Spotify Business Model: 3 Ways Its Transforming Audio

The Spotify business model is based on their digital platform which connects artists with fans to drive music discovery on a scale that has never before existed. Their goal is to enable 1 million artists to live off of their work. Officially launched in 2009, Spotify is by far the leading global music streaming platform.

Gary Fox

Spotify Business Model

The Spotify business model is based on their digital platform which connects artists with fans to drive music discovery on a scale that has never before existed. Their goal is to enable 1 million artists to live off of their work.

Spotify Co-Founders
Spotify co-founder Daniel Ek and Martin Lorentzon (photo via mashable.com)

Officially launched in 2009, Spotify is by far the leading global music streaming platform. But if you take a look at Spotify’s acquisitions and recent developments you can see that it has ambitions beyond being a music streaming service.

Key Facts About Spotify

Company name: Spotify
Ticker symbol: SPOT
Annual revenue: 2023: $6.76 Billion
Profit | Net Income: 2023: -$73 Million
Market Cap: $58.22 billion (April 2024)
Link: Spotify
Year founded: 2006
Founders: Daniel Ek and Martin Lorentzon
Company CEO: Daniel Ek
Headquarters: Stockholm, Sweden
Number of employees: 4,405
Type of business: Public

Spotify Competitors

  • Apple Music
  • Amazon Music
  • Deezer
  • Google Play
  • Pandora
  • Soundcloud
  • Tidal

Useful Links for Spotify

Spotify Business Model: 3 Ways Its Transforming Audio
Spotify Business Model: 3 Ways Its Transforming Audio
Spotify Business Model: 3 Ways Its Transforming Audio
Spotify Business Model: 3 Ways Its Transforming Audio
Spotify Business Model: 3 Ways Its Transforming Audio
Spotify Business Model: 3 Ways Its Transforming Audio
Spotify Business Model: 3 Ways Its Transforming Audio
Spotify Business Model: 3 Ways Its Transforming Audio
Spotify Business Model: 3 Ways Its Transforming Audio

How Spotify Makes Money

Spotify Business Model: 3 Ways Its Transforming Audio
Spotify Revenue 2013 to 2023 (source: Statista)

Revenue by Geographic Region (2023):

  • United States: €5,225 million, representing 40% of total revenue.
  • United Kingdom: €1,230 million, accounting for 9% of total revenue.
  • Other Countries: €6,783 million, making up 51% of total revenue.

These figures highlight the United States as Spotify’s largest single market, followed by a significant contribution from other global markets, underscoring the company’s widespread international appeal and market penetration.

Revenue Breakdown by Service (2023):

  • Premium Revenue: €11,566 million, constituting 87% of the total revenue. This substantial portion underscores the premium service’s crucial role in Spotify’s business model.
  • Ad-Supported Revenue: €1,681 million, representing 13% of the total revenue. This segment includes revenue from traditional music streaming ads and podcast advertising, which has been showing robust growth.

Service-specific Insights:

  • Podcasts: Contributed €64 million to ad-supported revenue. Although representing a smaller fraction of the total ad-supported segment, the growth in podcast revenue highlights the strategic shift towards diversifying content offerings beyond music.

Additional Financial Metrics:

  • Premium Service ARPU Decline: A slight decline from €4.60 to €4.39, which reflects strategic pricing adjustments and market mix changes, suggesting a focus on expanding user base possibly at the expense of higher per-user revenue in the short term.

Is Spotify Profitable?

Spotify reported a Net Loss in 2023 of €532 million. This was an increase from a net loss of €430 million in 2022 and significantly larger than the €34 million loss in 2021​​.

  • 2023 Net Income: Spotify reported a net loss of €532 million for the fiscal year ending December 31, 2023​​.
  • 2022 Net Income: For the previous year, the net loss was €430 million​​.
  • 2021 Net Income: In 2021, Spotify recorded a significantly smaller net loss of €34 million​​.

These figures highlight a concerning trend in Spotify’s profitability, with losses deepening significantly in the most recent fiscal year compared to the preceding years. This escalating loss could reflect various strategic investments, increased competition, or operational challenges within the industry.

The net income of Spotify and its breakdown are detailed as follows:

  • Net Loss (2023): Spotify reported a net loss of €532 million in 2023. This was an increase from a net loss of €430 million in 2022 and significantly larger than the €34 million loss in 2021​​.

The reasons behind the increasing net loss are primarily attributed to several factors:

  1. Cost of Revenue: The total cost of revenue in 2023 was €9.85 billion, a 12% increase from the previous year. This includes costs related to Premium and Ad-Supported services. Premium cost of revenue increased by 12% due to higher royalty costs and payment processing fees​​.
  2. Royalty Costs: A significant portion of the costs was driven by increased royalty payments, which totaled an additional €814 million in 2023​​.
  3. Foreign Exchange Impact: Adverse foreign exchange movements also had an unfavorable net impact on revenue, which was estimated to have reduced total revenue by approximately €399 million if exchange rates had remained consistent with the previous year​​.
  4. Increased Operational Costs: Research and development expenses grew by 24% to €1.725 billion, reflecting continued investments in enhancing the platform’s capabilities​​.
  5. Impairment and Other Costs: The company also faced significant impairment charges on real estate assets, amounting to €123 million due to strategic reductions in office space​​.
  6. Marketing and Sales Expenses: Sales and marketing expenses slightly decreased by 2%, but still involved substantial investment in consumer marketing and new user acquisition​​.

Changes in Royalty Rates Affecting the Spotify Business Model

Spotify, along with other streaming giants, has agreed to a new royalty rate schedule that will gradually increase from 15.1% of revenue in 2023 to 15.35% by 2027. This change is part of a broader agreement to ensure higher payouts to songwriters and publishers, helping to stabilize financial distributions in the streaming landscape​ (National Music Publishers’ Association)​.

Spotify’s Revamped Royalty Model

Starting in 2024, Spotify is introducing a new royalty model that includes several significant changes:

  1. Minimum Stream Threshold: Spotify will now require a minimum of 1,000 streams per track annually for it to qualify for royalty payments. This move is aimed at reducing the number of ‘ineffective’ tracks that do not contribute significantly to artists’ earnings​ (Digital Music News)​​ (Digital Music News)​.
  2. Fraud Detection and Penalties: In an effort to combat artificial streaming, Spotify will impose fines on labels and distributors when fraudulent streaming activity is detected. This policy is intended to deter bad practices and ensure that payments are directed towards deserving artists and rights holders​ (Music Business Worldwide)​.
  3. Longer Tracks for ‘Noise’ Content: To address the manipulation of stream counts through very short ‘functional’ tracks (like white noise), Spotify will require these types of tracks to have a longer minimum duration to qualify for royalties. This adjustment aims to ensure that payments are more aligned with genuine consumer engagement rather than manipulated listens​ (Music Business Worldwide)​.

The Spotify Business Model Map

Spotify Business Model Example
Spotify Business Model Made Easy

A Short History of Spotify

Spotify initially was on released in 2009 but rapidly grew and has become on the most popular music streaming platforms.

  • 2006Founding of Spotify: Daniel Ek and Martin Lorentzon founded Spotify in Stockholm, Sweden.
  • 2008Public Launch: Spotify launched publicly in Europe.
  • 2011U.S. Launch: Spotify expanded into the United States.
  • 2012Mobile Expansion: Spotify became available on mobile devices, significantly increasing its user base.
  • 2015Introduction of Podcasts: Spotify began offering podcasts, diversifying its content beyond music.
  • 2016Spotify Family Plan: Introduction of family subscription plans.
  • 2017IPO Preparation and Xbox Integration: Spotify prepared for its IPO and integrated with Xbox, enhancing accessibility.
  • 2018Direct Listing on NYSE: Spotify went public via a direct listing on the New York Stock Exchange.
  • 2019Acquisition of Podcast Networks: Spotify acquired several podcast networks, including Gimlet Media and Anchor, boosting its podcast content.
  • 2020Exclusive Podcast Deals: Signed exclusive deals with notable figures like Joe Rogan, enhancing its podcast portfolio.
  • 2021HiFi Music Tier Announced: Spotify announced a new HiFi music tier, aimed at providing high-quality sound.
  • 2022Expansion of Services: Expanded services to more than 80 new markets and added 36 languages to its platform.
  • 2023:
    • Revenue Growth: Generated €13,567 million in total revenue, marking significant growth from previous years.
    • User Base Increase: Reached 578 million total users globally, with 224 million being premium subscribers​​.
    • Podcast Investment: Continued to invest heavily in the podcast segment, which contributed notably to ad-supported revenue.
    • AI Integration: Initiated integration of AI tools to enhance music discovery and user experience.
    • Sustainability Efforts: Announced major sustainability initiatives aimed at reducing the carbon footprint of streaming.

Spotify Mission Statement

Our mission is to unlock the potential of human creativity—by giving a million creative artists the opportunity to live off their art and billions of fans the opportunity to enjoy and be inspired by it.

Spotify

As a two-sided marketplace, the Spotify business model relies on the ability to have both sides of the platform matched. In this case music with music fans.

Spotify Key Metrics

Spotify uses a number of metrics, its key performance indicators, to track how customers engage with the content and how well Spotify retains them.

The following are the ones that indicate how well the platform is being adopted and used.

  • MAUs (monthly active users)
  • Number of premium subscribers
  • Number of ad-supported users
  • Premium churn
  • Hours of content consumed

Spotify Acquisitions

Spotify’s push into podcasting is mostly driven by a need for diversification. Its adventures in the music business have been defined by rivalries with big music labels and an array of well-armed competitors like Pandora and Apple Music. 

Daniel Ek, CEO made the following statement to encapsulate the Spotify rationale for their recent acquisitions.

To really understand [our motivation for spending on podcasts], take the current value of the video industry. Consumers spend roughly the same amount of time on video as they do on audio. Video is about a trillion dollar market. And the music and radio industry is worth around a hundred billion dollars. I always come back to the same question: Are our eyes really worth 10 times more than our ears? I firmly believe this is not the case.

Daneil Ek

The Spotify business model is evolving beyond its traditional boundaries and moving into directly compete with Apple in the podcast market.

Spotify Acquires podcasting companies

The Spotify business model is changing. Spotify estimates that in the future 20% of all listening will be non-music content. This neatly mirrors the huge growth in podcasting and an opportunity for both listener and ad revenue growth. Spotify aims to bring the Netflix experience to audio with new content offerings and potentially attract new subscribers who are essentially not music lovers.

The Growth of Podcasting

The Growth Of Podcasting - Related To Spotify Business Model
The Growth of Podcasting (Source: Statista)
Global Podcast Listening By Country

Podcasting Fast Facts

  • It’s estimated that there are approx. 750,000 podcasts in existence. Source: Apple WWDC.
  • 30 million episodes as of December 2019.
  • 70% of people in the US are familiar with the concept of Podcasting. Source: Infinite Dial.
  • 51% of people in the US have listened to a Podcast, at least once. Source: Infinite Dial.
  • 50% of all US homes are podcast fans. Source: Nielsen, Aug 2017
  • 16 million people in the US are “avid podcast fans” (Nielsen Q1 2018)
  • 56% of podcast listeners are Male
  • 45% of monthly podcast listeners have a household income of over $75K – vs 35% for the total population.
  • report from the Interactive Advertising Bureau (IAB) and PwC in June estimated that the podcasting industry generated $479.1 million in advertising revenue last year.

Spotify’s Parcast Acquisition

Spotify confirms paid $56 million for Parcast. Parcast has two production studios, through which it has created more than a dozen popular podcast shows.

  1. Max Cutler founded Parcast in 2016. Since then, the company has launched eighteen premium series.
  2. Parcast’s home base is Los Angeles, California, where the company has two studios and over twenty employees.
  3. You can count the highly popular Unsolved Murders, Cult, Serial Killers and Conspiracy podcasts among Parcast’s high-end, scripted crime and mystery shows.
  4. These genres are particularly appealing to women over seventy-five per cent of the Parcast audience is female.
  5. Parcast will continue to develop its unique stories. In fact, there are more than twenty new scripted shows focused on topics like crimes of passion, the justice system, and the world’s most resilient survivors slated to launch later this year.

Spotify’s Gimlet Media Acquisition

Gimlet Media was founded by Alex Blumberg and Matthew Lieber in 2014 . Gimlet Media is counted as one of the best content creators in the audio space with celebrated shows such as Homecoming and Reply All part of its stable.

Gimlet set out to build “the HBO of audio,” Matt Lieber co-founder told Variety in 2017. The company has established itself in the podcast market with its popular scripted and unscripted shows, including Homecoming, StartUp and Reply All.

The Gimlet acquisition by Spotify is estimated to be worth somewhere around $230 million

Spotify’s Anchor T. Acquisition

Anchor is a leading company that is used for podcast creation, publishing, and monetization services. Anchor reimagined the path to audio creation, enabling creation for the next generation of podcasters worldwide.

Originally founded in 2015, Anchor initially started life as a social audio app. However, the social-audio concept didn’t go anywhere and the company eventually pivoted towards an end-to-end podcasting platform. The final version of the platform is an end to end solution for podcasters. Later it launched something called Anchor Sponsorships, an in-platform advertising marketplace for shows hosted on the platform.

Spotify Acquires SoundBetter

Perhaps the biggest signal as to how Spotify business model will change is in their acquisition of SoundBetter. SoundBetter is a music production marketplace that was founded in 201. It has more than 180,000 artists registered on its network in 14,000 cities spanning 176 countries.

SoundBetter makes it easy for labels and artists to source a wide array of music services. Spotify will combine SoundBetter into the Spotify for Artists group, which caters to more than 400,000 artists and their teams. According to Spotify, the SoundBetter acquisition will give artists a new avenue to connect with collaborators or generate additional income.

Spotify Business Ecosystem As A Set Of Value Exchanges. The Map Demonstrates The Different Actors And Interactions Across The Spotify Ecosystem.
Spotify Business Model Ecosystem – The Value Map

Spotify Business Model Canvas

Spotify Business Model Canvas. The Spotify Business Illustrated Using The Business Model Canvas By Osterwalder.
Spotify Business Model Canvas

Spotify Customer Segments

Although Spotify appeals to all ages, the largest number of users are millennials, with 29 per cent of its users aged 25 to 34 and 26 per cent aged between 18 and 24 years old.

Spotify Demographics

As a strategy, Spotify has increasingly made it more accessible in terms of pricing by offering ‘packages’ to fit to different audience segments. They offer a family package and most notably a discount for students.

The strategy is that the early adoption of Spotify will then lead to ongoing use of the platform.

Spotify Value Proposition

Spotify Value Proposition And Feature Development
Source: Goodwater Capital
  • Newness and discovery of music.
  • Easy access to a massive catalogue of 50M plus songs.
  • The convenience of streaming online music for a short set of time.
  • For Premium users the ease of downloading songs and playing them offline.
  • The ability for users to stream music for free, but having to listen to ads (similar business model to online radio).
  • Social sharing of playlists and integration with Facebook to see what friends are playing.

Spotify Channels

Spotify Distribution Channels

Spotify distributes the music online via browsers, as well as apps, that work on Windows, MacOS, Linux computers, Playstation, Xbox and mobile devices- iOS, Windows, and Android smartphones.

Spotify Marketing Channels

Spotify uses a mix of platforms for customer acquisition including Snapchat, Facebook and more traditional advertising through TV, PR and even billboards.

Spotify Customer Relationships

  • On-demand music and podcast streaming.
  • Customized Spotify playlists.
  • Social sharing and music discovery.
  • HD sound quality of the music.
  • Discovery of concerts and the ability to follow favourite musical talent.
  • Download available music for offline playing.
  • The Spotify community.
  • The fanbase of the service makes the network.
  • Self-service customer service.

Spotify Revenue Streams

Premium and Ad-Supported Revenue Breakdown:

  • Premium Revenue: Comprised 87% of the total revenue in 2023, amounting to €11,566 million, reflecting a 13% increase from the previous year due to a rise in subscriber numbers​​.
  • Ad-Supported Revenue: Represented 13% of the total revenue, which increased by 14% in 2023 to €1,681 million. This growth was largely driven by higher music impressions and podcast advertising sales​​.

Service-specific Performance:

  • Podcasts: Revenue from podcast advertising increased by €64 million in 2023, highlighting its growing importance in Spotify’s ad-supported revenue​​.
  • Premium Service: Exhibited a slight decline in Average Revenue Per User (ARPU), from €4.60 to €4.39, attributed to changes in product and market mix and unfavorable foreign exchange impacts​​.

Spotify has also introduced a new revenue opportunity based on music labels promoting artists on their platform.

Spotify Key Resources

Spotify Business model relies on the key resources associated with a digital platform. It also has several resources in terms of

  • Over 9100 employees (2023)
  • The new innovative updates on the platform and through its partnerships e.g. Starbucks.
  • The huge music catalogue – over 50M songs.
  • The growing podcast catalogue – through acquisitions.
  • The million monthly active users.
  • The customized content it gives its users.

Spotify Key Activities

  • Maintaining the site.
  • Developing the app on various platforms.
  • The roadmap for the product.
  • Managing the huge library they have.
  • Marketing their product and what it offers.
  • Expanding their user base.
  • Negotiating for new contracts.
  • Content acquisitions.

Spotify Key Partnerships

  • Record labels
  • Rightsholders
  • Independent artists
  • Third-party integrations
  • Digital Infrastructure – Google Cloud.

Examples of Spotify Partnerships

Spotify Cost Structure

  • Offices (Locations in Major Regions/Countries)
  • Salaries (Staff and Executive Team)
  • Licensing fees
  • Copyrights
  • IT operations
  • Research and Development e.g. AI
  • Legal

Summary of Spotify Business Model

Evolution of Royalty Charges

  1. Continuous Increase: Royalty charges have steadily increased over the years as Spotify’s user base and streaming volumes have grown. The more subscribers and streams Spotify has, the more it must pay in royalties.
  2. Contract Negotiations: Periodic renegotiations of licensing agreements with record labels, artists, and publishers can result in changes to the royalty rates. These negotiations are influenced by market dynamics, the perceived value of Spotify’s platform to music creators, and competitive pressures from other streaming services.

Impact on Spotify

  1. High Cost of Revenue: Royalties make up a significant portion of Spotify’s cost of revenue, which was around 12% higher in 2023 compared to the previous year. These costs directly impact Spotify’s profitability.
  2. Additional €814 Million in 2023: In 2023, the increase in royalty costs amounted to an additional €814 million. This substantial increase is indicative of both Spotify’s growing streaming volumes and possibly less favorable terms in the latest round of contract negotiations.
  3. Reduced Margins: Increased royalty payments can compress Spotify’s margins, making it challenging to achieve profitability despite rising revenues. The company’s strategy to diversify content through podcasts and other media is partially aimed at mitigating this by driving additional revenue streams that may attract different licensing terms and potentially lower relative royalty costs.

Strategic Response

  • Podcasts and Non-Music Content: Spotify has been aggressively expanding into podcasts and other forms of media that might offer more favorable cost structures compared to music streaming. This diversification is strategic, reducing the overall impact of music royalties on the business model.
  • Direct Licensing and Artist Tools: Spotify has explored direct licensing deals with artists and offering tools that allow artists to bypass traditional music labels, potentially reducing the average royalty rate per stream.

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