Meet Spotify: The Music App That Knows More About You Than Your Friend

Hey Everyone - Harry here 👋

Welcome to Issue #7 of Deep Dive with Inquisition. In this issue, we will cover the story of Spotify, one of the world’s most popular music streaming apps, from its founding stories to the strategies it used to dominate the music streaming industry.

Since today’s issue is on Spotify, I will be sharing one of my favorite songs on Spotify:

Early Days of Spotify:

Spotify was founded in 2006 by two Swedish entrepreneurs, Daniel Ek and Martin Lorentzon, with the purpose of tackling the music piracy problem. At that time, non-copyrighted music was being widely distributed across various platforms such as Napster. This issue made Daniel and Martin realize that the industry was in serious need of change, highlighting the immense potential of the music industry. The name 'Spotify' is a combination of 'Spot' and 'Identify'; however, it was actually one of the names that Martin (co-founder) shouted, which Daniel misheard as 'Spotify'.

Overview of the Global Music, Music Streaming Market, and Audiobook Market:

1. The global music market includes all types of music that are recorded or converted into a digital format. The music streaming market refers to the current global music streaming platforms.

2. The worldwide digital music market is expected to see significant revenue growth, reaching a projected amount of $41.09 billion by 2024.

3. The worldwide music streaming market is projected to reach a revenue of $29.6 billion by 2024.

4. The music streaming market is expected to show an annual growth rate of 4.7%, resulting in a projected market volume of $33.97 billion by 2027.

5. The United States (US) is the biggest market for revenue generation in the global music and music streaming industry.

6. Revenue in the audiobooks market worldwide is forecasted to reach $7.93 billion by 2024.

7. The worldwide audiobook revenue is anticipated to grow at an annual rate of 10.44%, reaching $13.03 billion by 2029.

Rise of Spotify: How It First Started:

Spotify was founded in 2006 as a solution to combat pirated music. During that time, platforms such as Napster, Pirate Bay, and LimeWire were popular for digital music, though they operated illegally. People, ranging from teenagers to grandparents, were being sued by music label companies, leading to a chaotic phase of the music industry versus pirate platforms.

Spotify co-founder Daniel Ek thought the solution to music piracy was to create a service better than piracy that also compensated the music industry. This led Daniel and Martin to leverage MP3 technology to provide free, non-pirated music for everyone. Unlike iTunes, which charged $2 per song, Spotify aimed to be approachable and affordable.

Spotify launched its free tier in 2008 after two years of development. After convincing music labels regarding copyright issues and securing $21.6 million in Series A funding, Spotify focused on launching in the European market. Due to its free, simple, and easy-to-use platform, Spotify attracted a significant number of users from Europe. This was a stepping stone towards Spotify’s ultimate ambition of entering the US market.

How Spotify Became One of the Biggest and Fastest-Growing Music Streaming Companies:

After establishing its foundation in Europe and gaining millions of users, Spotify entered the US market in July 2011. Key factors in Spotify’s growth included its partnership with Facebook and Sean Parker, the founder of Napster. In 2010, Sean Parker invested $10 million in Spotify through Founders Fund. His involvement helped Spotify negotiate with Warner and Universal Music, which was crucial for Spotify’s US launch. Additionally, Spotify’s integration with Facebook allowed users to connect their Spotify profiles, boosting user engagement.

Spotify’s product quality was another significant factor. Offering an ad-free service for the first six months, users could explore millions of songs for free, which was a huge draw.

Below are the strategies that contributed to Spotify’s growth:

1. High-Quality Disruptive Product: Spotify's music player was revolutionary, allowing users to play music just like from their hard drive. Its technology predicted and provided music recommendations, capturing users’ hearts.

2. Implementation of Freemium Model: Spotify gained initial traction with its freemium model. The free plan, though ad-supported, allowed unlimited song play, while the affordable paid plan provided ad-free music. This convinced people to switch from illegal music to Spotify.

3. Invitation-Only Model: Spotify’s initial sign-up model required an invitation, creating a sense of exclusivity and FOMO (Fear of Missing Out), which drove higher user engagement and attention.

4. Strategic Acquisitions: Spotify strategically acquired companies to enhance its offerings. One notable acquisition is The Echo Nest, a music personalization and discovery API, bought for around $100 million, significantly improving Spotify’s “Discover Weekly” feature.

5. Lots of A/B Testing: Spotify is known for extensive A/B testing, continuously improving its UI/UX and music recommendation algorithms. The company even developed its own A/B testing platform, "Confidence," for seamless experimentation.

*Spotify’s A/B Testing Platform:

*Spotify’s blog posts on its A/B testing:

Introducing Podcasts and Audiobooks from Spotify:

Spotify’s entry into the podcast and audiobooks market can be seen as a strategic move for the streaming giant to:

1. Create its ecosystem as a platform for users to do everything listen-related: from music to audiobooks.

2. Diversify its content offerings for users. (More offerings under the same price = better for users + more potential new users).

3. Diversify its revenue streams. (More markets = more potential revenue).

Spotify’s journey into podcasts began in 2015 and has never slowed. Why? Because Spotify was able to capture the growth in the market and predict the directional change in digital consumption (e.g., YouTube videos to podcasts). Below is research on the growth of the podcast industry.

According to the Edison Research Report “The Podcast Consumer 2024”:

*Link to the Report*

As you can see, the podcast market is expected to grow over time. Spotify didn't enter the podcast industry from scratch; it did so by making strategic acquisitions on both the supply and demand sides of the podcast industry. Specifically, it acquired companies that focused on making it easier for individuals to create podcasts (e.g., Gimlet Media and Anchor) while also bringing famous podcasts exclusively to the Spotify platform (e.g., The Joe Rogan Experience).

Regarding the specifics of the acquisitions, one major move was acquiring Gimlet Media, a leading podcast network, and Anchor, a powerful podcast creation and distribution platform, marking the beginning of this transformation. These moves allowed Spotify to host a diverse array of podcasts, catering to various tastes and interests, which later became one platform known as "Spotify for Podcasters."

Regarding the acquisition of the demand side of podcasts, the company took an unconventional route by signing and acquiring exclusive deals with famous podcasters (e.g., The Joe Rogan Experience) to be exclusive on the Spotify platform, attracting loyal listeners of the podcast to sign up for Spotify and become active.

So, Spotify conquered both the supply and demand sides while leveraging its technological resources, such as the algorithms it developed for music streaming, to further enhance the podcast user experience. Daniel Ek is so obsessed with podcasts because he believes that podcast users spend twice as much time on the platform when listening to their favorite podcasts, ultimately contributing to the platform’s Daily Active Users (DAU) and Monthly Active Users (MAU), while also becoming an alternative revenue source for the platform.

Then what about Audiobooks? What is up with Spotify’s new obsession with audiobooks?

This can also be seen as Spotify’s attempt to:

1. Expand into a new, similar market (audio needed) to create an ecosystem (Music + Podcast + Audiobook = Requires form of listening).

2. Expand its revenue stream and turn a profit.

3. Follow the global market trend, which shows that the global audiobook market is growing at a rate of around 10% annually.

Spotify officially entered the market by making a strategic acquisition of Findaway, a global audiobook distributor. With this move, Spotify positioned itself to compete with established players like Audible and Apple Books.

Just like how they entered the global podcast market, Spotify entered the audiobook market by acquiring a major key player who provided both supply and demand for its users. Spotify combined and implemented their technologies, such as its personalization algorithm, and directly entered the demand side by aggressively onboarding audiobooks, paying high royalties to offer a wide range of selections for the demand side.

Furthermore, by making the audiobook feature free for premium users (Paid users have access to 150,000+ free audiobooks) while also allowing non-paid users to pay per audiobook, Spotify has taken a smart strategic approach. By capturing users in the audiobook industry who are likely to also listen to music and podcasts, and by providing a seamless ecosystem, the company aims to attract new users from the industries it has entered, ultimately hoping to improve its total user numbers and profitability.

Challenges for Spotify:

1. Achieving Consistent Profitability: Spotify has struggled with profitability due to rising costs and continuous expansion. Achieving consistent profitability is crucial for its long-term success.

2. Artist, Podcaster, and Author Disputes: Spotify faces ongoing disputes regarding payment to artists, podcasters, and authors. Resolving these issues is essential for maintaining good relationships with content creators.

3. Overcoming Competitors: Competition from Apple Music, Audible, and YouTube Music is intense. Spotify must continuously innovate to stay ahead of its competitors.

Future of Spotify:

1. Finding Stability with New Expansions: Spotify aims to become the “All in One” platform for everything audio-related, focusing on finding stability and profitability through its expansions into podcasts and audiobooks.

2. User Retention and Growth: Spotify should prioritize user retention and growth, especially after expanding into new markets. Diversifying its revenue streams and improving user engagement will be key to its future success.

Key Takeaways from the Story of Spotify:

Spotify revolutionized the global music industry by leveraging technology and partnerships to combat piracy. From fixing a broken industry to unlocking the potential of human creativity, Spotify’s journey is an inspiration. Here are the key strategies that contributed to its success:

1. Dare to Dream Big and Turn It into Reality: The founders had a clear mission and ambitious vision to change the industry. Spotify’s revolutionary ideas and determination were crucial to their success.

2. Put in Time, Effort, and Quality: High-quality products/services require time, effort, and quality. Spotify's founders spent around two years developing their product to ensure it met user needs.

3. Business Model Matters: A unique and fitting business model is crucial. Spotify’s freemium model was key to gaining traction during its early stages.

4. Never Be Scared to Experiment: Continuous experimentation and leveraging data to understand user needs and wants are essential. Spotify’s extensive A/B testing played a significant role in its success.

5. Acquire Smartly: Strategic acquisitions helped Spotify enter new markets and enhance its features. Acquiring key players in the music, podcast, and audiobook industries was a smart move.

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Thank you so much for reading!

-Harry