Spotify: market leader through innovation

Wednesday 19 April 2017 | 16:17 CET | Background

Spotify is the world leader in streaming music, at least if we leave out YouTube and look only at paid services. Its success can be easily explained - not just 'hygiene' factors but other strategic choices, most important of which is continuous innovation. 


With around 120 million users and 50 million paid subscribers, Spotify is well ahead of its rivals Apple Music, Napster, Deezer, SoundCloud, Amazon Music Unlimited, Tidal, Google Play Music, YouTube Red, Pandora Media and any number of small specialist providers.

Market leader

That said, we should keep in mind how Spotify's competitors differ: 

  • Footprint. Spotify is active in 60 countries, the others usually in many less. Apple however is active across a much broader footprint.
  • Sound quality. Tidal is known for its loss-less quality (FLAC), the other services offer lower quality (usually 256 or 320 kbps).
  • Radio. Pandora Media and Beats One (Apple) offer a radio service, which may be personalised. This is going further than just playlists. 
  • Exclusives. Some players offer exclusive content, such as Tidal, Amazon Prime Music (the full version, free for Amazon Prime subscribers) and SoundCloud (user-generated). In general though the providers try to provide the most complete catalogue. 

According to Telecompaper research, Spotify is also market leader in the Netherlands, installed on 4.3 million smartphones (32%). On average users listen to Spotify 108 minutes per week and 16 days per month. In terms of quality, Spotify also gets the best marks from users (source: TP Dutch Apps Market February 2017).


Spotify is owned in part by major record labels (Universal/Vivendi, Sony, Warner) and other shareholders include Merlin, Coca-Cola, Li Ka-shing and Telia (1.4%). When it raised new money in March 2016, the company agreed to list on the stock market within two years. It was last rumoured to be planning an IPO in September 2016, at a valuation of USD 11-13 billion. In 2015, the company generated around EUR 2 billion in revenues and made a loss of EUR 200 million. However, it is profitable in some countries, such as the UK.

Potential investors can ask three questions: Has the company hit bottom yet in terms of losses? When will it reach breakeven? And how fast will it grow after that? There is also the question of how long Spotify can continue to exist. It is essentially an aggregator, which can always be swept aside by its suppliers. This was part of the reason that drove Netflix to start producing its own content. This is probably not an option for Spotify. However, at a certain point the majors will acknowledge that Spotify deserves to continue given its market power and customer numbers. Or better said, that at a certain point it will become a major (if not the most important) distribution channel.

Streaming music is well on its way to becoming the biggest part of the music market, alongside publishing and live concerts. It forms part of the recorded music market, which includes the two segments physical (CDs, DVDs, vinyl) and digital (downloads, streaming, radio, ringtones). Streaming has two revenue sources: subscriptions and advertising. In some countries, such as the Nordic markets and Netherlands, streaming is already for a few years the biggest part of recorded music. In other countries, physical players still dominate, but that is changing quickly, such as in the US and Germany. The market has shifted in the past decade from downloads to streaming, and Spotify and other services are driving this as well as profiting from it. At the same time, with their free services, they offer a good solution to stemming illegal downloads. 


But why is Spotify so successful? In addition to a number of 'hygiene' factors (financing, enthusiastic management, licensing deals, ease of use), Spotify has made a number of smart choices and is continuously renewing itself.

  • Diverse business model. The user can choose from free (with advertising), paid or family subscriptions.
  • Sound quality. Subscribers receive 320 kbps. Spotify is also rumoured to be working on a hi-fi version with loss-less streaming (like Tidal). This would cost USD 5-10 per month more.
  • Playlists. Spotify has loads, some provided through third-party cooperations.
  • Extras. Videos, podcasts, recommendations, song lyrics, etc. are all part of the offer.
  • Advertising. Various technologies support addressable advertising, customised to the listener.
  • Distribution. Spotify has three types of distribution partner:
  1. Telcos, incl. KPN and Telia.
  2. Hardware manufacturers, incl. Sonos, Vizio, Philips, Sony/PlayStation, Google/Chromecast and according to rumours Apple/Apple Watch.
  3. Others, incl. Starbucks, New York Times, Google/Waze, Tesla, Virgin America, Facebook/Messenger, Twitter.

The most important element of its strategy can be summed up in one word: innovation. 

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