Keith Jopling asks: Is Spotify caught in a pincer movement and what is its next manoeuvre?

20 March 2015 - Editorial

There wasn’t too much to say about digital music until a few weeks ago. Now it’s fair game again; cracks in the pavement appearing in streaming, download sales falling, Jay Z buying into the streaming business…it’s good, entertaining stuff if you like the great digital music debate.

It’s more serious for the businesses concerned of course. 

Music majors’ concerns about freemium are now out in the open. And it looks like Apple is doing a good job of bending some ears, by extolling the virtues of streaming purely behind a paywall.

It was a pretty brave decision, let’s face it, to license entire catalogues for free plays. One cannot imagine the movie studios doing something like that (even with trailers). But at the time, something radical had to be done about the ‘p’ word, and Spotify arrived with the balls to pull off the deal.

A reassessment of freemium however, puts new pressures on Spotify, the business that made the model work in the first place. Spotify knows its upsell rates from free to paid. Indeed the broader ratio has been widely broadcast (15 million premium subs out of 60 million users – that’s not too shabby at all). 

It was bound to hit a wall at some stage – 9.99 per month is a commitment too far for the majority. However, more limited access models have yet to resonate with consumers (apart from Pandora and YouTube, which don’t seem to represent the ideal solution, exactly). It seems like whoever can spot and identify the in-betweeny bit and make that work, will have the next breakthrough music service.

Spotify’s present options are to create revenue streams that augment the core premium subs. These include lower priced tiers, family upgrades, merch (and perhaps tickets), and major B2B partner deals. It seems that Spotify has worked all these angles, to some degree of success, but nothing to match the income from its core paid users. There’s always data – but then making money from data is never as easy as it sounds. But in this area, Spotify has made acquisitions (Echo Nest) and is making investments.

The major disappointment, is advertising. When freemium first arrived, I recall an astonishing conversation I had with a very senior digital exec at a label. The exec was asked “would advertising really be enough to pay for it [free streaming]”? The answer was a casual “Oh for sure. Look at radio”.  But Spotify’s early vision of developing new ‘audio advertising products’ has not materialised. The success of traditional radio’s advertising model hasn’t migrated to on-demand streaming. It seems that broadcast radio’s recipe of programming and personality is the real magnet for advertisers. When it comes to advertising, nothing can beat the ability to charge premium rates for primetime slots – something broadcast radio and TV have managed to hold on to despite the growth of on-demand content.

Spotify appears to have a limited set of choices. It simply has to keep its premium subs acquisition rates up. Moreover, it’s more critical than ever to keep acquiring ‘real’, as in committed, customers – genuine motivated monthly payers, and not go on an acquisition drive through discounts. When The Economist tried this, it was a disaster. Its contemporaries, Deezer and Rdio, have been over-reliant on cheap acquisition deals. They don’t work. Non-committed customers simply churn out the other end, while core customers witness their beloved brand being devalued. 

With or without the freemium funnel, the bigger question is, how can Spotify continue to grow its core? Driving premium subs into the mass market is tough enough when You Tube and Pandora exist, but it gets harder every day thanks to the added pressures of artist dissatisfaction, and now major new competition coming over the hill.

It seems inevitable that more artists will choose to withhold new albums (those that have, seem to have done well out of the decision). And once again, Apple has noticed – it will continue to push for windowed exclusives for downloads. 

I had a recent chat with one music executive who ‘fears for Spotify’s longevity’. While that seems like a sweeping statement (and one that wouldn’t ruffle any feathers at Spotify), it reflects a perception among those in the know, of the market pressures Spotify is facing into. 

It has done a remarkable job. I have often referred to Spotify as a ‘miracle business’ – because what it did was hard to achieve, but what it delivers to its customers is truly miraculous. However, it was built on a business model that crammed so much into value for customers, it created a massive commercial challenge for the business itself. 

But Spotify is too savvy a business to have an uncertain future, surely?

It has successfully kept its core proposition simple, while making continuous improvements to it. Anything that hasn’t really worked has been quietly, unceremoniously removed from or shifted down in the portfolio. It has also managed to divert industry argument away from churn – the killer for early subscription players and still probably, for Spotify’s peers. But it feels like Spotify needs a major manoeuvre and needs it soon, before the artist groundswell bites too hard and before the big gun competition arrives.

If it’s any consolation to Spotify, I also had a recent chat with an innovation expert, who thinks ‘Apple has no chance’ with Beats/iTunes [especially if it cannot secure its lower ($£€ 7.99) price point for its premium service]. So perhaps the upstart that is now the global streaming incumbent still has that most precious of business assets at its disposal – time. 

Keith Jopling is SVP of strategy, tech, media and telco at KAE Marketing. He teaches at Henley Business School and his recently published white paper on disruption in media & entertainment can be found here.