What is Spotify?

By Stephen O'Toole on Wednesday, 30 October 2019

Ad platform, social network or streaming service – what is Spotify really up to?

In April 2018, the most widely anticipated IPO in years took place on the NYSE. Spotify had finally gone public. To most, their story of growth has been remarkable. Founded in Sweden in 2006, and a multinational corporation today, they are a case study in exponential growth. They now boast a valuation of $25 billion and have over 100 million paid subscribers on their books.

Spotify positions itself as the ‘white knight’ of the music industry - saving it from a near death experience over 10 years ago as it grappled with the headwinds of music piracy and the global financial crisis. But in recent years, as their acceleration towards an IPO intensified, so did outside scrutiny of the company’s business model and what it actual stood for. For example, a recent article from The Nation posed a question around their primary function - a subscription based music streaming service? An ad-tech data broker, selling info on its users? Or more of a newsfeed, or “community” with all the trappings of a social network?

In this blog I take a deeper look at the service, analysing its early years in Sweden and how over the years it has utilised venture capital, programmatic advertising and advances in algorithmic thinking to grow its business and brand - and more importantly, how it has negatively impacted both the production of music by artists, and its consumption by us, the listener.

Humble beginnings
Daniel Ek, Spotify’s co-founder and CEO is often referred to as the most powerful person in the music business. In 2017 he reached Time magazine’s list of the “100 most influential people” for having “helped transform the way people listen to music and the way artists interact with fans.”

Spotify emerged in 2006. Mobile connectivity was not yet the norm, likewise algorithmic culture. The first dot com bubble had come and gone, which saw online innovations take place largely without the support of outside investment. The future of the internet in 2006 was described as ‘Web 2.0’ - it became a well-established term, based on open standards such as the blog, the wiki, and the Bit-Torrent protocol. The latter became especially prevalent with a boom in music file sharing. Political disputes over copyright enforcement became very intense in Sweden, where The Pirate Bay, the world's largest BitTorrent search engine, was founded in 2003.

But neither of Spotify’s two founders, Daniel Ek or Martin Lorentzon, had any experience working with music, either in the music industry or as subcultural enthusiasts. As the book Spotify Teardown explains, they conducted a haphazard search for business opportunities that just happened to involve music. Their new business began to take shape and was eventually named Spotify - a name without any meaning.

In August 2006 they opened their first office in central Stockholm. Software development was the initial focus. The kind of data to be distributed? In the early years this was a secondary consideration for Spotify. It could be music - but if video, film and images proved more popular, then so be it.

Beta periods followed between 2007-2008 and enjoyed much hype amongst tech bloggers. The first public version of Spotify launched in October 2008 - but what did it mean to ‘launch’ a music service that was already up and running and serving thousands of users a day? Some may say that in 2008 Spotify was in fact legalised - since its beta version had for the preceding 18 months used music originating from The Pirate Bay and other file sharing networks. So much for saving the industry from piracy.

Promises of fast growth
Spotify was now live, legal and above board. Its focus quickly turned to how best it could grow into more markets and scale at a quicker rate than ever before.

In the early years, Spotify had been regarded as a free music service, based on its founders’ vision that advertising can make music “free but legal”. This vision died in 2009 with the global financial crisis. The total market for advertising quickly declined, so it was now difficult for Ek and Lorentzon to convince investors and license holders that advertising would be a main source of income. There was also a downturn in venture capital, but this was much more temporary. In fact, central banks responded to the near meltdown of markets by lowering interest rates and introducing more QE - thus forcing investors to chase greater risk.

The Economist defines venture capital as “investment in new or young firms in return for equity in the firm. They are not lenders, but equity investors at a stage at which the firm's shares do not trade on public markets. Unlike most equity investors, venture capitalists typically play an active role in selecting management and overseeing strategy.” By 2013, Spotify had been through numerous funding rounds and was valued at over $4 billion. This elevation was in effect a huge gamble on world domination - especially since the company was not even profitable. In fact, The Verge reported earlier this year, nearly 13 years after their founding and almost a year after their IPO, that Spotify was finally in the black, reporting an operating profit of $107 million.

The way Spotify used venture capital is important, because it immediately exposes the shape shifting nature of their business. As mentioned earlier, the co-founders appear to have no particular affinity to music as an art form and would have happily traded this medium for another such as video or film - if that was what their investors had demanded. This has manifested itself over the years in how many times its core business model has changed: first it was not specifically about music, then it was about free and ad-supported music, then the free service was reconceived as a way to market the subscription service. It’s use of venture capital also partially explains it is approach to, and relationship with, both musicians and their listeners.

It’s all about the music
The newspaper, film and music industries have all faced the same problem - people have become used to not paying. Whilst newspapers have put up paywalls and studios have gone direct to platforms such as Netflix, the music industry has faced the stiffest challenge of all.

In April of this year, the IFPI — the global body of the recording industry — released its latest annual Global Music Report. For the fourth consecutive year, revenues were up, to a total of $19.1 billion, from a low of $14.3 billion in 2014. Nearly half of those revenues came from music streaming services such as Spotify, Apple Music and Tidal. However, it is worth remembering that 20 years ago, the IFPI reported global music revenues of $38.6 billion. So, today’s “booming” recording industry is less than half the size it was at the turn of the century.

In 2008 Ek and Lorentzon understood that if Spotify could offer an alternative to music piracy, they would win both political and industry support. No doubt they have transformed the industry, but what of the impact on the way we create and enjoy music?

The Financial Times explored this subject in May of this year. Firstly, a startling fact: to qualify as having been listened to on Spotify, a song must have been played for 30 seconds. Skipped after 25 seconds and the artist doesn’t get paid. The impact of this? Hit songs from the major labels have become increasingly predictable, offering up their chorus or riff in the first half a minute. This has led to albums with more tracks, but shorter. The more tracks there are, the more opportunities to get paid - and for all the money that streaming services such as Spotify generate for the music industry, very little of it flows back to artists other than a select few that dominate the streaming statistics.

The rise of Spotify has obviously been aided by much hype, centered around a central idea of convenience for people to have the world of music at their fingertips. This hype has helped to deflect from the fact that their main purpose is not helping listeners find new music (something they are not very good at), but in fact collecting data on their subscribers to sell its audience to advertisers. Want to listen to an album in full? Forget it. Our music consumption is now compartmentalised into ‘curated’ playlists based on our behaviours, feelings and moods.

The value of free
Society is moving rapidly from ownership to access. Home and car ownership are on the decline. The music industry was never going to be immune to this disruption in the face of changing behaviour.

You can see why the likes of Spotify have grown into a giant in this new environment. It has enabled advertisers to benefit from the presence of many users, whilst the consumer should benefit in the discovery of new products and services from many advertisers. But what are the benefits for musical artists, whose content is being used to incentivise both sides? If their production or style doesn’t fit neatly into one of the platforms playlists or pre-defined moods, then they are probably wasting their time.

If the company’s royalty rates continue to be determined by track length, popularity and catalog size, it will only benefit the big 3 labels Universal, Sony and Warner - all who have large equity in Spotify - to the detriment of independent artists, and listeners who want to discover their new music.

The medium is the message
Living in an internet age has truly transformed how we consume all manner of things, and music is no different. In fact, music consumption was changing well before streaming culture became mainstream - think of the evolution which took in radio, cassettes, CDs and MP3.

Streaming services such as Spotify have popped up to meet a real consumer need. Even the home entertainment industry is having to move to a streaming and subscription model - take the fact that the forthcoming launch of Disney+ may see the production and sale of their DVDs and Blu-rays discontinued later this year.

People need to start making conscious decisions about how they interact with such services. Trust an algorithm more than your favourite radio DJ to recommend the best new music? Or do you want your relationship with music to be purely online, with a company that doesn’t pay artists fairly?

Streaming comes at a cost to the way we create and enjoy music. Let’s ensure we don’t consign more traditional forms of listening to the history bin just yet.

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