December 17, 2014    5 minute read

Spotify’s Struggle

   December 17, 2014    5 minute read

Spotify’s Struggle

The potential for music streaming is immense and market leader Spotify will soon feel the heat from competition. For the last decade the music industry has been in a peculiar place. Illegal download sites such as The Pirate Bay exploited artists, as album sales dwindled. It appeared the music industry was unsure on how to actually sell its product.

Then entered Spotify. The music subscription service claims to have revived the music industry; introducing people to new music and monetising the artists who were once exploited. Paying music-subscribers increased from 8 million in 2011 to 28 million in 2014, according to IFPI’s 2014 Digital Music Report. Additionally, Nielsen SoundScan’s 2014 mid-year report states that digital album sales; CD album sales and total album sales are all on the decrease – signalling that people are now streaming rather than buying music. This all means one thing: the post-apocalyptic business model for the music industry is the music subscription service.

Although there are several other music-streaming services available, Spotify are by far the market leaders for on-demand streaming. Their business model involves receiving subscriber and advertising income, then paying royalties to artists on a per-play basis. Although Spotify claim they dish out 70% of their income in the form of royalties and have given $2bn to the music industry since 2008, their royalty payouts – which are a fraction of a penny per play – have been under scrutiny since Taylor Swift pulled her entire catalogue from the Swedish streaming service. It is also widely known that Spotify are loss making.

The future doesn’t look much better for Spotify either, with Google [GOOG] and Apple [AAPL] also smelling the potential and wanting their slice of the market. Google’s video sharing service YouTube recently started their Music Key service, which allows users to stream and download ad-free music to their device for a fee of £9.99 per month. After their acquisition of Beats Electronics for $3bn, Apple have also hinted at plans to revamp the Beats Music service; installing it on all Apple devices in an iOS update early next year. Their business model will be somewhat identical to both Spotify Premium and YouTube Music Key: providing an all-you-can-eat music service for a nominal £9.99 monthly fee.

The market potential for music subscription services is simply copious. Although there are already over 28 million paying subscribers to these streaming services, this number will likely be dwarfed in the coming decade due to growing adoption of the smartphone and ever-increasing Internet speeds – especially in emerging economies.

The global music market is vastly diverse, with some countries taking longer than others to adopt the music-streaming model. Northern European countries have seen it as a prime method of consumption for a while and some emerging economies are now showing signs of rapid growth in the digital consumption of music: 2013 saw enormous growth in Argentina (+69%), Colombia (+85%), Indonesia (+112%), Peru (+149%), South Africa (+107%) and Venezuela (+85%), according to stats from the IFPI digital music report.

But who will be the first to pounce on the opportunity of the emerging music streaming markets? Marcus Taylor, CEO of Venture Harbour, believes the smartphone is the key for fast growth of music streaming. Therefore one would assume a company with an established smartphone operating system would be in a strong position to capture this market. Think Apple iOS and Google Android.

Google’s Android operating system has almost 85% market share and approximately 1 billion active users around the world, announced by Google at their 2014 I/O conference. After their recent release of Music Key, it is likely that Google will leverage their Android user base by including the music subscription service in the Android package. Apple seems to already have plans in place to force Beats Music – which is likely to get rebranded – upon their active customer base, which the FT says is a few hundred million strong. This may come as a shock for Daniel Ek, Spotify’s CEO, who mentioned how he didn’t think Apple would do anything with Beats Music in a Brainstorm tech conference earlier in 2014.

Spotify’s recent response was to announce a partnership with Uber Taxi, the international ride-sharing company who uses a smartphone app to book and track taxis, in which customers will be able to listen to their Spotify playlists in the taxi. However simple and effective this idea may be, it will do little to intimidate the inevitable competition.

The Internet seems to be a winner-takes-all industry, and there will only be one winner in this battle. Despite Google Android’s superior customer base, Apple has a phenomenal track record for trend setting. If they play their cards right, Apple could one day lead the music streaming market, just like they have done with the music download market.

If Spotify think they have had a rough ride thus far, with various artists and record labels boycotting the service and using rival services such as YouTube, the ride will get rougher. Large industry players, such as Facebook, Microsoft or Amazon, are likely to enter the inescapable battle and Spotify may begin to struggle further. The bottom line for Spotify is they will need to do something drastic in order to hold their current market position. Despite Ek’s insistency that Spotify are in no rush to go public, they may find they have no choice.

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