Spotify: Why It’s Been So Successful and What it Needs to do Next

I first spoke to the guys at Spotify a good few months ago and I have to confess to thinking at the time that they were just another digital music start-up. In fact, it was worse than that, I thought they were potentially another doomed digital music start-up if they didn’t revise their strategy.

On the face of it Spotify doesn’t actually have that much to offer. The discovery, programming and community features are next to non-existent in comparison to the feature rich functionality that the current next-wave of digital music services such as imeem, Pandora, Last.FM and Comes With Music are offering. Added to that the core of the business model seemed to be a 9.99 monthly subscription for non-portable streaming music rentals (with an ad supported layer that appeared to be a customer acquisition tool). In short, it was the increasingly defunct premium subscription model that Napster, Yahoo and Rhapsody have all failed to push out of a niche. To give a sense of the degree of failure, the share of European Internet users that paid for music subscriptions in 2008 was approximately 0.1 percent.

And yet despite all of that, Spotify is proving to be a roaring success, rapidly become the darling of the digerati (it certainly seems to have replaced Blip.FM as the service of choice for European Twitterers). Why? There are three key factors behind Spotify’s success:

  1. The actual lack of sophisticated functionality has actually proven to be an asset: the simplicity of the proposition has made it equally popular among tweens as it has pensioners.
  2. Spotify used smart viral marketing tactics, launching in an invite-only mode, but giving each user a large number of invites. This created apparent (though not actual) scarcity which drove demand, making those invites hot-tickets and giving whoever had them kudos. It was essentially a pyramid selling scheme, but it worked, and some.
  3. The single most important factor though is the fact the ad-supported tier offers completely free access to very comprehensive catalogue.

In short, Spotify gives you most of the music you could want for free without hassles or complications. My Forrester colleague James McQuivey has developed a methodology called the Convenience Quotient that measures products and services based upon the benefits to consumers and the barriers to adoption. Spotify would get a strong CQ score because it makes it easy to get strong benefits.

So what next for Spotify?

Spotify, by accident or intent, now has the potential to become a mass market free music offering. They need to build up their audience sufficiently to attract big advertisers to generate enough revenue to enable them to ditch any business plan reliance on the premium tiers. Founder and CEO Daniel Ek is talking up strong new features for premium subscribers, some sort of mobile play and even downloads. I hope they don’t spend too much time focusing on the premium offering. They’ll struggle to get anything as near as compelling user experience as Rhapsody which even with market leading UI failed to break out of niche.  I’d also steer clear of ad supported downloads. That would require messy DRM implementation which will muddy the service’s current simplicity.

Mobile though could be a hugely important move. Pandora’s iPhone app has demonstrated how well implemented mobile can turn a PC-centric service into a truly portable one. If you have a compelling portable streaming element, the need for downloads becomes much less important.

So interesting times ahead for Spotify. They succeeded so far by smart adherence to the KISS principle: Keep It Simple Stupid.   If they stick those ideals they stand every chance of stepping up to the next level.

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8 thoughts on “Spotify: Why It’s Been So Successful and What it Needs to do Next

  1. Disclaimer: I work for Rhapsody.
    I think you’re too glib about the current “premium subscription services”. None of the 3 you mention actually have European licenses (Napster has a limited presence in the UK), and Europe-only services haven’t achieved critical mass in content or in users for all kinds of reasons (localization among them).

    Your pro-Spotify arguments amount to:
    1. It doesn’t do much
    2. It has good marketing
    3. It’s free

    There are a number of other free-ish services which are also promising and theoretically geographically limited (Deezer, Grooveshark). I am sure plenty of users will check them out.

    Rhapsody (and I suspect other services’) pricing is largely dictated by their arrangements with the content providers. Whether any of the services (Rhapsody and Spotify included) are able to create viable business models has a lot to do with those label agreements.

    Finally, for people that care enough about music to pay for it, there are things the premium services offer which Spotify does not (yet), including off-PC access via portable devices and connected home units like the Sonos.

  2. Hi Anu

    Don’t get me wrong. I’m a big fan of subscription services. In fact I’ve been criticized over the years at Jupiter (now Forrester) for being too bullish on their prospects.

    The fact is, Rhapsody & Yahoo did not consider there to be enough European opportunity to launch PC subscription services. Napster struggled so much in the UK that it scaled back it’s UK operations. Globally Napster is losing subs. Yahoo closed its doors. Rhapsody remains an essential niche audience service in the US. So premium subscriptions have not been a success. They have certainly not broken out of niche audience appeal.

    None of these factors take away from the value of the proposition, rather they illustrate that rental music models (even with portable rentals) charged at 9.99+ a month are not appealing to the majority of consumers.

    Spotify’s success shows that consumers ARE interested in the value proposition, just not paying 9.99+.

    The conundrum with Spotify is that it offers so much less than Rhapsody (which FWIW I think it the best programmed digital music service out there) but has so much more appeal because it is free and simple.

    I fully understand the inherent limits that license costs place on pricing. But Rhapsody has two key long term choices:

    1) continue as a niche top end play for music afficionados (and even this IMO requires the major change of going unlimited MP3)
    2) aim for the mass market & renegotiate contracts based on an ad supported model, and developing an iPhone app to deliver the portability story

    Mark

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  5. Wenn ich es nicht wirklich wüsste, dann würde
    ich ohne Weiteres dazu sagen, dass dieser Beitrag mit dem Titel “Spotify: Why It’s Been So Successful and What it Needs to do Next | Music Industry Blog” von mir geschrieben ist so gelungen
    wie der hier steht. Alle Finger nach oben und viel Glück noch
    weiter so in Zukunft!

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