Spotify's Success Story: How Spotify's Freemium Model made Billions

Are you guilty of ditching apps like Jio Saavn, Wynk Music, or Gaana just to switch to Spotify? And even after repeatedly listening to someone rant about the 'the engine and the wind' (if you know, you know), you don't plan to go back to other apps, then let me assure you that you're not the only one.

Spotify has created a brand image for itself. It's like the "Apple" of the streaming music industry, but ironically, it beats apps like Apple music. So, what's so special about Spotify?

Spotify is a streaming music platform that started as a small company in Sweden in 2006. Daniel Ek and Martin Lorentzon founded it. It is one of the largest music streaming service providers that beat big players like Apple Music, Google Play Music, and Amazon Music. Currently, Spotify has 17 offices in different countries and has a presence in over 102 countries. At the beginning of February, it scales up this number to 187 by launching Spotify in more than 85 countries across Asia and Africa.

Back in 1990, CDs were a standard medium to stream music. With the introduction of home computers, consumers could rent their favorite CDs and convert the music into an MP3 file format. This invented the problem of music piracy.

Even in India, we had websites like Pagalworld.com or Songspk.com (feeling nostalgic yet?) through which anyone can download any Bollywood song they desired for free.

To combat the situation, Apple took a step forward and started selling music digitally on platforms like iTunes in 2003. As iTunes rose to fame, it destroyed the CD industry. People started buying music digitally for 99 cents rather than paying $10 for a CD.

But a portion of people couldn't afford to make this switch and relied on radios for free music services, but radio had its limitations.

Spotify was born out of frustration as the founders spent hours finding and listening to music on the computer. After brainstorming many ideas, the founders decided to find a middle ground between illegal websites that allowed users to listen to music for free and Apple iTunes, which was legal but used to put a dent in the users' pocket.

The entrepreneurs took these extreme niches to develop Spotify, which was legal and free for users. The company made sure that the delivery of music is instant and the quality remains intact.

The duo invested heavily in the engineering of the product to nail the aspects mentioned above.

Initially, the entrepreneurs named their app Spotify AB and launched it in Sweden. They invited music bloggers of Sweden to try out their product to attract consumers, and it did help them create awareness about their product in the market. The company spent a lot of time focusing on latency to ensure that consumers have a smooth experience, and it paid off well.

In just two years, the company raised more than $85 million in 2 series, which was later used to improve their app by hiring top engineers.

Five years after the launch, the company made its way to the US market. The company entered the market with an 'invite only' program for the free tier, and soon it was able to gain favorable reviews. Although it took many years to enter the United States, as it struggled with the music rights issue, Spotify's timing was considered to be perfect. From 2001, the global music industry saw a decline, and by 2011, the revenue of the industry had fallen to $14.8 billion. As a result, the Big Four American record labels, namely, EMI, Sony, Universal, and Warner Music, agreed to share their catalogs with Spotify. In return, these big four became the biggest shareholders of the company.

Although there are many competitors in the music streaming industry, Spotify maintains its spot at the top thanks to its freemium model. One can either listen to music for free or pay for a subscription for uninterrupted music. 90% of its revenue comes from selling the premium plans, whereas ads contribute 10% to their total income.

It offers various premium plans like Premium Family Plan, Mini Plan for a week or a day, Premium Individual Plan, and Premium Duo Plan. In March 2014, Spotify even introduced a Premium Student Plan for students of an accredited higher education institution. Under the plans mentioned above, one can stream ad-free music, download songs, and even provide a group session facility.

For streaming music created by artists, Spotify pays 70% of the revenue generated as copyright holders' royalties.

As per the data received in December 2020, Spotify has 345 million subscribers across the world, out of which 155 million users hold premium accounts. With such a huge subscriber base, the company generated total revenue of $2,168 million. Although the company reported a net loss of $125 million, the company's YoY net profit was up by 40.19%.

Spotify's primary advertisement was launched in 2008. Although it was made on a small scale, it created a buzz in the market. Today, 13 years later, the company relies on heavy advertisements to market its premium plans. These advertisements are slotted in between streaming songs. These ads may sound annoying, but it's just a way of generating income. They aim at annoying the consumers to buy their premium plan to get rid of the repetitive ads.

The app also customizes the homepage according to music that the users often play. Furthermore, it helps the users to discover new music in the most minimalistic manner.

In 2017, the app also introduced its biggest advertisement, i.e.,2017Wrapped', through which the app summarizes your listening time, your favorite artist of the year, the song you streamed the most, and many more such categories. Users also shared this information on their social media handles, which helped the company add more freemium users.

The company, which initially launched in Sweden, started its operations in countries like Norway, France, Spain, and Finland, now has a presence in over 187 countries. It captured markets like the United Kingdom and the Netherlands before entering the United States in 2011. In the same year, the company expanded to other European countries like Denmark, Austria, Germany, Switzerland, and Belgium.

Each year the company systematically approached different markets around the globe. This slow and steady plan of expansion helped the company to focus on few markets to gain more subscribers.

In 2019, Spotify successfully penetrated the Indian market but unfortunately was not able to able already existing players like Gaana and Jio Saavn.

In February 2021, Spotify increased its international presence by entering 85 new countries across Asia, Europe, South America, and Africa.

Spotify is constantly trying to outdo its competitors. The company also announced that it is moving its focus from music to more general audios to broaden its offerings and widen its global lead. Spotify still has the potential to grow and explore new opportunities. One cannot deny that Spotify (minus the ads) is one of the best music streaming platforms available in the market.