Why Spotify Will Win The Online Music War

The Swedish take their music seriously. From Abba to Robyn to Swedish House Mafia, the Scandinavian country punches above its weight in the charts. Now as Stockholm’s tech sector continues to develop, it’s also making an impact in the music tech world, with licensing startup Epidemic Sound taking on USD5m earlier this week. However, the poster child of Swedish music tech is undoubtedly Spotify. Since being launched in 2008, the music streaming service is now available in 56 markets worldwide and is en route to overtake iTunes as Europe’s largest digital music service.

Spotify keeps its user numbers pretty close to its chest. Just over a year ago it revealed that it counted 24m active users, 6m of which were paying USD9.99 for a premium subscription. Now it says it has 40m active users on the service and 10m paying for access. That still means the vast majority of users are listening to its ad-supported free service, but it shows that Spotify’s initiatives, such as opening up a limited version of its mobile app for free and student discounts, are successfully converting listeners to payers. Its model is working and while there are plenty of rivals in the online music space, Spotify is becoming an ever more powerful player that stands a better chance than any of taking over digital music.

There Is A Profit Plan

Spotify is not profitable. It’s still far from it. In its most recent earnings call at the end of 2013, the company posted growing revenues of EUR435m (USD580.6m), yet its losses widened significantly, from EUR45m (USD60m) to EUR59m (USD78.7m).While it seems as if Spotify’s business model is fundamentally flawed and the sheer costs of dealing in the music industry making it almost impossible for a streaming service to generate a profit, there is a plan.

In an effort to prove its long-term value to disgruntled artists Spotify last year launched a free analytics tool and its Spotify Artists website. Emphasising how much the amount paid out to artists will increase as Spotify scales the company reveals some pretty convincing plans that all depend on scale. Next to something like YouTube, which brings more than 1bn viewers to its site and app, Spotify’s 40m is still tiny. However, if it can scale to even 100m its pay-outs will be more than four times what it is now and its revenues exponentially higher. YouTube is a consumer's go-to video consumption location, Spotify aims to become that for music, in order to make some serious money from digital music.

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Heading Public?

Getting there is going to be costly though and the company has already raised more than USD540m in venture capital funding. However, reports are circulating that an IPO might be in the works. An offering might help the company gather more sustainable income flows from investors to allow it to spend big on expansion, but it needs to strike while the iron is hot. There’s a big appetite for tech shares at the moment and it’s becoming more normal for a revenue-free company, like Twitter, to list. With a USD8bn valuation rumoured the company could benefit from an IPO.

Market Consolidation Begins

One of the biggest challenges for any music streaming company is tackling competition, from startups to pirate sites. On top of that there’s the ongoing legal debates between services and major labels desperate to get back to generating the kinds of revenues they made in the days of vinyl.  

However, the number of opponents has hit its peak and that number will only diminish as the market shakes out the stragglers and larger players begin to consolidate the market. This week saw London-based music streaming app Bloom.fm announce that it will shutter its service after its sole investor TNT ducked out and it failed to find a buyer. Meanwhile, Beats, which launched its music service as a self-proclaimed ‘Spotify Killer’ is about to be scooped up by Apple after only acquiring 110,000 subscribers. It’s unclear what Apple’s plans for the streaming service are, but realistically it's paying USD3bn for hardware rather than an expansion of iTunes.

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The ongoing consolidation of the market means Spotify only really has three legitimate rivals. First there's Pandora, which as a radio service is fundamentally different to Spotify and while it counts 75m listeners, it’s so bogged down in legal issues that it just can’t seem to break out of the US on the global market.  

Then there’s Apple. The California company is finally realising that consumers want to stream rather than download content and it’s big hardware division can fund any new music streaming projects. However, Spotify’s cross-OS capabilities mean it can appear on Android phones where iTunes doesn't. Lastly there’s Google. Owning YouTube means it’s currently in control of the world’s largest music streaming platform and rumours of an offline playing mode on its app could seriously disrupt mobile music, but would consumers pay for a service that’s always been free?

One other opponent to Spotify is the traditional music industry. While it acts as if Spotify is stealing from it, it needs to remember that without services like Spotify consumers might never pay for music again. There are endless illegal ways for consumers to get music and only the pettiest of bands are willing to sue pre-teens over it. In any case, suing your customer isn't sustainable. The music industry needs to realise that consumers are not going to pay USD10 for an album, period. The best it can do is get on the winning side and when it comes to paying out, Spotify is parting with noticeably more cash than either iTunes or YouTube.