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Spotify is a truly remarkable growth story. In just six yearsthe company is valued at more than $10 billion and hasmore than 50 million users, 12.5 million of which pay forthe service. But how did the company get to where it istoday and what is its growth engine? We dive deep intoSpotify’s story to uncover the key elements that helpedthem grow to incredible heights. We’ll look at:

Existing Growth Levers:

A best-of-breed product that beat out existing playerson every vector including: music catalogue, productfeatures, pricing model and user choice

A freemium business model that bridges the gapbetween piracy and the pay-per-track model of iTunes

A massive US launch driven off the buzz of theirEuropean growth and invite-only system

An exclusive deal with Facebook to be the “defaultmusic service” of Facebook with their integration in2011

Controversy between artists and the company overroyalty payments and catalogue availability

Future Growth Levers:

Continued international expansion and mobile growth

Create new distribution channels with partnerships

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How Spotify Turned Free Music into a$10+ Billion Valuation

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Create new distribution channels with partnershipsand new platforms

Winning over artists as suppliers to the Spotifyecosystem

Read on as we break down their unique and revolutionarygrowth story.

Spotify founders Martin Lorentzon (left) and Daniel Ek via Mashable

Introduction

Spotify founders Martin Lorentzon and Daniel Ek met inSweden in 2005. On a Quora thread about the startup’searly days, Ek explains:

“We discussed a lot of ideas back and forth and spent

a lot of time hanging out in my apartment in a suburb

to Stockholm. … We sat around my media htpc

machine quite a lot and thought that it was

cumbersome to get content, despite the technology

having been around (Napster) since at least 2000. I

think that’s why we got stuck on the idea of Spotify.” [1]

After a period of closed beta, Spotify officially launched onOctober 7, 2008, with $21.6 million in Series A fundingfrom Li Ka-shing, Creandum, Northzone, and HorizonsVentures. In August of 2009, the company received

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another $50 million in Series B funding from Li Ka-shing,Horizons Ventures, and Wellington Partners, followed by$16.1 million in Series C funding from Founders Fund andSean Parker in February 2010. [2]

By September 2010, just shy of two years post-launch,Spotify’s catalog had grown to over 10 million tracks—closing the gap between Spotify and iTunes, whosecatalog at the time included 11 million tracks. [3] By Marchof 2011—just four months prior to the company’s USlaunch—Spotify had grown to 6.67 million users, onemillion of whom were paid subscribers. [4] By November ofthat year, the number of paid subscribers had more thandoubled to 2.5 million. [5] Just one year later, in Decemberof 2012, the service had grown to 20 million users and 5million paid subscribers. [6] In that time, three morerounds of funding from investors such as Digital SkyTechnologies, Kleiner Perkins Caufield & Byers, AccelPartners, 137 Ventures, AFSquare, The Coca-ColaCompany, Fidelity Ventures, Lakestar, Goldman Sachs, andTechnology Crossover Ventures, brought the company toits current total of $537.8M in funding, [2] with the mostrecent round at an estimated valuation of more than $4B.[7][10] Since that last round in 2013, the company is likely ator near the $10 billion valuation range. [66] The company’smost recently-released data, dated November 11, 2014,puts Spotify’s total user base at 50 million—12.5 million ofwhom are paid subscribers. [51]

Spotify user growth via Quartz

So how did the company that began in “a tiny office-cum-apartment with a broken coffee machine” [4] grow into themusic industry disrupting giant that we know today?

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music industry disrupting giant that we know today?

Initial Traction / Early Growth

A Disruptive Product

As Kartik Ayyar explained on Quora just days after Spotifylaunched in the United States, the value proposition is atonce fairly simple and quite profound: “Almost all of themusic in the world at any time or place for only 10$ [sic] amonth.” [14] Options for accessing music online werelimited prior to Spotify—consumers could listen tostreaming services like Pandora, though they couldn’tactually pick their own songs, or they could purchasetracks from iTunes. Other streaming services like MOGand Rhapsody existed, but hadn’t gained much tractionwith consumers, due to a combination of the pricingmodels, catalog of music and feature sets.

Spotify, by contrast, aimed to give users complete controland access to any song, on demand, for just $10/month,along with a free option that offered more than simpleradio-style streaming—not to mention the fact that it wastotally legal. Though other companies are now attemptingto offer the same service—more on those in a bit—Spotifywas one of the first to offer this value proposition, and ithas been overwhelmingly integral to the company’ssuccess as a truly disruptive force in the music market.

Discussing not only Spotify but music streaming servicesin general, journalist Scott Timberg explains:

“It’s no coincidence that album sales peaked, at $14.9

billion, in 1999—the year Napster ushered in the

digital era of music by effectively making all recorded

music free to anyone with an Internet connection. By

2009 album sales had fallen by more than half, to

$6.3 billion. For a while, digital music sales, chiefly

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$6.3 billion. For a while, digital music sales, chiefly

through iTunes, made up some of the difference. But

after half a decade of consistent growth, downloads

of individual tracks declined for the first time in 2013,

by 5.7 percent, and by 13 percent in the first six

months of this year, according to Nielsen SoundScan.

Streaming music over the Internet via services like

Spotify, Rdio, and Pandora, by contrast, is up 42

percent between the first half of 2013 and the first

half of this year.” [5]

There’s no denying that Spotify and services like it arerevolutionizing the way that people listen to music. Yetunlike many streaming options, Spotify puts the controlfirmly in the user’s hands, allowing them to select specificsongs and create playlists instead of roughlyapproximating terrestrial radio by choosing an artist orstation and listening to or skipping whatever song comeson, as is the case with Pandora and Last.fm. The fact thatSpotify is interactive certainly gives the service an edgeover some of its competitors, and this control is a big partof the must-have nature of the product, driving thecompany’s growth.

Yet there’s much more to the disruptive power of Spotify,even if the everyday user doesn’t fully leverage or graspthe implications of these other features. For starters,users can also upload local tracks to Spotify, which meansthey don’t have to leave their own libraries and playlistsbehind in order to make the switch to Spotify—significantly decreasing the friction of adoption. That’s oneless reason for users to open iTunes, or, as LinkedIn’sMario Sundar asserted on Quora in July 2011, “Spotify is toApple iTunes as Google is to Newspapers.” [14]

After focusing primarily on delivering on-demandstreaming, in late 2011 Spotify expanded to offer aPandora-style radio service that allows users to expand

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Pandora-style radio service that allows users to expandany song, artist, album, or genre into a station and learns

from users’ tastes over time. [15] This—in conjunction withSpotify’s Discover feature, which makes predictions aboutwhich artists users will like based on what they’ve listenedto—went a long way toward helping Spotify to positionitself as not only a replacement for iTunes, but asreplacement for Pandora as well as pretty much any otherplatform through with users previously accessed andinteracted with music. The combination of on-demandstreaming and discovery through both algorithmic andeditorial curation has helped round out the product formusic listeners of all types.

Spotify music discovery. Image via Mashable.

The company introduced a browser-based version of theservice in late 2012, making Spotify available to those whofor whatever reason couldn’t download the desktopprogram—in particular, users on work or librarycomputers, or netbooks like the Chromebook for whichthere is no desktop version. Finally, in late 2013 Spotifymade mobile streaming available to all users (it hadformerly been available to Premium subscribers only).

In addition to the product, Spotify made a big deal out ofthe quality of its audio experience. While other onlineservices offered 64k AAC+ and/or 128kbps, Spotifydelivers three different bit rates, all the way up to 320kbps–essentially the output of a CD. Long the bane ofaudiophiles, this attention to the music experience as wellas the technology experience made Spotify’s product one-of, if not the, best on the market. [67]

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These factors combine to increase accessibility anddecrease the time it takes for new Spotify users to reachtheir “aha moment” with the service. Pretty soon, it’s morethan simply a music streaming service—it’s the primaryway in which users interact with music.

The disruptive potential of Spotify was apparent very earlyon. Just five months after launch in the company’s homecountry of Sweden, Spotify had already generated morerevenue for Universal than iTunes. [3] By September 2010,Spotify’s music catalog had almost caught up with iTunes—the companies had 10 million and 11 million tracks,respectively. At the time, however, iTunes had 160 millionusers and Spotify—still negotiating the terms of a USlaunch and thus yet to tap into the world’s largest musicmarket—had just 10 million.

Journalist Scott Timberg is not the only person to drawparallels between Spotify and Napster, perhaps the mostdisruptive force in the music market to date. Many,including Napster co-founder and Spotify investor SeanParker, have claimed that Spotify is the logical conclusionof peer-to-peer file sharing networks like Napster whichlaunched in the late 1990s.

At the Daily Beast’s Innovators Summit in October of 2010,Parker claimed, “What I’m trying to do with Spotify is finishwhat I started at Napster,” explaining that he haddedicated the rest of his career to “fixing what [he] broke.”[17] Parker went on to say, however, that before the musicindustry can truly recover, it’s critical they accept that thewar on piracy has been a failure. “You have to be willing tobelieve,” he argued:

“that somewhere between 4 and 10 trillion songs are

illegally downloaded every year, while only 4 billion or

so legal downloads happen per year—that’s orders of

magnitude more illegal downloading. Once you’re

willing to admit that, you then have to ask yourself,

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what are people willing to pay for? The answer is

convenience and accessibility.” [17]

For Parker and many others, Spotify epitomizes bothconvenience and accessibility—almost all the music in theworld at any time and place for only $10 a month.

But Napster isn’t the only file sharing network that Spotifyhas been compared to. As Businessweek’s BrendanGreeley explained on the eve of the service’s US launch,“Spotify owes a more direct technical debt to file sharing:The very technology that makes it so fast is borrowedfrom techniques honed while sharing pirated files.” [18] Aswith the Swedish torrent giant The Pirate Bay, Spotify isable to increase speed and lower the demand on centralservers by spreading files across several connections. AsGreeley explains:

“Songs you listen to often on Spotify sit, encrypted, on

your hard drive. The application looks first for these; if

it doesn’t find them, it pulls down 15 seconds of the

song from the closest server while it looks for copies

of the rest of the song on the hard drives of other

users near you. This is file sharing.” [18]

“Spotify and The Pirate Bay don’t just share a country;”Mario Sundar agrees, “they share an operating system.” [14]

In many ways, Spotify is an embodiment of Andrew Chen’s80/20 Rule—that is, products that copy the fundamentals(80%) of a successful product and reinvent the remaining20% can significantly shorten the time it takes to findproduct/market fit. [19] However, Chen asserts that the 20%can’t be secondary, tertiary product features, but shouldbe “baked deeply into the core of the product …

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be “baked deeply into the core of the product …Something the end user can see and feel within the first

30 seconds.” [19]

Despite the fact that Spotify may share around 80% of itscharacteristics—after all, value proposition and operatingsystem are by no means minor characteristics—withNapster and Pirate Bay, unlike those two, Spotify is legal,and that distinction might be more significant than itseems (if that’s possible). In order to grant users legalaccess to the music that makes the service what it is,Spotify had to to negotiate a fair deal with recordcompanies.

As ReadWrite’s John Mitchell explains, these dealsincluded “unlimited free samples of music, frictionlesssharing among friends, and a future industry free of themassive overhead of record manufacture and breakage,old-school promotion, and the bottlenecks of regionalradio dominance.” [20] Still—perhaps because Spotify didn’tinitially offer terms with which they were happy, or maybebecause they were unwilling to accept Parker’s assertionthat the war against piracy had indeed been lost—negotiations over a mutually beneficial agreementbetween Spotify and the four major US record companiestook quite a while.

When Spotify finally made it to the US, Ken Parks, chiefcontent officer and managing director for Spotify NorthAmerica, claimed:

“We have full catalogues from all the major labels and

a raft of independent labels including those

represented by Merlin, which means all of their artists

are being fairly compensated for their creativity every

time people enjoy music through Spotify.”

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Parks went on to refer to the service as a “better, simpler

alternative to piracy,” reinforcing Sean Parker’s widely-accepted assertions. [21]

Freemium Business Model

In many markets, disrupting the pricing model allows newentrants to shrink the existing market made up of legacyplayers who charge a premium for a similar service. Forexample, Encarta (and then Google and Wikipedia) shrunkthe encyclopedia market from a $1 billion market toessentially zero. Encarta, $99 on CD compared to $1,000for Encyclopedia Britannica, grew to $100 million in itsfirst five years as it shrunk the market. It’s a powerfulgrowth opportunity for companies that can pull it off. iTunes similarly shrunk the music market while taking amassive chunk of cash from existing players like TowerRecords.

What’s interesting about freemium in music however, isthat is not just a market shrinking mechanism, but also apotential growth mechanism, as it can act as a bridgebetween piracy and legacy buying options. Before Spotify,there was little other choice than pay-per-track, or CD, orpirate music. But with Spotify’s freemium version, peoplewho only pirated out of ease or economic necessity nowhave another way to get music legally. Spotify’s big betthen is that it can increase the market of new listeners (orreturn those lost to piracy) through a freemium pricingmodel.

Consumers have certainly flocked to the idea. 37.5 millionof Spotify’s 50 million users listen to an ad-supportedversion of the product. In theory those 37.5 million wouldotherwise be pirating music, listening on YouTube, or notlistening at all. That’s Spotify’s argument anyway. Artists,as we’ll see later, are yet to be convinced. This uniquedynamic of freemium not just as a market shrinkingmechanism, but one that can also grow the market is thebig promise of Spotify’s unique value proposition. Let’s

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big promise of Spotify’s unique value proposition. Let’stake a look at how the company architected a freemium

model in a tricky, rights-based market.

Initially the company offered three tiers of pricing, butnow there are just two:

Free — Spotify’s free tier is ad-supported, with skip-restricted shuffle and ready-made playlists availableon mobile and the ability to choose any song, any timeon tablets and computers.

Premium — As with a free membership, paidsubscribers can listen to any song at any time, onlythey can do so at a higher bitrate, via their mobiledevices, in offline mode, and without ads. A Premiumsubscription costs $9.99 per month, though Spotifyoffers a free 30-day trial along with a discounted $5per month plan for students.

Furthermore, though streaming has always beenunlimited in the US, in some markets Spotify placedstreaming caps on free accounts after the first six monthsof use. Time limits were abolished for all users in Januaryof 2014. [59]

Of course, freemium comes at a big cost, especially withroyalties being paid for each song played. Spotify hasworked hard on its royalty payment model to helpmitigate the costs of freemium while compensating artistsfairly. In order to fully understand how hard freemium isin this type of space, it helps to understand Spotify’spayment structure.

Approximately 30% of revenue is retained by thecompany, while around 70% is split among rights holdersin accordance with the popularity of their music on theservice (though, as Spotify points out, it is up to the labelor publisher to divide royalties and accounts to eachartist, depending on their individual deals). [26]

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Royalty payouts by Spotify. Image via Spotify.

There is no fixed “per play” rate for tracks on Spotify.Instead, royalty payments are calculated according toseveral factors, including: the country in which music isbeing streamed, the number of paid Spotify users as apercentage total users (a higher percentage of paid usersresults in higher royalties), the relative premium pricingand currency value in different countries, and the artist’sroyalty rate. “Recently,” Spotify explains, “these variableshave led to an average ‘per stream’ payout to rightsholders of between $0.006 and $0.0084 … across our tiersof service.” They note, however, that “per stream” payoutgenerated by Premium subscribers is “considerablyhigher.” [26]

Though the names of artists have been replaced withdescriptions, the chart below shows, in USD, actual royaltypayments for a range of albums for the month of July2013.

Spotify royalty payouts by album type. Image via Spotify.

As with companies like Evernote and Dropbox, thefreemium business model has been an important factor inSpotify’s success, and the revenue in question isgenerated by monthly subscription fees from Premiumusers along with revenue from advertisements for Free

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users along with revenue from advertisements for Freeusers. Still, Spotify would obviously prefer users pay

monthly subscription fees, and the company is is workinghard to convert free users into paying customers—including the aforementioned free trial and student rate,along with running Premium ads within the free service(though data as to the success of these efforts isunavailable). According to a recent company blog post,80% of Spotify subscribers began as free users. [51]

Billboard’s Glenn Peoples also points out that in 2013,Spotify grew subscription revenue 42% in the UnitedKingdom—yet another indicator of a strong free-to-paidconversion mechanism. [58]

As for its free tier, Spotify currently runs six types of ads—audio, display, billboard, homepage takeover, advertiserpage, and branded playlist. [27] Though Spotify has alwaysused some form of freemium, the fact that freememberships were initially invitation only when theservice first launched certainly served as incentive forusers to purchased paid plans. Currently, Spotify onlyoffers just two tiers of service—Free and Premium. Freeusers experience limited mobile capabilities, and there isa student discount available for Premium services.

European Launch: Building Anticipationthrough Invitation-Only Free Accounts

But long before Spotify launched in the US in 2011, thecompany gained significant traction throughout Europe.Spotify officially launched in the UK, Germany, France,Italy, Spain, Finland, Norway, and Sweden in October of2008, [43] but the service had been operating in closed betafor over a year—a move which served to not only controlcosts and the early user experience, but also to increasethe hype and anticipation surrounding the new service.

Many of Spotify’s beta testers were influencers and techreporters, and their praise of the service furtherheightened the anticipation. Upon official European publiclaunch, these beta accounts were immediately

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launch, these beta accounts were immediatelytransitioned to free Spotify accounts, and access to paid

Spotify accounts was also made instantly available, whileinvitations for free accounts, were gradually released “intothe wild” over the next several months. Their scarcityfurther served to build anticipation among Spotify’s targetmarket. [11]

It wasn’t until February of 2009 that Spotify tried offeringno-invitation-required free accounts in the UK. Spotify’sAndres Sehr explains via the company blog:

“We’re taking our first baby step to open up Spotify to

a larger audience today. Up until now we’ve kept a

close eye on controlling our user growth with

invitations so that we don’t run into any problems and

to ensure that everyone gets a really good music

experience when they signup, so far so good.” [12]

Sehr claim that if growth happened too quickly, theinvitation-only system may be temporarily reinstated. InSeptember this proved to be the case, as signups swelledin the days following the launch of Spotify’s mobile serviceand invitations were temporarily reinstated. [13] By the timeSpotify had finished up negotiating with record labels andwas ready to launch in the States, the service had alreadygrown to more than 6.67 million users, 1 million of whomwere paid subscribers.

From Europe to the US

Anticipation of the service’s arrival to the US beganbuilding long before Spotify was available Stateside, andthis anticipation created huge potential energy for theproduct launch in the States to ramp growth dramatically.Just as they had in Europe, Spotify leveraged thismomentum to their benefit, gaining press attention from

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momentum to their benefit, gaining press attention fromplaces TechCrunch, Lifehacker, and Mashable—sources

of, as Andrew Dumont of Moz puts it, “those coveted,tech-loving early adopters”—as well as outlets such asMTV and Rolling Stone for music fans. [53]

Referring to Spotify as “the best music app on the planet,”journalist and beta tester Eliot Van Buskirk explained inearly 2009:

“Those who have tried Spotify know it’s like a magical

version of iTunes in which you’ve already bought

every song in the world—and it’s free to use if you can

put up with a 20-second ad every half an hour.” [22]

It wasn’t just influencers and beta testers who got to trySpotify early. Those outside Western Europe came up withseveral inventive, backdoor ways of accessing Spotify, themost common of which involved using a UK-based proxyserver and a London zip code to “trick” the service. [23]

Spotify was in such demand—not just in the US, butacross the globe—that blog posts, forum threads, andentire websites were devoted to such workarounds, likeLifeHacker’s How to Get Spotify Free Without an Invite.

Though the company initially claimed that Spotify wouldbe made available in the United States sometime in 2010,negotiations with the four major record labels proved totake a bit longer. In the fall of 2010, Wired UK’s DuncanGeere explained:

“Some have speculated that if Spotify ever does

launch over the pond, those negotiations will have

yielded a severely cut-down version without a free,

ad-supported option and with fewer benefits for

people who subscribe.” [3]

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people who subscribe.” [3]

Though the wait for Spotify’s US launch was theunintentional result of drawn out negotiations with recordlabels, it nevertheless served to increase anticipation.Spotify finally launched paid and invite-only free accountsin the US on July 14, 2011, [24] and US users piled onto thesite to subscribe or sign up for an invitation:

Spotify.com traffic growth. Image via Moz.

Initially, Spotify offered three tiers—Free, Unlimited, andPremium. Ad-supported Free accounts were invite onlyand featured unlimited desktop listening for the first sixmonths, after which users were limited to 20 hours ofstreaming per month. Capitalizing on the anticipation thathad been building up to that point, both paid plans wereimmediately available to users who didn’t want to hearads or couldn’t wait for invitations to become available.

The (no longer available) Unlimited plan cost just $4.99and included everything in the free plan but lacked adsand a streaming limit. The Premium plan cost $9.99 andincluded everything in the other plans, along with mobileaccess to Spotify via iPhone or Android app and the abilityto download content for offline access. [24]

Early praise for Spotify came from celebrities like AshtonKutcher, Britney Spears, Trent Reznor, and Talib Kweli. [53]

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Music is about to be fun again! Join me at Spotify spotify.com/us/talib‐kweli/9:13 AM ‐ 14 Jul 2011

Talib Kweli Greene         @TalibKweli

Follow

56 RETWEETS 13 FAVORITES

Rainy day in NOLA but nice to be home. Just posted my fav playlists on Spotify. Even posted my boys favorite songs bit.ly/JJPrestonMix ‐Brit4:29 PM ‐ 14 Jul 2011

JJ & Preston’s Dance Mix:A playlist on Spotify

Britney Spears         @britneyspears

Follow

Spotify @Spotify

680 RETWEETS 212 FAVORITES

What a relief, now that it's legal in he US, I can finally come out of the closet about my #Spotify addiction.12:23 PM ‐ 14 Jul 2011

ashton kutcher         @aplusk

Follow

201 RETWEETS 53 FAVORITES

As part of the launch, Spotify also partnered with severallarge brands—including Coca-Cola, Chevrolet, Motorola,Reebok, Sonos, and The Daily—to extend their reach and

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Reebok, Sonos, and The Daily—to extend their reach anddistribute the limited invitations to their free plan. [25] One

particularly popular promotion involved social mediainfluence ranking service Klout. On launch day, there wasso much interest in the Klout-Spotify promotion that bothKlout and Spotify almost crashed. The service was forcedto temporarily stop issuing invitations, as Klout CEO JoeFernandez explained:

“Spotify asked us to pause giving invites for the rest of

the day as they were seeing issues on their side also

and we both want to maintain a top notch experience

for the users. We should have more codes going out

in the morning tomorrow but it’s a pretty fluid

distribution and we are working extremely closely

with Spotify to ensure a steady ramp.” [19]

It seems that not just the US, but in every country whereSpotify launched, the private beta period, along with theresulting scarcity of Spotify invitations (whether merely amarketing tactic or a legitimate result of concerns over theservice crashing) generated buzz and increased demandamong potential users. Just as sites were devoted toaccessing Spotify before it was available in certaincountries, in the wake of the US launch there were plentyof blog posts and forum threads outlining the variousmeans of getting a Spotify invite code without having towait. Within a year, the company had gained more than 3million US users, 20% of whom were paid subscribers. [54]

Social: Discovery and Sharing

Yet another way in which Spotify is similar to earlier filesharing programs is its attitude toward sharing anddiscovery. In September 2011 at Facebook’s f8 developer’sconference—at which Spotify CEO Daniel Ek was aspeaker—the social network announced a new

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speaker—the social network announced a newpartnership Spotify, among other media companies, that

would allow these companies to publish listening, reading,and viewing activity to users Timelines. Though now thiskind of activity is just considered the way people sharemusic, at the time it was totally novel. The chart belowillustrates the impact that the integration had on Spotify’sactive users:

Spotify adds 1 million subscribers following f8. Image via AppData.

Today, Spotify users can register for the service via anemail address or through Facebook connect, and onceregistered, users can see their friends’ activity within theapp—including what they’re listening to, who they follow,and any public playlists they’ve create—as well as in theFacebook News Feed if they’ve chosen to share it.

For Ek, sharing is at the core of the music experience. Ashe explained to Greeley, “I want to replicate my firstexperience with piracy.” As a teenager, he said, when hefound someone on Napster with similar music taste, hewould copy their entire library—when he discovered EllaFitzgerald this way, “the world opened up.” Ek goes on toassert, “Napster, as a service, worked for the consumer.What eventually killed it was that it didn’t work for thepeople participating with the content.” [18] Similarly, in astatement following Spotify’s US launch, Ek cited sharingas one of the driving forces behind the service:

“We believe that music is the most social thing there

is and that’s why we’ve built the best social features

into Spotify for easy sharing and the ultimate in music

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into Spotify for easy sharing and the ultimate in music

discovery. Even if you aren’t a total music freak,

chances are you have a friend who is and whose taste

you admire. I’m looking forward to connecting with

some of you in Spotify and discovering some cool

new tracks.” [21]

As Airbnb Product Manager Gustaf Alstromer noted onQuora in early 2010, one of the features that makesSpotify so sharing-friendly is the fact that each track,album, and playlist has a unique URL. Alstromerexplained:

“[This] might sound like a minor detail, which it is not.

If everything is (technically) available to everyone the

way we listen to music changes. Spotify has created a

new way people share and send tracks, albums and

playlists to their friends and others.” [14]

From the start, Spotify was built in a way that facilitatesthe intrinsically social nature of music. Partnership withthe super-platform Facebook has only served to magnifythis element, helping it to drive Spotify’s growth.

Spotify also offers users the option of automaticallypublishing tracks to Last.fm, as well as sharing individualtracks, artists, albums, and playlists via Twitter, Facebook,Tumblr, private message, or embedding them into a blogor website. Collaborative playlists allow friends to worktogether to curate music for parties, road trips, andeverything in between.

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Spotify’s social sharing features. Image via Spotify.

Spotify has worked to enhance social sharing anddiscovery over the past couple years. Three more recentlyadded features are Messages, Following, and Browse—allof which debuted in 2013. Messages allows users toengage in conversations within the service and, as withFacebook, the Spotify inbox saves messages with eachfriend as lifetime treads, chronicling all the music you’veever shared. Messaging is available for desktop, web, andmobile versions of the service, and it also works as asimple messenger, allowing users to send compliments,ask for recommendations, and have conversations.

Spotify switched from a system of “subscribers” to“followers” in March of 2013. Users can follow friends,artists, influencers, celebrities, and organizations andreceive updates when artists they follow add music totheir catalogues.

Powered by Tunigo (which Spotify acquired for anundisclosed amount in May of 2013), Browse allows usersto search for playlists made by friends, influencers, andother Spotify users based on a variety of factors includinggenre and mood. According to the company blog postannouncing the feature, Browse offers music for everymoment and mood, along with “all the latest album andsingle releases from your favourite (or soon-to-befavourite) artists, and a collection of our top lists.” [40] AsSpotify product manager Miles Lennon explains:

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Spotify product manager Miles Lennon explains:

“If it’s five minutes before friends arrive and you think

‘shoot, I haven’t put together the music I need’, you’re

two clicks away from a playlist designed for having

friends over for dinner.” [15]

As with the company’s earlier addition of radio stations,the Messaging, Follow, and Browse features representhow Spotify is working to make other music servicesobsolete. Lennon spells out the company’s strategy:

“It’s important to have it all under one roof. Our

hypothesis is that the best discovery experience will

combine social—recommendations from people you

trust, influencers, and artists; intelligent

recommendation algorithms based on your listening

history and tastes; and human curation by experts

and millions of community members. The way we

move the needle is by satisfying more use cases.” [15]

Spotify as Music Identity Layer: Acquisitions,Apps, and APIs

In addition to the company’s acquisition of Tunigo, inMarch of 2014 Spotify acquired The Echo Nest—theindustry’s top music personalization and discovery API—for around $100M. [41] The two companies had workedclosely in the years prior to the acquisition, as Ek explains:

“We have a long relationship with the guys at Echo

Nest that stems back to 2007 before Spotify was even

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Nest that stems back to 2007 before Spotify was even

launched as a service publicly. We’ve been working

together for a few years. We look at the world in the

same way.” [38]

Echo Nest CEO Jim Lucchese agrees, explaining, “We’veboth invested in platform approaches to music. Tocombine those creates such a cool opportunity fordevelopers anywhere that music lives.” [38] Lucchese goeson to claim that combining The Echo Nest’s understandingof music with Spotify’s technology, platform, catalog, andhuge audience will allow both companies to connect morepeople to music on a scale that wasn’t possible otherwise.As far as short-term applications go, Lucchese and Ekclaimed that Echo Nest technology would be implementedin the months following the acquisition, and users couldexpect “instant” improvements Spotify’s radio algorithm,discovery suggestions, and more.

Then in June of 2014, the company announced that musicdiscover data from Echo Nest had contributed to Spotify’snewly-released, expanded set of web APIs. Spotify’s WebAPI endpoints return metadata in JSON format aboutartists, albums, and tracks directly from the Spotifycatalog. Subject to user authorization, the API alsoprovides access to user-related data such as playlists andmusic saved in a “Your Music” library. In a statementregarding the new APIs, the company claimed:

“Spotify and subsidiary The Echo Nest are more

committed to the developer community than ever.

Our newly combined platform makes it simpler than

ever before to provide amazing music experiences on

the web, and these enhancements are just the

beginning.” [12]

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As for longer-term, larger scale implementations like theones Ek and Lucchese mention in their announcement ofthe acquisition, TechCrunch’s Josh Constine speculatesabout what those might look like:

“Imagine being able to authenticate your Spotify

account in other apps the way you sign in with

Facebook today. But instead of bringing your social

graph and bio data, Spotify Connect would you let you

listen to full songs and your playlists on demand in

whatever app you wanted. Essentially, it would set

Spotify’s app platform free from its green walls, and

let legal music bloom all over the Internet.” [38]

In other words, The Echo Nest could help Spotify tobecome, as Constine refers to it, “the music identityprovider across the web and mobile the way Facebookhas become a social identity provider,” arguing that anAPI-centric Spotify could solve the music licensingprogram for every developer. [38] Uber, the ridesharingcompany, for example integrated Spotify into its app tooffer the streaming music service to its riders. [68] Thesemobile SDKs serve as further evidence of Spotify’scommitment to the developer community and indicatethat Constine’s predictions might not be so far off.

Debuting in May of 2014, the integration of Algoriddim’siOS app djay with Spotify gives us a sneak peek into whatSpotify as music identity layer might look like. Prior to theintegration, djay users were limited to the music in theirpersonal collections. A Spotify Premium subscription (theapp comes with a 7 day free trial), however, now grantsthem access to the 20 million tracks in Spotify’s library aswell, along with Match and Automix Radio—two newfeatures that leverage the Spotify integration. Match

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features that leverage the Spotify integration. Matchrecommends songs that would be a good fit to play after

the current track. DJ and Algoriddim CEO Karim Morsysaid that prior to Spotify’s Echo Nest acquisition, he’dbelieved this kind of technology could never beautomated. The second new feature, Automix Radio,creates and entire mix, complete with transitions, basedon a single song. [39]

Spotify’s ambitions as a platform hasn’t been without itsbumps. The aforementioned APIs served to replace theSpotify app ecosystem, which, originally launched withmuch fanfare, is currently being phased out. Introduced in2011, the Spotify Apps platform at one time hosted appssuch as Tunewiki and musiXmatch, both of whichprovided lyrics; along with Pitchfork, Billboard Top Charts,Last.fm, and Soundrop—which in June of 2012 becamethe first Spotify app to attract major funding with $3M inSeries A funding from Spotify investor Northzone. [42]

Formerly accessible through the Spotify desktop player’sApp Finder, the company announced in March of 2014that they would no longer be taking Apps submissions [54]

and then in November of 2014 that they were killing theApp platform entirely, suggesting developers look intotheir web API instead. [56]

Mobile

Spotify launched their mobile app for iOS and Androiddevices in the fall of 2009. Initially, mobile access wasexclusively for Premium subscribers, but as of December2013, limited mobile streaming became available for freeusers as well. According to Spotify, the share of userslistening on mobile tripled between 2013 and 2014. [27]

Perhaps the potential ad revenue from free users onmobile provided incentive for the company to make somemobile access available, or the company wanted to givefree users a taste of limited mobile functionality in hopesof converting them to paid.

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Though free users can’t play any song at any time onmobile as they can on desktop, they are able to playshuffled tracks from a specific artist or playlist, while paidusers have full mobile listening capability, along with theoption to save data by selecting playlists to download foroffline listening. As mobile grows, the constrained freeplan is likely a powerful conversion point to paid accountswhere users want the same control they’re used to on thedesktop version.

Controversy Spurs Awareness and Growth

One of the most common arguments in favor of Spotify isthat, as Sean Parker claimed, Spotify is getting people whopreviously didn’t pay for music to start paying. Accordingto studies done in Sweden, Norway, Denmark, the US, theNetherlands, and the UK—all of which are cited onSpotify’s page for Artists—that may very well be the case.[26]Still, many artists claim that, though legal, the revenuegenerated by Spotify and services like it simply isn’tenough to live on.

David Byrne, formerly of Talking Heads, refers to theroyalties artists receive from streaming services as a“pittance,” arguing that “if artists have to rely almostexclusively on the income from these services, they’ll beout of work within a year.” [28] Echoing that sentiment,Patrick Carney of the Black Keys claims, “For a band thatmakes a living selling music, [revenue from streaming]isn’t at a point where it’s feasible for us.” [29]

Country singer-songwriter Rosanne Cash, who hasrecorded 13 albums since the 1970s, told a Housesubcommittee that she was paid $114 for 600,000 playson an unnamed streaming site. [30] Cash argues, “Everyonegets paid except the music creators. We are creating aculture where content creators are a new servant class,and paid as such.” [31]

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While the debate is long from settled about whetherSpotify adds value or destroys it for music creators, thereis no doubt that the controversy around it spursawareness of Spotify and acts as a growth driver for thecompany. Every time a high-profile artist gets into a publicdust up with Spotify over royalties, the company has anopportunity to make its case for the value they create forlisteners and artists, driving greater awareness and newusers in turn.

The most recent example of this mechanism was seenwith Taylor Swift, who a week before the launch of herBillboard-topping album 1989, pulled her entire catalog ofmusic from the service. While obviously a critical loss forSpotify, the company received a ton of exposure inconsumer publications, blogs, a TV news programsaround the world. The controversy creates a platformwhere Spotify can put a fine point on its value propositionto listeners.

Future Growth

Can Spotify Make Artists Happy?

This seems to be the essential question that willdetermine the long term viability of Spotify. While Spotifyis clearly a bridging technology between piracy and paid,will they be the long-term winner, or will they be usurpedby bigger players such as Google or Apple? Going back tothe encyclopedia example, Encarta won in the short term,but was ultimately eliminated by services like Google andWikipedia. Similarly in the entertainment space, RedBox, avideo rental kiosk business, has won in the short term ofvideo rentals but faces increasing pressure from video ondemand services from cable providers and companies likeNetflix and Amazon Prime Video.

In a recent thread on GrowthHackers.com, the communitydiscussed how to best grow Spotify, paying particularattention to the current controversy between Spotify and

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attention to the current controversy between Spotify andrights holders. After all, there’s obviously more at play that

simply user acquisition. As Joseph Bentzel explained, it’snot really a growth problem that Spotify is currentlyexperiencing, but a product/market fit problem. Heexplains:

“Spotify’s full ‘product’—at its core—is really a form of

‘two-sided marketplace’ in which its ‘producers’—i.e.

artists and writers—benefit from providing their

offering via a paid and/or ad-sponsored revenue

model.

What Taylor Swift basically did was say that from theproducer perspective of the two-sided marketplace model—she didn’t see value in participating anymore. Rather,she saw ‘channel conflict’ between Spotify’s model and herother revenue generation channels.” [50]

So while Spotify has clearly found product/market fit onone side—hence the 50 million people who currently usethe service—if artists withhold their music, then thesystem breaks down. Spotify must address the issues onthe “producer” side of the marketplace. Yet as Ekexplained in the wake of Swift’s breakup with thecompany, in a blog post entitled “$2 Billion and Counting:”

“When I hear stories about artists and songwriters

who say they’ve seen little or no money from

streaming and are naturally angry and frustrated, I’m

really frustrated too. The music industry is changing –

and we’re proud of our part in that change – but lots

of problems that have plagued the industry since its

inception continue to exist. As I said, we’ve already

paid more than $2 billion in royalties to the music

industry and if that money is not flowing to the

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industry and if that money is not flowing to the

creative community in a timely and transparent way,

that’s a big problem. We will do anything we can to

work with the industry to increase transparency,

improve speed of payments, and give artists the

opportunity to promote themselves and connect with

fans – that’s our responsibility as a leader in this

industry; and it’s the right thing to do.” [51]

In other words, Spotify is doing all it can to ensure thatartists are compensated for their work, and if recordlabels don’t share, then it’s not their fault. Nevertheless, ifartists choose to remove their music because they aren’thappy, it doesn’t matter whose fault it is, because Spotify—and its users—will be the ones to suffer.

International Expansion

As the company explains on their page for artists, despiteexpanding to a total of 55 countries thus far, the company“plans to continue this rapid expansion around the world”in order to “add millions more users quickly and in turnenable us to pay even more out in royalties.” [26] One suchexpanding market is Canada. Though a launch date hasnot been announced, the country is currently in a state ofanticipation similar to the pre-US launch, and a Spotify.casite is currently accepting requests for invitations. [36]

Spotify availability by country. Image via Spotify.

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Platforms and Partnerships

One way to grow the Spotify user base is through newpartnerships and platforms. The company has releasedSDKs for iOS and Android developers and has launchedhigh profile integrations with companies like Uber. It’s nothard to imagine Spotify shipping on Samsung or HTCphones, Spotify on Xbox One, Spotify on PS4, Spotify onRoku, Spotify in your BMW, and so on.

Starting in November of 2014, Uber began rolling outsomething along these lines in London, Los Angeles,Mexico City, Nashville, New York, San Francisco,Singapore, Stockholm, Sydney and Toronto (with morecities added in the following weeks). The car service nowallows its customers to remotely control the music thatplays through their ride’s speakers. To integrate the twoservices, users connect their Spotify accounts from theUber Profile screen. After that, whenever they request aride from the Uber app and are matched with a music-enable dUber, a music bar will appear at the bottom ofthe Uber app. Users tap the music bar and choose a songfrom any of their Spotify playlists while waiting for the carto arrive.

The Spotify + Uber partnership is available to SpotifyPremium users only, though Spotify does offer a free, no-credit-card-required week of Premium so that Ubercustomers can try out the service. [62] By making theseintegrations available only to premium subscribers,Spotify may be able to drive not only user growth butupgrade conversion to paid accounts.

Is Spotify Sustainable?

In May of 2014, Joshua Brustein of Businessweek cited areport published by Generator Research the previousNovember, claiming that the business model forstreaming music might be “inherently unprofitable.”According to Andrew Sheehy, the report’s main author,“No current music subscription service—including

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“No current music subscription service—includingmarquee brands like Pandora, Spotify, and Rhapsody—

can ever be profitable, even if they execute perfectly.”Brustein went on to claim that, according to a reportwritten by the firm PrivCo using Spotify’s financialdisclosures, the company had lost a total of $200M since itwas founded, though Spotify declined to comment. [33]

Despite these claims, plenty of streaming services areattempting to make a go of it. In fact, an August 2014article from Time.com cites 102 available music streamingservices—though they did count basic and premiumversions separately. [65] Nevertheless, that’s still a ton ofcompetition for Spotify.

Conducted by Edison Research and Statista, the survey’sthe main points of consideration were whether thosesurveyed had heard of certain services and which onesthey had used within the past month. The chart belowrepresents that data:

Audio streaming consumption stats. Image via BGR.

Yet in addition to competitors like Pandora and Rdio,Spotify is now also faced with competition from well-funded giants like Apple and Google, toward whom Ek isparticularly (and probably rightly) hostile—claiming in thecompany blog post responding in detail to Swift’sdeparture, “Our whole business is to maximize the valueof your music. We don’t use music to drive sales ofhardware or software.” [51]

The market for streaming radio is becoming increasingly

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The market for streaming radio is becoming increasinglycrowded, with established services—such as Beats and

iTunes—joining forces and new services—such asYouTube’s music streaming service—entering the fray leftand right. In particular, the launch of YouTube’s servicecould mean trouble for Spotify, since many see YouTube,with its 1 billion visitors per month, and 4 billion musicvideo streams on Vevo alone, as the biggest streamingmusic site on the planet. [52], [69]

In March of 2014, TechCrunch reported rumors thatSpotify might go public at some point in the fall of 2014.That time has come and gone, though in February theirwebsite had listed a job opening for an External ReportingSpecialist to “prepare the company for SEC filingstandards. Set up all reports necessary to be SECcompliant.” Furthermore, there were reports that Spotifyreceived a $200M credit facility from Morgan Stanley,Crédit Suisse, Deutsche Bank, and Goldman Sachs, whichTechCrunch perceived as a bid to to improve theirchances of being the underwriter when Spotify does gopublic. [37]

Little more was heard regarding a Spotify IPO until Augustof 2014, when the company relisted the same regulatoryfilings expert position. In an email to Reuters, Spotifydirector of communications Marni Greenberg affirmed,“This is the same role that was advertised back inFebruary,” though she declined to explain why theposition was being re-listed or provide any furthercomment. [49] Current speculation is that the company willgo public sometime in early 2015.

There’s no denying that Spotify has turned the musicmarket on its head, providing a value propositionattractive enough to decrease digital piracy and convincemillions of people that music is worth paying for. Onlytime will tell, however, whether that business model issustainable. Nevertheless, if Spotify does have intentionsof going public, revenue losses of $200M are certainly notsustainable—especially in light of increasing competition

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sustainable—especially in light of increasing competitionfor paying users and artist dissatisfaction.

Written by: Morgan Brown

You must be logged in to post a comment or flag apost.

demetrius michael (@dem_z) • January 9, 2015 at 9:38 am Link

People still use iTunes Radio? I guess distributionmatters.

6 Reply

Sean Ellis (@sean) • January 8, 2015 at 5:51 pm Link

Excellent breakdown of the growth engine forSpotify @morgan ! I’d ask if you think they areovervalued at a $10B+ valuation, but that’s a gutcall. Instead, I’ll ask if you had an opportunity toinvest a few thousand dollars at a $10B valuation,would you take it? If not, is it because theheadroom for more growth is too limited orbecause the risk of the model is too high, or acombination of both? Curious what other peoplethink on this question too.

5 Reply

Morgan Brown (@morgan) • January 9, 2015 at 9:04 am Link

It’s a great question and hard to say really.Pandora has a market cap of $3.4 billion and isthe leader in the online streaming space, so it’shard to say that the $10 billion is justified. Andat $10 billion, I think they’re probably too richfor an acquisition, so the public market is theonly way to go for them (or an acquisition at abig haircut on this value).

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big haircut on this value).

So, I probably wouldn’t put money into them atthis point, but I probably would’ve a year ago.

3 Reply

Luis Albertson (@lalbertson) • January 9, 2015 at 2:36 pm Link

Very insightful @morgan . I was consideringpurchasing Spotify Stock If & When they go public.This article has only strengthened my position.

3 Reply

benhoffman (@benhoffman) • January 9, 2015 at 9:04 am Link

Another amazing growth study. I guess the growthlesson here is, among others, build an awesomeproduct + perceived or real scarcity. (i.e. amazingmusic player + invite system)

Do we think Spotify’s scarcity is real or perceive?Klout did have to limit their invites. But then again,I’m sure Spotifys founders saw what happened inEU and figured it wouldn’t hurt to do the same inthe US.

2 Reply

Sean Ellis (@sean) • January 9, 2015 at 9:19 am Link

I also think a growth lesson here is that wellexecuted freemium can lead to strong customerevangelism with low friction conversions. Toexecute freemium well, they not only needed tohave this strong user evangelism, but needed tohave a significant number of people upgradingto premium. The stats that jumped out at mefrom the study is that of the first 3 million usersin the USA, 20% were on premium plans. Andthat 80% of premium users start on a free plan.

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that 80% of premium users start on a free plan.In my experience, those are excellent freemium

numbers and make their growth modelsustainable (as long as they can keep artistshappy).

3 Reply

andrewgale (@agale) • January 9, 2015 at 9:46 pm Link

Another epic post @morgan – great work!

2 Reply

Matt Morgan (@mmorgan) • January 9, 2015 at 12:15 pm Link

Awesome writeup @morgan .. So interestingtaking a critical look at these companies. Keepmaking SB proud brotha..

1 Reply

Morgan Brown (@morgan) • January 9, 2015 at 2:31 pm Link

Thanks @mmorgan! I appreciate it and thanksfor stopping by!

1 Reply

Matt Challberg (@mattchallberg) • January 10, 2015 at 8:04 pm

Link

This is an amazing case study and extremelydetailed! @morgan do you think the majority oftheir growth was from their uniquepositioning/value proposition in the music space,or due to marketing/growth strategies?

1 Reply

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Morgan Brown (@morgan) • January 12, 2015 at 11:16 am Link

Update: Spotify now has 60 million users and 15million paid customers:

http://www.theverge.com/2015/1/12/7531261/spotify-hits-15-million-paid-subscribers-60-million-listeners

1 Reply

Pol RAS (@polras) • January 20, 2015 at 2:19 pm Link

great article @morgan !

1 Reply