Adrien Book

@ThePourquoiPas

How Can Spotify Survive The Next Decade?

June 4th 2018

A non-musical lesson for a musical strategy

It would be easy to argue that Spotify is on its way to industry hegemony. With 170M users, 75M of whom are premium subscribers (36% of premium music subscribers globally), the company made $5bn revenues in 2017, compare to $2bn in 2015.

Such growth is, to me, indistinguishable from magic.

Yet, Spotify still can’t make a profit, in part due to absolutely razor-thin margins (ie: non-existent). That’s because a very high percentage of its revenues are paid back to the artists, meaning the company has always operated at a loss as it concentrates on break-neck growth. And therein lies the issue: 1 fan who listens to 1 song 10,000 times is only 1 subscriber, giving Spotify a mere $9.99 of revenues per month, yet the company has to pay the recording artist about $44. At this pace, the company is losing $2 per user per year, and its average revenue per account is declining fast.

Yes, Spotify’s numbers are impressive, but a strategy that assumes revenues but not expenses rarely makes sense.

How can these issues be solved?

The first point of action for Spotify is addressing its non-existent margin: streaming is a technology, not a business, and as such no business plan should solely revolve around said technology itself; just because people care about music doesn’t make it profitable. And even though its base is solid thanks to a subscription-based model instead of an advert-based model, Spotify has very few good options:

Lower customer acquisition costs by banking its great product

In the 21st century, customer-experience is everything, and nobody really cares about your marketing campaign anymore, however cute it may be. This really shouldn’t come as a surprise to anyone, yet still does. Cutting marketing costs might be hard to achieve for a famously frugal company, but should be something Spotify aims to achieve.

The product has some really good fundamentals and does a great job converting free users to premium users. Yet some tweaks are possible beyond the “playlist appeal”. Curation is great, but isn’t nearly enough. Banking on lyrics, karaoke and podcasts could be a start.

Reduce the churn rate

Spotify is already making good headway in reducing its churn rate worldwide, going from 7.7% in 2015 to 5.5% in 2017, despite strong customer growth. These are great numbers for a price-sensitive product in a competitive environment.

The company achieved this by providing a sticky offer (which could be made stickier with paid upgrades and/or a price hike), a Family Plan, a personalised product and network effects. Yet it needs to go further by offering a great product that customers simply can’t live without. There were briefly talks of hardware. But hardware is an old man’s game, and potentially too hard for young streaming services.

Real estate money never truly left: it only moved to our smartphones, and any app taking a permanent seat on our main screen is worth billions of dollars. Currently, the average premium subscriber remains subscribed for 18 months. It should be double that.

Find new ways to get users hooked

In less developed parts of the world, Spotify aims to attract customers by bunding its product with those of Telcos. For now, it represents only a small percentage of revenue, but could, and should, grow worldwide in the near future. One issue to keep in mind: potential brand damage (remember when U2 was forced into our iPhones?).

Another way to get users to onboard is to vary payment options. Instead of credit card, Spotify could concentrate on mobile contracts and vary payment options more than it does now. This would work best in developing nations, where the market is both untapped and growing.

The nuclear option

Spotify might be tempted to try negotiating better terms with labels by presenting a scaling potential argument, but why bother? Why not cut the labels altogether and deal with artists themselves? This would give Spotify power over supply and marginal costs, as well as first-mover advantage on the market.

Original, first-party content

Forget the earlier ideas. This is the one.
For now, Spotify has basically been able to overcome what’s generally really well understood about media streaming services: exclusive content matters. They’ve done so by creating an experience that allows people to do what they want to do in the world of music, which is listen to hours of music every day and have that music be interesting and varied and true to their tastes. But that doesn’t pay the bills. Creating unique content does. For now, nothing on Spotify is unique, bar its algorithm-playlist. Getting users to stream stuff besides licensed music, like podcasts or original videos, ought to be a priority.

Want a bet? Spotify moves to video and tries to eat Netflix: Netflix needs to become Spotify before Spotify becomes Netflix.

Netflix was born on TV and cant compete with a mobile native going at it guns blazing. Yet Netflix has an advantage: unique content that people will pay for. A fun fight ahead.

Spotify is a global A.I which gets better as it ages and is seen as an upstanding, likable employer. All the right ingredients for success (see Google, Netflix, Amazon, Facebook…). Moreover, they’re natively social. Because of this, I see it having a long successful life. That is, if GAFA lets it…

The “Others”

Google, Amazon, Apple are among the wealthiest on earth, and currently use music to draw traffic to their sites and keep people within their ecosystems. Amazon Music and Apple Music simply makes their respective companies’ hardware more valuable. For them, the business end of music is hardly more than a rounding error. Not so for Spotify, which makes it that much harder for it to survive.

If tomorrow Jeff Bezos wakes up and decides to make a music streaming service at $5.99 and is serious about it, good-bye Spotify. Same for Apple and its stupidly high margins. If the competition is able to sling money around with little regard for profitability and outspend your cash-strapped startup, why bother innovating and coming up with the next smart business built around music?

And so, I once more arrive to the same conclusion I nearly always inevitably get to: the big Tech companies must be broken up to allow others to survive.

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