Jul 94 min read

Initial days of Spotify

Market before Spotify:

The market had already been predominantly using file-sharing services like Napstar, Limewire, and Piratebay. But the artwork is not just any file (copyright is *). These companies were non-copyright groups.

Product:

Spotify is a free music streaming service. Below are a few pointers that spotify was a better product than other existing service providers.

Not just free, it was instant. (500ms latency)
Services are legal. All licenses are obtained for streaming.
Similar music and best recommendations + shared playlists.

Giving competitive edge

In the initial stage, the product was described as 80% of the product development was copied from successful models and the rest has been reinvented.The following data shows how Spotify was successful in overthrowing the competition.

Product	Service	Revenue Source	vs Spotify
Napster	P2P music sharing	$4.95 for a subscription monthly plan	Instant music, fremium+premium plan
Limewire	P2P music sharing	Premium service for faster	Instant music+ enhanced music quality for premium users
Piratebay	P2P music sharing	Ad revenue	Instant music + UI/UX
iTunes	Selling digital audio files	Selling digital audio files, Ad revenue	Instant music + http link share for playlists + Music algorithms

Besides, The emphasis is given to onboarding the affected market due to piracy who filed severe allegations against all illegal service providers. (At the end of series B funding, the company is said to have issued all major record labels a combined stake of almost 20% in Spotify as part of a global deal.)

Revenue model of Spotify

Spotify generates revenue from mainly 2 sources.

Premium subscription (10% premium users in 2011 to 48% in 2018 which constitutes 90% of total revenue)
Ads

As for the artists and the licensors, the money is paid in recording and publishing royalties each time the recordings are played by a premium or freemium user.

Spotify paid record labels close to 52% of the revenue generated by each stream. Over 85% of music streamed from Spotify belonged to four record labels: Sony, Universal, Warner, and Merlin. In 2018, Spotify paid €3.5 billion in royalties for premium users and €0.5 billion for free users, which equals 74% of overall costs.

Launch and operations Spotify

launched with both freemium and premium models.
The idea is to acquire customers > convert them to active users > Manage churn rate(Royalties for free users) > convert freemium users to customers to premium customers > manage churn rate(Royalties for premium users) (the first half year of 2019, Spotify’s premium subscriber churn rate fell to a record low of 4.6%)

Operational viability

The server maintenance costs are cut down to as low as 30% through implementation of the hybrid infrastructure. The key features include overwriting the TCP/IP network suite by manually controlling the packet exchange speed at gateways as a result losing a negligible amount of data loss but high speeds.

A centralized server-client model is used to fetch the search results and first 15sec of the recording to user, the rest is shared locally over a P2P network from a user who already have loaded the recordings.

Target audience Source: simply learn

Age	Mainly 18-24 years
Total markets	178+
Gender	More men than women
Top countries	The USA, Europe, Latin America, North America
Type	Students & Young Business Professionals

Launch

The founders were confident of the products’ adaption into the market but the question was on how to release it into the ecosystem.First endeavors

Outreach to bloggers, creators, and other community leaders with exceptional customers.
Setting up the referral score. (Not more, not less)
Marketing and advertising in the name of fan-fav artists. (Tailor Swift)
Content aligning with social media trends.
Unpacking music trends at Spotify on billboards.
Partnership with Klout to give the first 20,000 invites to influencers.

Shared playlists created clusters of internal communities who share similar tastes in music.

Acquisition - Through combined chain reaction and referrals +Creator community influence

User experience- UI>Discoverability> Speed>Quality>Similar recommendations+playlists+ personalized library( Available with a freemium plan) >>> More active users> more advertisers.

Enhanced quality + Downloadable + Pre-release notifications + Exclusive concert ticket lotteries + NO ADS

Retention: Idea was to offer royalties to keep the churn rate low for both freemium and premium users. Spotify has become a self-growing product and was able to retain the customers without any need for further efforts.

Referrals: A referral currency was set as a user status symbol at the time (Max invites are limited).

Early revenue

Spotify encouraged users belonging to inactive Spotify zones to opt for day passes and premium before the launch of freemium. Hardcore music fans at the time did so following the craze and traction it gained globally.
Pre-release of exclusive albums even before the actual launch to premium users enticed freemium users to opt for premium subscription.

Branding

One of the tailwind factor was reviews and appreciations from the renowned personalities and businessmen like Mark Zukerberg.Spotify focused on collaborations with exclusive concerts, MNCs like Starbucks as part of brand value proposition.

Spotyfy disrupted many brands like itunes in music streaming industry and defeated them in their own markets and dominated monopoly for over a 2 consecutive years.

Challenges and allegations

Spotify was criticised of unfair artist compensation. While it was true and the issue was brought to trial. At the time, the company was in desperation for funding support from loans and yet managed to survive the crisis as the results went out that spotyfy was not just the market leader but almost a monopoly in the global and chinese markets.

Road to PMF

The products success and companies growth are self explanatory. The product at the time was everything the market lacked and day on day, spotify evolved into delivering to the customer what exactly the market needs.

The product was said to have shared 80% of the features from existing successful products in the market with the most unique differentiator, the speed. There are other factors too that contributed to products traction in the market. Soon the market started saturating with new competition with better quality and by products yet spotify was spoken well for the best recommendations and music algorithms.

Spotify was able to deliver most of all the user’s looking into and the user is desparate anf enticed to spotify.Spotify has achieved it’s PMF and in a span of less than 7 years.

Thank you for Sudheer Kota for contributing this article.

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