through 2025 the global music streaming revenue at that time could reach an estimated $90 billion in US dollars.
Spotify
Company: SPOTIFY TECHNOLOGY S.A.
Founded: April 23, 2006, Stockholm, Sweden
Founders: Daniel Ek and Martin Lorentzon
CEO: Daniel Ek
NYSE: SPOT
2020 Revenue: 7.88 billion EUR (+16.6% Year-over-Year)
Monthly Active Users (MAUs): 345 million worldwide at the end of 2020
Spotify’s 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 these creators.
Benefits for Users
345 million consumers use Spotify worldwide as of Q4 2020 for audio and 155 million of those subscribe to Spotify’s paid premium service for uninterrupted audio.
Playlists and Personalization. Users benefit from the ability to navigate millions of tracks. This is done with editorially curated and machine-generated playlists. Users are more likely to engage with a platform that reflects their real-time moods and activities and captures a unique understanding of moments in their lives.
Ad-Supported and Premium Listening. Spotify provides a wide range of listening options that meet the varying needs of a rapidly growing User base. Listening options include an Ad-Supported Service, Family Plan, Student Plan, and individual Premium subscriptions.
Cross-Platform Flexibility. Spotify is built to be functional across multiple platforms—from smartphones to laptops to video game consoles to cars. As an independent service, the platform is uniquely positioned to work with the broadest set of partners in the ecosystem.
Benefits for Creators
Spotify provides a large stage for more than 3 million creators and artists to connect with existing fans and to be discovered by new fans. In addition to providing artists with access to 345 million consumers, the company also provides artists with a full stack of tools and services, enabling them to grow their businesses on a single platform.
Monetization. Spotify pays royalties to artists, music labels, and publishers.
Discovery. Spotify helps artists connect with existing fans and supports artists connect with the Users who are most likely to become fans of their music.
Distribution. An artist who makes their music available on Spotify gains access to the largest music streaming subscription service in the world. The service is available in over 65 countries and territories around the world. Artists can distribute entire albums and individual songs to this audience. Spotify also places artists’ content on curated playlists, further amplifying their reach.
Promotion. Spotify provides artists and their teams tools to personalize and create unique artist profiles to develop their artist image, including featuring songs on their artist profiles and creating artist playlists.
Analytics. Spotify provides numerous analytics for artists through the Spotify for Artists service. Analytics that artists can access include the demographics of their listening audience, Users’ anonymized geographical locations, similar artists that their fans listen to, the number of real-time Users, song performance data, playlist data, and playlist notifications.
Tools for Creation. The Creator Technology Research Lab focuses on making tools to help artists in their creative process—with a goal of helping artists at all career stages to realize their creative visions.
Product
: Mobile App for Music & Podcasts as shown in Fig. E4-1 combines Passive (Curated Radio) and Active (On-Demand Streaming); Mobile App for Artists & Creators
Strategy
: Target audio as a medium; 2-sided marketplace for creators and consumers adds a 3rd side with advertisers and business partners to realize a 3-sided marketplace; preferred platform for recording artists and creators; revenue is driven by a premium monthly paid subscription-based service that is augmented by a freemium ad-supported model.
Spotify is platform agnostic for access on as many devices as possible. That also means it’s not exclusive to any platform and must compete head-to-head with other services like Apple Music on Apple devices where the ecosystem helps drive adoption of Apple services. But Apple Music is less likely to be adopted on new technology platforms like Tesla electric vehicles. So Spotify wins as emerging technology platforms enter the market with a need for access to audio streaming services.
Fig. E4-2 below illustrates the Spotify business model and the flow of data, experiences, music, royalty fees and money across the marketplace.
Fig. E4-3 shows key components for the Spotify business model across key partners, key activities, key resources and cost structure to deliver the value propositions. Customer relationships and channels access customer segments to generate the key revenue streams.
Innovation
: AI Engine & Machine Learning
Spotify uses artificial intelligence and machine learning to recommend music based on learning user preferences. This has 2 immediate benefits. It keeps users engaged to discover work and personalize their listening experience to what they are likely to prefer. It also helps artists grow an engaged audience of new listeners who are targeted based on their preferences.
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1. Spotify is all-in on music with a 3-sided marketplace
Two-sided marketplaces pair buyers with sellers. More buyers attract more sellers. And more sellers expand available products and services to attract more buyers. So the circular nature of this business model looks attractive, but this is a hard strategy and business model to execute. Google search, Facebook social media and Amazon e-commerce are very successful two-sided marketplaces, but they likely represent three out of many thousands who have tried unsuccessfully. And Google, Facebook and Amazon raised substantial capital to build and scale their platforms without a need for profits for a number of years.
Three-sided marketplaces for the right products and services can leverage a business to business relationship to access consumers for what is known as B2B2C. A 3-sided marketplace can also accelerate consumer adoption using an ad-supported freemium model with advertisers. Maybe this can be referred to as B2C2B. This does require adequate scale to offer value to advertisers, but a launch strategy that targets specific demographics can align the marketplace with target advertisers. If the products and services can be delivered as a digital solution, the business model is even more effective to acquire more customers and to cost-effectively deliver these products and services. As the freemium model scales, the business model also offers the opportunity to introduce uninterrupted paid services on top of what is available for free. As the freemium and premium models further scale, advertisers are attracted to the ability to segment and target specific demographics, regions and markets. Advertisers could also see creators that appeal to a target demographic of interest leveraging Spotify as a platform to build influence around a brand.
The actual products and/or services provided to consumers form the third side. This scales as the number of consumers make the marketplace more attractive to commercialize the products and services. Once 3-sided marketplaces achieve a certain scale, they almost become self-sustainable with each of the 3 sides supporting the other two. Spotify went public in 2018 with just over 150 million monthly active consumer users and 3 million recording artists. Spotify is the dominant audio streaming service today most likely due to the mix of both freemium and paid subscriptions on top of the same streaming platform with advertisers making the freemium option possible.
As far as product, the Spotify mobile app for music and podcasts is well-designed and works well in the background while using your streaming device for other applications. Installing Spotify starts a process to select favorite artists and music. This builds favorite lists and a benchmark for the AI service to recommend content. I’m more of a consumer of my favorite artists, but I do find it interesting to see what is recommended and also find the recommendations appropriate for my interests. Building and sharing playlists is another key feature of Spotify that drives adoption when sharing requires recipients to download Spotify to use the playlist for free with ad-support. The cost to acquire these new consumers is negligible with significant long-term value if they convert into a paid subscriber later with years of revenue generated.
Spotify for Artists is the complementary app for creators to help build a following, grow their fanbase and also learn how fans are listening to their audio content. Spotify apps play across multiple devices like computers, tablets, phones, TVs, speakers, mp3 players, smart watches, virtual assistants, etc. from major consumer electronics brands unlike Apple Music playing primarily on Apple devices.
2. Spotify expands audio with podcasts
Past MTV VJ Adam Curry and host of No Agenda plus Podcasting 2.0 and Dave Winer are credited with the invention of podcasting in 2004. Ben Hammersley brought attention to this form of amateur radio in a 2004 article in The Guardian. The widespread use of iPods combined with cheap audio production software plus blogging as an established part of the internet were the key ingredients to foster podcast growth. By January 2020, there were 850,000 active podcasts with more than 30 million podcast episodes (Podcast Insights, 2020). The compound annual growth rate for podcasts from 2020 to 2027 is estimated to be 27.5%. North America accounted for the highest global podcast revenue share with about 40%. The global market for podcasts was $11 billion in 2020 with a forecast to reach $60 billion in 2027.
Apple iPods helped advance the concept with iTunes and its podcast app. Podcasters have continued to advance their craft with multiple platforms to support them today. Spotify moved into podcasts aggressively with the acquisitions of Anchor FM, Gimlet Media and Parcast in 2019. Anchor is a popular tool to create, share, grow and monetize a podcast on all popular platforms. Gimlet Media is the creator for the StartUp podcast hosted by Alex Blumberg. Other Gimlet podcasts include Reply All, Science Vs, Heavyweight, Crimetown, Every Little Thing, The Pitch, Mogul, Uncivil and others. Parcast is another media company with multiple podcasts focused on topics like serial killers, unsolved murders, cults and conspiracy theories. The scale of these acquisitions allowed Spotify to immediately build a strong podcast presence.
In May 2020, Spotify announced an exclusive license deal with Joe Rogan for all content to host his podcast The Joe Rogan Experience. The podcast was estimated to be licensed for $100 million. Michelle Obama and Kim Kardashian also brought their podcasts to the Spotify platform in early summer 2020. The audio format and projected growth make podcasts a strategic asset for Spotify to grow users who consume multiple forms of audio content from recording artists. Podcasters also provide another key driver for Spotify with the need to monetize 850,000 podcasts and 30 million podcast episodes. This growing base plus more traditional recording artists provide the scale needed to create the tools for these creators. What works for Joe Rogan can expand to other artists.
Clubhouse is yet another format of audio that launched in April 2020. It is currently an invitation-only, drop-in audio chat iPhone app that is creating an audio only version of social media. Some people think it could further expand the social experience by adding virtual reality capability. Users can host “rooms” to discuss topics of interest with invited speakers. Others can join these "rooms” to observe the discussion, but require an invitation from a host to participate in the discussion. High profile discussions with key speakers could be archived just like a podcast to offer another form of audio content, but could also be streamed on a service like Spotify to reach a broader audience. Spotify could also partner with Clubhouse to stream exclusive “rooms” just as they licensed the Joe Rogan Experience. Social audio adds a new dimension and scale to podcasts. This format could also really help creators engage indirectly with their fanbases through moderated discussions with invited athletes, entrepreneurs and celebrities on topics that help listeners better understand what drives the creators work. Twitter also launched Spaces to build its own social audio service on Android since Clubhouse is currently only on iOS.
3. Spotify disrupts traditional media beyond audio with expanded services
Audio will likely remain the dominant medium for Spotify, but video capabilities build on audio and add to a platform built for creators with music videos of their work, documentaries and live performances. These help support building a fanbase. Opera, Ballet and other visual art forms also benefit with video beyond the audio format alone to expand their content of interest with consumers and advertisers. YouTube is more in scope for Spotify versus Netflix for movies, film and TV shows.
Virtual reality adds another dimension to audio with custom experiences and user interaction with others like fans of the same recording artist. Designers and creative artists can work to build branded or themed environments for a recording artist to provide unique audio listening experiences. This brings multiple art forms together to create something new and totally immersive. Social audio plus virtual reality can also create unique experiences for interactive virtual discussion and live virtual performances. Haptic feedback can add another dimension to enable sensory experiences. These are all extensions on audio to provide a broader tool kit for creators to develop content and deeper experiences for their fanbase and to attract new fans.
Services to help creators monetize their work
Spotify partnered with Square in April 2020 during the early stages of the pandemic to help creators on Spotify’s platform use Square’s Cash app for fund raising campaigns to counter lost income from not being able to tour. The pandemic has provided a rare opportunity for Spotify to innovate new ways to monetize creators with some freedom from consequences by the record labels. Square already has strong ties to the creator community and offers opportunities for money to flow from consumers and businesses to creators around causes and merchandise. Creators can post their unique $Cashtag on profiles so Cash app users can send direct payments for fund raising campaigns. Square also provides opportunities for creators to sell merchandise through a free online store. Spotify can also expand the partnership with Square to build out more features for premium subscribers and creators using more of Square Cash app and Square business tools.
Spotify has also created unique partnerships to expand and monetize a creator’s reach. A 2015 deal with Starbucks built on a 20 year history of Starbucks creating playlists played inside and sold in over 7,000 US stores as CDs. Starbucks announced earlier in 2015 they were discontinuing the sale of CDs, but they still had all of their curated playlists. The partnership made these playlists available to all Spotify listeners. Spotify premium fee-based subscribers also earn Starbucks “Stars as Currency” points to hold and redeem for purchases at Starbucks. This provides an incentive to convert more Spotify freemium consumers into paid subscribers that pay creators more. Starbucks-friendly creators also get favored airtime when consumers use Spotify to stream Starbucks playlists.
A non-fungible token (NFT) is a unique crypto-asset authenticated by a blockchain. They originated around 2012, but advanced significantly in 2017 when Ethereum introduced ERC721 as a technical standard for these tokens on the Ethereum blockchain. The first NFT to use ERC721 was CryptoKitties. This token allowed players of a virtual blockchain-based game to adopt, raise and trade virtual cats.
American rock band “Kings of Leon” released a musical album last week with tokens, making it one of the first ever bands to distribute digitized art. The album titled ‘When You See Yourself’ will be distributed in 3 tokens as part of a series called ‘NFT Yourself’. One NFT is a special album package. A second NFT offers live performance perks, like front row seats for life. A third NFT offers exclusive audio-visual art. NFTs can be built as ‘smart contracts’ for general tickets to allow artists to earn a small percentage each time a token is resold. NFTs can be traded like any other asset, but can also be redeemed for a one time benefit like a vinyl album of the digital content you can access for free on Spotify.
The recording artist Grimes recently sold a series of 10 digital pieces like the one in Fig. E4-5 for approximately $6 million after putting them up for auction. Some were sold individually like a one of a kind video with a single NFT while other pieces were sold as thousands of copies with a unique NFT for each copy. This could be the future of art where new work is still distributed through traditional channels, but unused tracks, videos, writings, notebooks, instruments and other media used to create the work are sold individually or bundled and sold using tokens. These tokens can then be traded until redeemed to receive the associated goods. Spotify could partner with a company or add its own token service to help creators leverage tokens to monetize their work.
Conclusion
Daniel Ek is building a 3-sided marketplace through Spotify that provides substantial value for consumers, creators and advertisers using artificial intelligence, machine learning and other exponential technologies. Exclusive licensing deals and acquisitions of leading podcasts has accelerated competing with Apple on this growing long-form audio style for top creators like comedian Joe Rogan who currently has the top podcast called the ‘Joe Rogan Experience’. But the ability for a young artist to create their own brand and distribute their creative work is the true upside potential for Spotify. The number of U2s and Rolling Stones created by major record labels will shrink, but that model will be replaced by a million artists who build their brand and career primarily with a platform and partner like Spotify. And we all benefit from the breadth and diversity of their creations. And Spotify will partner with other 3rd parties like Square and Starbucks to offer unique benefits to both consumers and creators. Spotify’s AI and machine learning will grow in importance to access these emerging artists based on past listening preferences. The traditional function of the record label will be amplified 100x by Spotify for creators worldwide.
Merging the cultures for Spotify’s commercial operations in Sweden, the United States and other countries provides significant challenges, but also opportunities with recording artists and creators who are as diverse as a company that spans many cultures itself. Allowing multiple cultures to flourish within Spotify and fostering different opinions leads to better outcomes. Apple and Google have global operations, but they are primarily based in the United States. Spotify’s founder and CEO Daniel Ek is based in Sweden with Spotify’s corporate headquarters.
Music has evolved into a digital ecosystem with many intermediaries between the recording artists as the creators of original audio and the consumers who listen to their music. Record labels and digital rights distributors play a substantial role aggregating and monetizing music, but these intermediaries also take a substantial portion of the revenue generated. And platform technologies from companies like Alphabet, Amazon and Apple can license the rights to music from digital rights distributors to stream music as a value-added service to help build value for their overall platform.
Spotify has 4 main levers to build a competitive advantage over time. These include 1.) stay open, platform agnostic and available to stream music on as many technologies as possible; 2.) expand audio streaming services beyond music with adjacent opportunities like podcasts; 3.) build out an elaborate business model to evolve a 3-sided marketplace with distinct value drivers for each side of that marketplace; 4.) build out unique services for creators to help them monetize their work and connect to their fanbase and 5) leverage success with the 1st 4 levers to expand into adjacent media to grow the base of creators using the Spotify platform.
Spotify is now almost 15 years old from its founding in Stockholm, Sweden and has built a substantial audio streaming business over this time with an effective strategy and business model. But it seems over the next decade, Spotify can take all these assets to the next level with expansion into adjacent areas to grow a base of creators with expanded services to help them monetize their work. And as this thriving creator base grows, so too will the Spotify value proposition to consumers. Daniel Ek will advance humanity through the art and creativity we love and enjoy.
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