Product Breakdown: Spotify

Even though Spotify is busy cleaning up its lawsuits and debts before its projected public offering, investors are valuing the music streaming giant at $16 billion. Having 70 million out of 146.6 million total paying music subscribers worldwide, Spotify sits at owning just under 50% share of the music streaming market.

Know thy history…and repeat it.

So what brought Spotify to where it is today? There are a few key strategies that worked and continue to work well:

Social features:

  • Subscribing to your friends to see what they are listening to. Since Spotify is integrated with Facebook, finding your friends is trivial. Seeing what your friends listen to makes you feel more connected and adds an extra point to music discovery.
  • Sharing songs/playlists with anyone via a simple link directly to the platform. Each share acts like an invite, promoting growth.
  • Public playlists account for a major part of music discovery on Spotify. Having 30 million songs available, Spotify has a whopping 2 billion playlists. Such an enormous number is no surprise, considering the platform design promotes making playlists and keeping them public. Playlists are public by default, creating friction to hide your music tastes. Making a playlist either from scratch or by adding onto an existing one is just a click away.

Smart pricing (regular subscription is 10$/month):

  • Discounted 5$ subscription for students to capture the market segment that is the most present in online social networks, thus being the most likely to cause cascades of invites to use the service.
  • Family subscription at 15$ for up to 6 people, incentivizing the whole family to switch to one platform, reducing the market share of competitors.

Locked-in design. As users grow their collection of saved songs and tailored playlists, they are increasingly more likely to keep using Spotify because there is no feature to export user libraries outside of Spotify’s ecosystem. While this may act as a deterrent to joining Spotify, it is a smart strategy to keep as it acts as a strong barrier of entry to new competitors. Unless the competitor can offer something drastically different and better, most users who already have a collection on Spotify will not switch. To compensate for the discomfort of not owning your music, Spotify implicitly promotes the belief that there is an enormous ocean of music that should be our actual interest, not just keeping the music you already have.

Authenticity. It is tempting to monetize the music selection algorithms by allowing songs to be “promoted” on them, but so far Spotify has been right to fear losing listeners’ trust. By keeping listeners’ interests at heart, Spotify quickly got everyone comfortable with its music finding features such as Discover Weekly and artist/song radios.

Data-driven culture: Spotify almost immediately started pursuing the goal of getting to know music algorithmically, seeing it as the best way to develop its features. While Apple Music was boasting its “hand-curated playlists”, Spotify was busy hiring as many Machine Learning/Data Science experts from the field as it could afford.

Spotify – your guide into the world of music.

More than anything, Spotify seeks to act like and be thought of as a tour guide, an algorithmic guru that holds your hand on your journey to music enlightenment. That is reflected in Spotify’s marketing and UI.

Many chuckle at Spotify’s witty campaigns (20162018) that often parallel important news (“Dear 3,749 people who streamed “It’s the End of the World As We Know It” the day of the Brexit vote, Hang in there.”), or light-heartedly ridicule social norms (“Exercise more conventionally than the 46 people who put “Slow Hands” on their running playlists.”). Aside from astute comedy, common themes among them are a demonstrated understanding of music, and attention to users.

The UI is designed in such a way that every element acts like a door waiting to be opened, a new territory waiting to be explored. If you like the song – right-click to start the song radio to find similar music. Looking for something new – check your Discover Weekly or click on one of your friends’ feeds. Want to tune out to your favorite jams – choose one of your Daily Mix playlists.

More formally, Spotify’s UI is a mere surface of the Machine Learning iceberg that lives at the heart of Spotify. There are 3 main sources of data it has: playlists which give information about what music is seen as similar, likes/dislikes/skips from the radio stations, and individual listening histories. All of that is content-agnostic data, but by using neural networks to predict that data only from the audio signal (i.e. music content itself), Spotify’s algorithms also become content-aware.

Spotify is using a whole array of collaborative filtering methods (a decomposition of an artist-user, song-user matrix that becomes compact by finding patterns in the data) [slides] that gives it latent representations (vector of numbers) of each user and each artist/song. That gives Spotify a comprehensive map of music, where similar songs are positioned together and users tend to listen to music only in certain areas of that map. By traversing that map, Spotify can find songs that are close, yet novel relative to your indicated preference (Discover Weekly, suggested songs to playlists) or to a given query (radio stations of a playlist, song, artist, etc.).

To summarize, most of Spotify’s navigation features are just a wrapper for navigating the music map, only going to areas that are or are likely to be of interest to you.

Quality music requires happy artists.

Spotify is not one to boast the highest pay per stream rate. At $0.0038 per stream, it is behind Google play ($0.0059), Apple Music ($0.0064), but ahead of Pandora ($0.0011) and YouTube ($0.0006). [informationisbeautiful] Yet Spotify is not being stingy – it pays out around 70% of its revenues to the industry, mostly in royalties. The reason lies in the market history and aggressive artist-label contracts.

Back in 2008, Spotify inherited the state of the music industry at its decline as the internet was chewing away music profits with a culture of free downloads. However, even at the music industry’s peak in 1999, consumers spent an average of $28/year (41.46$ if adjusted for inflation) on music. Today, many are willing to pay for music again, even at $120 per year of subscription. Therefore, when more consumers embrace the new music model, Spotify will triple the music industry’s revenue potential.

Until that happens, it is essential for Spotify to maintain a good relationship with its artists. Spotify is wise to already provide artists with free data about where to look for their active fans to host a concert, how many people are streaming each song, etc.  It can use the same data to aid artists’ marketing campaigns. Knowing the audience for each song, artists can tailor their performance content based on location, as well as decide where is it best to rent advertising spots and what sentiment to aim for.

Labels are becoming an obsolete middleman in the payment chain, taking a lion’s share of all the royalties. Thus, in the long-run, Spotify should aim to become its own label. That will cut the wasted profits and allow Spotify to attract artists with a more generous share of royalties. It already has all the data necessary to maintain artists’ optimal concert schedule, suggest collaborations with relevant artists, help deliver artists’ work to its most likely audience, etc. That will cause a backlash from the label industry. However, considering Spotify is already under pressure to pay more royalties from CRB, and it has no alternative revenues to rely on like Apple or Amazon, Spotify is essentially forced to cut out any middleman it can.

Currently, Spotify can create a more explicit dialogue between the fans and the artists. There is a clear demand from fans to be in-tune with their favorite artists, as demonstrated by the popularity of Genius (already integrated in Spotify) – song lyrics explanation platform, and podcasts about individual songs (e.g. Song Explorer). Creating a story around the song is often as important as making the song itself. Spotify can create platform features that are conducive to sharing such stories (either by integrating existing platforms or by designing the features from scratch):

  • A simple upvote/downvote based Q/A tab can act like an easy way for artists to answer the most pressing questions from their fans, providing them with the comforting feeling of “being heard”. (Think r/AMA on reddit.)
  • A specialized feed of what the artist is working on, where they are performing, and how their collaboration is going. Perhaps, an integration with artist’s Twitter account would do the job, but it runs the risk of not being music-related.
  • Depending on how much demand there is and how resource heavy it ends up being, short recording session updates (i.e. “snapchats” of 15-45 seconds in length) can act as brief moments of intimacy between artists and their fans. Instagram integration might do the job to require less maintenance across various platforms for artists.

By providing more explicit data analytics tools, and by giving artists a chance to intimately connect with their audiences, Spotify can compensate for its lower pay rate and maintain a healthy relationship with artists, which eventually should flourish into artists seeing Spotify as not only a streaming platform, but a necessary all-in-one tool that can truly aid their career.

Final remarks.

Spotify is a long way from securing its position in the marketplace. It is ahead of the game due to smart initial promotions, socially tailored design, ML focus, and free data services to artists. However, its competitors are aggressively investing into the music streaming business, willing to put up with paying higher royalties, and cutting corners by pre-installing their platforms on hardware (e.g. Amazon, Google, Apple) or even integrating with software (e.g. Apple). But if Spotify can maintain good relationships with its artists by offering more than just a streaming platform, and keep attracting more listeners with its authentic music discovery design, it will have an opportunity to reshape the music industry even further in the future.