Author(s): Peter Bryer
Spotify has more than 60 million users around the world, including 15 million with paid subscriptions. It's become a popular service thanks to a catalogue of tens of millions of songs, fine-tuned usability and social integration. The company has grown quickly, but has struggled to covert free users to its paid services and fought to curb licensing costs. It's also facing significant competitive challenges from Apple and some well-funded Internet competitors — Google in particular. It's time for adjustments.
The company will hold a media event in New York later this month, during which The Wall Street Journal and other news outlets are reporting that Spotify will announce a planned expansion into video services. However, such a move could present the same challenges of rights and funding that the company currently faces in music. The statement will come a two weeks before Apple's Worldwide Developers Conference, where it is expected to launch a Spotify challenger in Beats Music.
The news of Apple's intent to challenge Spotify's business model makes it easy to overlook another key competitive threat: YouTube. The online video service is certainly a key stimulus for Spotify's anticipated entry into the field.
The company is aware that younger people don't just listen to music, but watch and share it as well. Spotify has become the largest purely music-based streaming service, but the real numbers give YouTube a large lead. The International Federation of the Phonographic Industry says that YouTube is by far the most popular global access point for music, and has business development plans to take this further. YouTube uses Google's ContentID system to recognise content, and has revenue-sharing deals with media owners to serve ads through user-generated videos.
YouTube has about 1 billion users worldwide (more than 16 times Spotify's reach), and research shows that YouTube has become the primary channel for music among young people. A study by Nielsen, for example, revealed that two-thirds of people under the age of 18 use YouTube for listening to music more than any other medium, including iTunes, Pandora and Spotify.
The success of Netflix could also encourage Spotify to offer entertainment beyond music. Netflix now has more than 60 million paid subscribers, having almost doubled its user total in the past year.
CCS Insight cautions that tangible progress in video may prove difficult owing to the phenomenal rise of Netflix and the arrival of many strong providers, including content owners. We predict that Spotify may instead consider becoming a record label, following the successful model deployed by the video and TV industries whereby streaming providers commission original content. This would allow the company to differentiate its offering and help to control high licensing costs, particularly as it can no longer rely on advertising and as subscription growth has dwindled.
Spotify has changed the music business once, and it's not standing on its past merits. The company is wise to expand its services according to market trends. In growing into a wider digital media firm, it will find itself in league with the likes of Amazon, Apple, Facebook and Google. The addition of video won't solve all of the challenges faced by the company in the long term, and complications may only escalate, but Spotify looks to be coming a long way from its musical roots.