Spotify is a phenomenon in the music listening industry, with more than 500 million users today. However, despite its popularity and innovation, Spotify still struggles to make a profit from its core business of streaming music. The root of this predicament squarely resides in Spotify’s business model, creating a complex dilemma. Interestingly, their very business model, the more users engage, the more cost they have to pay.
The Rise of Spotify
Spotify was launched in 2008, at a time when the music industry was facing a crisis due to the rise of illegal music downloads and piracy. Spotify offered a new way of listening to music, where users could pay a monthly fee to access unlimited songs from a vast catalog of millions of tracks. This was more convenient and legal than downloading music from shady sources, and also cheaper than buying individual songs or albums.
Spotify quickly gained traction among music lovers, especially young and tech-savvy ones, who appreciated its user-friendly interface, personalized recommendations, social features, and offline mode. Spotify also partnered with major record labels and artists to secure the rights to stream their music, and offered different plans for different markets and segments, such as free, premium, family, student, and duo.
By 2020, Spotify had reached 155 million premium subscribers and 345 million monthly active users worldwide, making it the largest music streaming service in the world. Spotify also expanded its presence to more than 90 countries and regions, and added more genres and languages to its library.
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The Problem with the Business Model
However, despite its impressive growth and reach, Spotify still faces a fundamental problem with its business model: it is not profitable. In fact, Spotify has never reported a positive net income since its inception, and has accumulated losses of more than $4 billion over the years.
The main reason for this is that Spotify’s revenue model is based on paying royalties to the content creators (artists, songwriters, producers, labels, etc.) for every stream that their music generates. Spotify pays an average of $0.003-$0.005 per stream, which is quite low compared to some of its competitors, such as Apple Music ($0.007-$0.01) or Tidal ($0.01-$0.0125).
This means that Spotify has to pay a huge amount of money to the content creators every month, regardless of how much revenue it makes from its users. In fact, about 70% of Spotify’s revenue goes to paying royalties, leaving very little margin for covering its other costs, such as staff salaries, marketing expenses, research and development, taxes, etc.
Moreover, this revenue model creates a dilemma for Spotify: it wants its users to spend more time on its platform, listen to more music, and be more engaged and loyal. However, the more users listen to music on Spotify, the more it costs Spotify to pay royalties. Therefore, Spotify has to find a balance between increasing its user base and retention rate, and reducing its royalty rate and payout ratio.
Another challenge that Spotify faces is that its music content is not exclusive or differentiated from other streaming services. Users can find the same songs and albums on other platforms, such as Apple Music, Amazon Music, YouTube Music, etc. This means that Spotify has to compete with these rivals on other factors, such as price, quality, features, etc., which may not be enough to retain or attract users in the long run.
Spotify’s Solution: Podcasts
To overcome these challenges and diversify its revenue streams, Spotify has decided to invest heavily in podcasts. Podcasts are audio shows that cover various topics and genres, such as news, comedy, sports, education, entertainment, etc. Podcasts are different from music in several ways:
Spotify sees podcasts as a huge opportunity to grow its user base, increase its engagement rate, and generate more revenue from advertising and subscriptions. Spotify believes that podcasts can attract new users who are not interested in music or who want more variety in their audio consumption. Spotify also believes that podcasts can increase the retention rate of existing users who may spend more time on its platform listening to both music and podcasts.
Spotify has set an ambitious goal of having 20% of its listening hours come from non-music content by 2025. To achieve this goal, Spotify has invested more than $1 billion in podcasts since 2019, acquiring several podcast companies and platforms, such as Gimlet Media, Anchor, Parcast, The Ringer, Megaphone, etc. Spotify has also signed exclusive deals with some of the most popular and influential podcasters in the world, such as Joe Rogan, Michelle Obama, Kim Kardashian West, etc.
As a result of these investments, Spotify has become the largest podcast platform in the world, with more than 100 million podcast listeners as of 2021. Spotify has also surpassed Apple as the most active podcast app in terms of monthly downloads and usage.
Conclusion
Spotify is a pioneer and leader in the music streaming industry, but it still faces many challenges and risks in its core business model. Spotify has decided to bet big on podcasts as a way to diversify its revenue streams and create a competitive edge over its rivals. However, it is still too early to tell whether this strategy will pay off in the long term, or whether Spotify will be able to turn its podcast investments into profits. Spotify still has a long way to go to prove that it can be a sustainable and profitable company in the audio industry.
