Know your target.
Spotify does; it chose casual listeners over what I would call
“hardcore listeners”. You know the type:
they hang out at record stores, buy concert tickets, merchandise, and equipment
for both listening and playing. They
might be the most valuable piece of the market, but to fight for them would
bring the combined wrath of the big 3 record labels, Sony, Apple, Beats, and probably
the Catholic Church for good measure.
Instead Spotify chose to be music for the rest of us.
This is an important piece of Spotify's winning strategy because the company is what you would call a disruptor. Almost all disruptive business models involve 1. a new technology or capability to undercut the big players and 2. focusing on the least attractive customers. By targeting those who rarely buy music, Spotify received minimal retaliation from the record labels, iTunes, and CD sellers while building up sales, users, scale and experience. Remember that Spotify was completely free on desktop from day 1, a strategy Rhapsody and (legal) Napster never dared. By the time the incumbents felt threatened, they were behind the streaming wave.
But wait, doesn’t Spotify have plenty of company in the
casual music listener space? Pandora is
the original streaming radio and has an impressive library. An array of playlist apps like Songza and
user-submitted music apps like Soundcloud are still free. Youtube Music Key is only a few months old,
but promises to harness the world’s greatest content creation platform for an
ads-free, online and offline music experience that, combined with the existing
Google Music service, will be tough competition for Spotify.
Still, the green streaming machine has staked
out its position as cheap relative to owning music, but more premium than its peers. While all streaming
services may have a superior product to CDs, Spotify leapfrogged its peers with
simplicity, focus, and overall user experience.
The features, such as the ability to see what music your Facebook
friends like, add value without muddling the experience. I converted to the cult of Spotify a year ago, and it took a lot to finally overcome my routine of organizing a hard drive full of music and transferring it between devices as space allows. I was paying nothing and now I'm paying something, but the experience is immeasurably better. I love the extra benefits of using a service, such as my “Year in Review”, which gave me pretty graphs about what and when I listen,
and recommendations with a level of depth and quality Pandora never reached.
While the features are well-executed, the key to Spotify is what’s not there: it’s a controlled environment without copyright infringement, reposts and unclear labels (looking at you, Soundcloud and Youtube). There is no needless integration with other services (Google Music) or video and banner ads (Groovesharks, Songza) to ruin the interface. There are no links to merchandise or to see artists on tour (last.fm), because hardcore listeners are not the target. Granted, new features do come gradually and will continue to be welcome (I would love to see integration with Facebook chat so that you could tune people into what you’re hearing), but they are done at a pace users can learn and appreciate. If you’re seeing the parallels to Apple, you’re not the only one.
Spotify’s focused, holistic strategy has yielded a ridiculous conversation rate – 25% of its 50 million listeners pay $10/month for premium, while only 3.5% of Pandora’s 70 million active users pay $5/month for an ad-free product. This is money in the bank moving forward, as consumers rarely cancel subscriptions they don’t use, let alone ones they tried out for free and use often.
Spotify is threading the needle, balancing a quality product, attractive prices, and also a lack of the image problems that tend to plague tech companies on the rise. OK, there’s one controversy, surrounding Spotify’s payment of its artists. Click here for a shorter Part 2, where I examine Spotify’s relationship with the musicians that make up its huge library.
Update 3/2015 - Kendrick Lamar broke the single-day record for streams of his new album, which reignited the debate over Spotify's royalties. Considering Kendrick made $1 million in one day, and streaming revenue officially passsed record sales, I feel good expressing continued faith in Spotify's business model, for both the company and the artists.
