The currency of Spotify: How it changed the way we discover music


Pandora was once the leader by a long shot in the music streaming space. But today, all eyes are on the neon-green world of Spotify as the next heir to the throne. Spotify is currently touting over 75 million users, with 25% of them (20 million) being paid subscribers. This is a rapid increase from the 40 million (10 million paid) it had in May 2014. Compare that with Pandora which currently has just about 76 million users after losing 2 million in Q1 of 2015.

Spotify is catching up—and fast.

That begs the question; why the explosive uptick in users?


Setting the Stage

Spotify was launched in 2008 by Daniel Ek and Martin Lorentzon in Stockholm, Sweden. It was launched at a time where music consumption was either done by buying in bulk (cds), buying a la carte ($2 a song on iTunes), aimlessly curated (Pandora), or illegally downloaded (on Napster). It has evolved from being just a streaming service, to offering downloaded content, radio capabilities, and playlist curation. In its current form, Spotify has two paths of customers: freemium with ads, and $10 a month for premium.

Initially, the service started off as a response to the difficulty of retrieving music content from Napster, and the expensiveness of the iTunes “pay-per-song” model. The founders were interested in providing an “all-you-can-eat” music experience, with a flat subscription fee. The idea made sense, but it heavily relied on direct network effects to work.

In order to provide a service to consumers that would be successful, it needed to satisfy their core needs from a streaming service: variety. Because listeners have such a large array of tastes, it was necessary for Spotify to have a large network of artists and record labels signed on to its platform. These direct network effects were crucial for the service to compete in growing digital music industry; and it did. The way Spotify got artists to sign on to its service, was by providing an easy way to upload their music, and get paid a percentage each time their song was played. To date, the platform has paid artists over $2 billion in royalties.


Shades of Blue

Although Spotify’s customers benefitted from the direct network effects of customer to artist matching, other services also provided this opportunity. What differentiated Spotify though from its competitors, was the understanding that music consumption was inherently a social activity. People listened to music together, shared discoveries, and were referring to friends for music curation. This ideology is what prompted the partnership with Facebook in 2011. Spotify users benefitted from the direct network effects of a large artist base on the platform, but they were now able to benefit from another network; their own. For the first time, users were able to see what their friends were listening to, and discover new music or share music with them. Direct network effects from a user’s Facebook circle, were now transferred into their music space. There was a 50% monthly usage increase and 2 million new users in Spotify’s network after the integration with Facebook.

Since then, the music platform has tried to incept itself in new spaces where its users could use its service. In 2014, Spotify partnered with Uber to allow its users to stream their music from the sound system of the Uber cars they were riding in. And in 2015, it partnered with the Playstation network to let players stream music from the gaming platform. This is another network play, with Spotify tapping into the background of apps they see their members utilizing.


The True Currency of Spotify

As Spotify was growing, other music streaming services such as Pandora, Beats Music, and Apple Music started to dwell in the realm of tackling music curation. It was important to posses the network of artists, but what their member bases really wanted was the ability to discover new music that is specifically curated to their tastes. If Facebook could provide them with a curated newsfeed of personalized content, why couldn’t their music service provide them with curated music?

The complication of music curation stems from the inexact quantification of its content—music isn’t an exact science. What’s important about music discovery is not just the content, but the flow in which it’s presented as well; what comes after a song is just as important as the song itself. The playlist is the medium of music curation. Thus, different platforms approached the construction of playlists in varying different ways. Pandora, along with other radio streaming apps used the method of real-time curation, where the user provided the service with a seed (either a song or an artist) and the user would “like” or “dislike” the songs it suggested as they were played, and the platform would auto-adjust the playlist. The problem with this method is the inability to repeat a well-curated playlist, or to share it with friends; it wasn’t static. Understanding this problem allowed Apple Music to attempt static playlist curation for its users by claiming that algorithms could not curate, so they implemented a fleet of human DJs that would tweak playlists alongside the algorithms. Unfortunately, as the networks of users grows, the amount of human curators needed would surpass the amount that even a company like Apple could afford.

So, Spotify saw an opportunity. They understood that human curation is the best way to discover music, but its scalability is almost impossible. So they discovered a new potential network effect—the utilization of their user base as 75 million human DJs.The result is a new service this July called “Discover Weekly.” It is a static playlist of about 20 songs that changes weekly, and is personalized to fit each person’s music taste. The way Spotify is able to create an extremely well curated playlist of music for each user, comes from the realization that their currency is the playlist. Within their service, every user has the ability to not only stream and download their favorite music, but curate multiple playlists that can start to help Spotify understand the intricacies and nuances of music tastes and relationships. The way the service works is by crawling a user’s listening behaviour and playlists, seeking other users that listen to similar combinations of music, and seeing which tracks the user has yet to hear on their platform to create a curated playlist for them. Thus, Spotify users now have another network effect to benefit from; users benefiting from the curations of other users.

These unique interactions with music content are what making the switching costs from Spotify so high. There is currently a limit of transfer between music interfaces. So if a premium user has hundreds of songs downloaded onto their account, the likelihood of them abandoning this capital is slim. But what about freemium users?

What makes the service even stickier than other freemium services though is this quality of playlist and music curation. A streaming service like Pandora has low switching costs because of the lack of digital real estate each user has in their account; there are no playlists, just live radio feeds which are easy to replicate. And unless a user has a particular interest in the curation of the algorithm that Pandora offers, there is not much else to keep them glued. Spotify however benefits from the ability to have all its users save playlists. The amount of effort that goes into re-curating playlists is much more than the re-downloading of mere music capital. And now that the playlist has become a part of the network effects equation, the switching costs are even higher.

Without the utilization of user data and leveraging networks to benefit subscribers, other music streaming services will be drowned out by the electric green of Spotify. Rock on.


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Student comments on The currency of Spotify: How it changed the way we discover music

  1. Spotify has done a great job tackling the existing pain points in the music industry and creating a huge direct network effect for listeners who benefit from their friends joining and creating playlists that they can follow or send to other friends. I think one other interesting thing they have done is with their new running feature (and their integration with the Nike running app) which creates additional customer touch points and stickiness by integrating itself into the customer workout. Huge fan!

  2. I find some things very interesting here. I agree that Spotify is the clear leader in this space (even when it doesn’t have the largest user base compared to Pandora). Both services have direct network effects (since there not a lot of bargaining going on in the supply of music to these platforms) which primarily affect their ability to give better recommendations and to build more relevant playlists to their users. Nevertheless, they both provide very different customer value propositions: Spotify is 100% on-demand and Pandora is a radio service (I would dare to say that they address different needs too; I would assume that the Pandora user doesn’t really want to invest any time or effort in their “listening to music” experience… this is what is called a lean-back experience in the streaming industry). What does not make a lot of sense to me, is that Pandora has managed to convert 5% of its user base into a paid tier that offers only slightly better experience (no ads, unlimited skips). I wonder if Pandora developed a user experience comparable to Spotify’s, would it be more successful than Sporify in leveraging their huge userbase to convert them into a $9.99 tier?

  3. Informative post! I’m probably the last millennial to not use Spotify so it was interesting to read about how Spotify has continuously evolved its product to take advantage of network effects. I also recall when Spotify integrated onto Facebook so that every song a user was listening to was put on blast, for better or for worse. Though it was a great user acquisition tool, as you mentioned, it also was a reminder that there are limits to exploiting network effects, and the customer experience must always be considered. I also think the indirect network effect is strongest when it comes to indie artists who now have a centralized place for their music to be discovered and downloaded by a significant pool of users. Do you think there ever will come a time when large record labels will gather together to protest Spotify’s content licensing fees a la Taylor Swift? The impact it could have on Spotify’s ability to benefit from direct network effects could be pretty damaging.

  4. I really like this line: “What differentiated Spotify though from its competitors, was the understanding that music consumption was inherently a social activity”. It’s a great perspective and true. There was very little music I listen to that wasn’t directly recommended to me before online streaming services.

    However, I disagree with this line: “So if a premium user has hundreds of songs downloaded onto their account, the likelihood of them abandoning this capital is slim.” I don’t think users are inhibited by leaving the service because of sunken costs, as long as they can get the same content elsewhere. I have abandoned many music services after spending lots of money on them (iTunes being the most glaring example). I think it’s access the same content on a new platform obviates the worries about losing content that has already been paid for.

  5. I agree that Spotify creates a lot of value by aggregating the songs that are “trending” and deliverying playlists that are popular in a given region. But I disagree that routine music consumption is a social activity. Music consumption is a social activity only when people are together like during parties or hangouts. I am a big user of the “private session” button in Spotify that hides my activity from my network on Facebook. Additionally, a majority of my friends are on both Facebook and Spotify and I do not receive a large stream of songs that my network is listening to. This tells me that others are also using the “private session” button . I argue that majority of the music we consume is actually private; we listen to different things when we feel certain ways and when we are with different people. We don’t necessarily want to tell the world how we are feeling or what we are doing all the time. This is a key difference between Facebook and Spotify. In Facebook, I put on my profile only the information I want to share with my network and nothing else. The equivalent of this on Spotify would be creating a playlist to share with friends. This I think is way more cumbersome and involved than simply posting pictures on Facebook. For these reasons, I doubt that Spotify will be able to achieve the network effects that Facebook and others have achieved.

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