Why Spotify’s “Grand Strategy” Will Fail

Summary

Spotify, once facing competition from smaller players, now contends with tech giants like Apple and Amazon. Despite being the largest music streaming service with 239 million subscribers, Spotify has never turned a profit due to high royalty costs and a variable cost structure. The company has explored diversification into podcasts and audiobooks, investing heavily in exclusive content, but has yet to achieve profitability. Spotify's strategy of chasing the next big thing distracts investors and brings in new listeners, but it struggles to monetize these ventures effectively.

Takeaways

• 🎧 Spotify faced immense competition from Apple Music, which had several advantages such as pre-installation on devices, wide reach, and established industry connections.
• 📈 Despite competition, Spotify remains the largest music streaming service with 239 million paid subscribers, outpacing Apple Music.
• 💰 Spotify has never been profitable in its eighteen years of operation, with revenue increasing but profit remaining stagnant.
• 🚀 The music industry's decline was caused by piracy, but Spotify's unlimited streaming model helped revive it, surpassing its 1999 peak.
• 🎵 Spotify is often criticized for underpaying artists, but artists overall earn more today compared to a decade ago.
• 💸 The company is caught between high demands from record labels and competition from other platforms, leading to low profit margins.
• 📉 Spotify's variable costs mean that any price increase could lead to more customer frustration than profit, unlike fixed-cost businesses like Netflix.
• 📚 Spotify's strategy to diversify into podcasts and audiobooks has been challenging, with high-profile deals not leading to the expected profitability.
• 🔄 The company's attempts to find new revenue streams, such as merchandising and original content, have not yet resulted in significant profit.
• 🔄 Spotify's approach seems to be a cycle of investing in new industries, attracting users, and then moving on to the next 'big thing' without achieving sustained profitability.

Q & A

What challenges did Spotify face in 2015?

In 2015, Spotify faced the beginning of the end with the launch of Apple Music, which had several advantages over Spotify, including the ability to pre-install on top smartphones, reach billions of devices with notifications, advertise in physical stores, bypass the App Store commission, and leverage long-standing music industry connections.

How has Spotify managed to stay ahead of its competitors despite the challenges?

Despite the challenges, Spotify has continued to grow and is still the largest music streaming service with 239 million paid subscribers, which is twice the size of Apple Music. It has done so by offering a compelling service that continues to attract and retain users.

Why has Spotify never been profitable in its eighteen years of operation?

Spotify has never been profitable due to the high costs associated with paying record labels and the low margins in the streaming business. It has to pay a percentage of revenue to labels, which means the more it earns, the more it owes.

How has the music industry evolved since the advent of digital piracy and services like Spotify?

The music industry had been in rapid decline due to piracy until services like Spotify introduced a subscription model that offered unlimited streaming for a fixed price, which helped revive the industry and surpass its 1999 peak by 2021.

Why does Spotify pay so much to record labels?

Spotify has to pay a significant amount to record labels because it doesn't pay per stream, which would be risky, nor per user, which labels wouldn't allow. Instead, it pays a percentage of revenue, which means its costs are variable and high.

What strategies has Spotify attempted to diversify its business and escape the unprofitable music streaming industry?

Spotify has tried to diversify by investing in podcasts, audiobooks, and even online courses. It has also explored other revenue streams like merchandising, concert tickets, and music production tools.

What was the outcome of Spotify's investment in podcasts and exclusive deals with celebrities?

The investment in podcasts and exclusive celebrity deals did not lead to profitability as expected. High-profile deals with the Obamas, Joe Rogan, and others did not result in a significant or lasting increase in user engagement or revenue.

How does Spotify's business model differ from Netflix's in terms of profitability?

Netflix's costs are fixed for producing original content, so every new subscriber after the content is paid for contributes to profit. In contrast, Spotify's costs are variable and tied to the number of streams, making it difficult to achieve profitability.

What is the potential risk of Spotify offering free audiobooks to its premium subscribers?

The risk is that users may not see the value in paying for audiobooks when they are offered alongside free music, potentially commodifying the audiobook medium and reducing the willingness of users to pay for it.

What advice did Reed Hastings, co-founder of Netflix, give in his book 'No Rules Rules' that could be relevant to Spotify?

Reed Hastings advises on the Netflix 'innovation cycle' that empowers employees to experiment with new ideas and offering generous severance packages to maintain high talent density, which could help Spotify in finding a path to profitability.

How does the Imprint app relate to the discussion about Spotify and the challenges of learning from books?

The Imprint app distills influential books into their most essential lessons, providing an alternative for busy people who may not have time to read full books. This is relevant to the discussion as it suggests a way for Spotify to potentially learn from successful business strategies without getting bogged down in lengthy reading.