A Deep Dive Into Spotify’s Business Model

What’s your go-to music streaming platform? You might say Spotify, Apple Music, or Pandora. Music streaming services have increasingly dominated our music consumption. They have democratized and diversified the ways in which we listen to music, and how artists engage with their fans. Recent data suggest that streaming services generated $13.4 billion globally in 2020, which made up 62.1% of the total music industry revenue. Streaming also reached a new high of 487 million global subscribers by the first quarter of 2021. Within the music streaming industry, Spotify is currently seen as the most popular streaming platform in the world. As a musician and music lover myself, Spotify is indeed one of my favorite go-to apps on a daily basis. Therefore, I think it will be interesting to take a deep dive into the company— by specifically analyzing its business model.  

Spotify was founded by Daniel Ek and Martin Lorentzon in April 2006, with its headquarters in Stockholm, Sweden. It employs more than 5500 people across 15 different international offices, with over 406 million users and 180 million premium accounts signed up on its platform. Its music service is also available in approximately 178 countries internationally, as of August 2022. Spotify’s mission is essentially “to unlock the potential of human creativity” by allowing creative artists to spread their talents and interact with fans. In short,  it aims to create an immersive artistic experience for both its artists and users. You might be wondering how Spotify has developed so rapidly from a Swedish startup to the most loved and biggest online music platform today. Its success narrative has a lot to do with its “freemium” business model. 

Spotify generates its revenue mainly by utilizing a diverse business model called “freemium,” which offers a limited and ad-supported service for free, and an unlimited service for a monthly subscription fee of $9.99 (with options for student accounts at $5 every month and family plans for $14.99 per month). In other words, users have the option to open a free account and start consuming content. Nevertheless, if they want an ad-free and immersive music listening experience, they have to register for a premium account. Thus, the major source of revenue is the premium subscription fees from users. The limited free service primarily plays a role in driving subscriber growth by triggering free users to enter the premium funnel. 

Moreover, Spotify earns its major shares of revenue from in-app advertising as well. By selling ad space on its free and limited streaming service, Spotify charges businesses for promoting their ads. Advertisers get the option for either video or banner advertising, utilizing a similar model to YouTube. In short, users have to watch a certain portion of the advertisements before accessing content on Spotify. Advertisers are also able to use Spotify’s suite of advertising metrics to enhance their reach to target audiences. Specifically, advertising creators can set up an account on the “Spotify ad studio” that helps them target a particular demographic. For instance, brands can target audience members based on their age, gender, location, or interests that make them compatible with the brands. In short, this method of target marketing ensures that the right people are hearing the ads. 

After knowing the basics of how Spotify works economically, it is essential for us to ponder who actually benefits the most from its “freemium” business model. First of all, it benefits the platform users as Spotify offers them two tiers of services. We can choose to enjoy the basic features and access limited content with advertisements for free, or pay the affordable subscription fees for consuming content without the hassle of advertisements interfering with our experience. Furthermore, Spotify utilizes algorithms to analyze our listening habits and offer us recommendations that aim to improve our music listening experience on the platform. At the same time, advertisers also benefit largely from the “freemium” business model, since Spotify has a solid audience base and ad-supported users— who tend to spend long hours on its platform— must listen to the advertisements between songs since there is no fast-forwarding or skipping. 

Now, you might wonder who might not be benefiting much from Spotify’s business model. Surprisingly, it’s the artists on Spotify. Spotify currently operates through a “pro rata” royalty model, in which the majority of the money paid by subscribers is pooled. In other words, this particular model favors the right holders of most-listened tracks, which puts relatively new artists or those who have less listened tracks at a disadvantage. Moreover, since streams are so easily accessible now, the payout of each stream is significantly little. The money earned also has to be split among several groups of people in the industry, such as labels, songwriters, and producers. Therefore, artists only receive a small percentage of the payouts, and some artists have gradually found themselves struggling financially. For example, British singer-songwriter Nadine Shah shares her experience in a New York Times article that, “[i]f we got paid a meaningful income from streaming, that could be a weekly grocery shop; it could contribute to your rent or your mortgage when you need it the most.” As a result, in 2020, The United Musicians and Allied Workers Union (UMAW) launched a campaign called “Justice at Spotify” that demanded higher average streaming royalty for all artists.  

So, what does the future look like for Spotify? With its growing popularity among Gen Z users, Spotify has gradually become an app that many of us can’t live without on a daily basis. Spotify has also added a healthy number of premium subscribers over time, which continues to drive outstanding revenue growth. It has also been finding ways to diversify its revenue streams. For instance, it has the potential to move into the concert ticket sales business, which can further enhance its market growth. Nevertheless, criticisms such as the ethics of music streaming have also presented challenges to Spotify’s potential growth. The question of how to stream ethically is essential for Spotify to contemplate at the moment. Essentially, the company should think about ways to make its business model more equitable and transparent. If this streaming giant can improve its platform with the aim of benefiting as many musicians as possible, the future will look promising for Spotify in the booming streaming landscape.