9
May
2009

The future of Spotify and its competition 23:06 on Saturday

Spotify logo

Spotify is growing strongly, and everybody seems to be talking about it. Spotify even made the news on Finnish national TV last week! It’s David Bowie’s music like water pouring down the internets, and if Mr. Bowie’s 2002 epiphany is to be believed, the aging 20th century music industry will exist no more after three years. Three years!

(See also music like water, as popularized by Gerd Leonhard.)

So what is the future of Spotify?

It is difficult to envision any other serious competitor for Spotify but Apple. I find it quite brave of the small Spotify to go against the big Apple in the music market — and they will go against each other, even if they do not yet compete directly. I’m not claiming to have any information on either company (I haven’t even done my research, really) so this is just speculation, mainly to entertain my tired brain after work.

Here are a couple of possible scenarios for what might lie in Spotify’s future:

Spotify might have been able to secure exclusive deals on music streaming with the major labels. This is quite a long shot, and if true, the sales team at Spotify should be crowned and bathed in honey and milk and saffron (does that combo actually work? anyone?). This would also imply that the cluelessness of the execs and licensing managers of the majors stretches far beyond the bounds of my imagination. On the other hand, they’ve been clueless before.

In the summer of 2001 I was in the middle of licensing my most successful musical work, Slusnik Luna’s single “Sun”. Everyone in the industry thought it was a good idea to maximize profit by splitting the copyright by territory. Basically the idea was, that instead of getting paid once for licensing the track to one record company for the whole world (or actually, for the “known universe and beyond”, as the contracts put it), it was better to sell the UK distribution license to one record company, GSA (Germany, Switzerland, Austria) to another company, Spain to a third, USA to a fourth company, and so on… And each company would pay a licensing fee; Individually not as big as if one company would have paid for the universal license, but in total the territorial licenses would add up to a bigger amount. Everyone thought that was the best deal for the artist.

May I remind you that this was the summer that the original Napster closed down, so it was not like MP3s or P2P networks were unknown at the time. But it never occurred to the record industry folks (and not in time for me either), that having the licensing rights distributed around the world based on physical territories would make it nearly impossible to sell the music online. That was, and to some extent still is, the reason why you cannot download everything on Emusic, why it took so long for iTunes to start selling outside the U.S., and why you have songs appearing and disappearing from Spotify.

So, in their quest for maximal short-term profit, the labels effectively cut off the possibility of online delivery (and related income) for a lot of artists. For years. In layman’s terms, pretty fucking stupid, considering this was done by people who should have an idea where their industry is going.

Which brings me back to the cluelessness of the record industry peeps and how that might have played a part in Spotify (possibly) getting an exclusive deal for music streaming. Like said, mad props to Spotify if they pulled that off.

An exclusive streaming license would put Spotify in a strong position, giving them a couple of years to grow their user base without worrying about direct competition. They could start building the Spotify ecosystem, experimenting with how to entwine streaming music in the social networks of users, or partnering with device manufacturers to create Spotified portable players, phones, and home stereos. All of this within a somewhat sheltered business environment.

But all things come to an end, and so do licensing deals.

If the above future scenario were true, I would be absolutely certain that Apple would not rest on their laurels and sit back, waiting for the streaming licenses to expire. No, they would be busy preparing their own offering, so when the licenses became available, Apple would be ready to roll.

The question then is, what would Spotify need to compete against a streaming service from Apple?

First, being the leader in the streaming music market wouldn’t be enough for Spotify. They would need to achieve such a critical mass during their period of exclusive streaming licenses, that they would succeed the popularity of the whole iTunes ecosystem. The iTunes ecosystem has a strong position not only because of the superb user experience and great marketing clout, but because of the “soft lock in” achieved by the combination of the iTunes software, the iTunes Store services, world’s largest mobile application marketplace, and of course the iPod devices. Considering these features of the environment Apple has created, it would be an unbelievable undertaking from a young company like Spotify to beat Apple in a few short years.

Should Spotify decide to compete by trying to create a more compelling ecosystem rather than trying to win by simply being more popular, it wouldn’t be much easier to find unique advantages for Spotify. With my current knowledge (and at this time in the evening) I can’t think of single way a possible Spotify ecosystem could provide significant value to its users. That said, months ago I didn’t see Facebook status updates providing significant value for users either, and turned out I was wrong. Without significant value for users, there would not be notable switching costs associated with users moving over to Apple’s offering. So if users were able to leave the ecosystem easily, the ecosystem wouldn’t be very valuable to Spotify, now would it?

Mobile being the Next Big Thing for the past few years (when will it really happen?), it’s again a market dominated by Apple. There are app stores for Android and S60 (kind of), but they are nothing compared to the success of the iPhone app store. Spotify has already demonstrated an iPhone app, but Apple can easily block that app from ever reaching the app store. For Apple it would actually be beneficial for S60 and other competitors to catch up just a little, so they would be better protected against someone, like Spotify, trying them for misusing a monopoly market position.

If Spotify is lacking exclusive streaming deals with labels, like it probably is, what prohibits Apple from wiping them out in a couple of months after Apple comes out with their own streaming offering? Just asking.

So, it looks like the only way for Spotify to thrive would be for Apple to not go into streaming. Why wouldn’t they?

I cannot think of many reasons. Maybe Apple, or their major label licensors, would fear that streaming would eat the iTunes download sales. Obviously majors are not against streaming, they have licensed their catalogues to Spotify after all. But if download sales are good on iTunes, why kill a milking cow?

If David is right, Apple has only three years to be a part of the future, where music flows like water. The streaming market will emerge, whether Apple goes into it or not, and eventually the streaming market will eat download sales, whether Apple offers streaming or not. Better get the streaming revenue as well as the downloads revenue, rather than let a competitor like Spotify take the market. How well Apple will maximize profit, is a question of timing really.

The investors of Spotify will most probably make huge profits eventually. But how well off Spotify the company will be in the music like water economy, I wouldn’t be too sure.

9 Responses to “The future of Spotify and its competition”

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  1. DJ Orion
  2. Comments:

  3. Ville Vesterinen Says:

    Nice post. Shed light to the industry on how they work to understand the sometimes crazy like decision that are made by the big record labels.

    Here’s another take on the situation, which can further help you think about the situation and where it’s moving http://www.arcticstartup.com/2009/01/07/will-the-future-itunes-look-like-spotify/

    Thanks again for the quality blogging.

    Ville.

  4. Niko Says:

    Thanks for the link, great discussion there! The first comments from Spotify’s Daniel Ek seem to be aligned with my guesses: they will go for one or both of these options:

    • Creating an open system that would increase Spotify’s mass past iTunes
    • Creating an ecosystem around music data (as social objects)

    You can read from above what I think about those approaches. ;)

  5. Mika Peltola Says:

    Thanks for a great discussion on a fascinating topic.

    It seems to me that Spotify has opened up a vulnerability in Apple’s iPhone-strategy, at least temporarily. Making Spotify quickly available on non-iPhone handsets would weaken Apple’s position against it’s mobile competition. Nokia and other old-skool handset manufacturers should see Spotify as a godsend, allowing them to charge into the music scene and get them out of the wilderness. By the same token, Spotify could increase their “installed base” massively.

    So 3G technology allowing, maybe the decisive blows in this match will be played out in the mobile arena?

  6. Niko Says:

    Mika, that is indeed a very potent scenario. Having said that, I think they would need to succeed in two “industry firsts” at the same time:

    1. Creating the first widely accepted mobile streaming service
    2. Creating the first massive installed base with a high usage ratio on the “old-skool” mobile platforms. There are apps that can claim a high installed base, but very few that would claim any significant usage base. Even Skype on mobile doesn’t seem to be catching on that well. Am I right?
  7. Afront Says:

    Great post Niko, a very insightful read. I think it will be another year or two before the music masses get past the idea of owning rather than streaming music, and even then there’ll always be audiophiles (“I can only listen to uncompressed music, man”).

    Your article mentions “Apple” 19 times, but I wouldn’t underestimate Google and its Android platform. Recent reports claim that by the end of the year there will be almost 100 different types of Android handset (as well as Android-powered netbooks and toasters), compared with perhaps a couple of variations on the ipod/phone Apple gadget. This will provide for a massive ramp-up of people using Spotify for Android. Perhaps the future of music will be more like the current state of videogames: two companies own the platforms (Microsoft and Sony) while the publishers release their product on both. Of course there are some exclusives only released on one platform, but we already see “itunes exclusives” and even a few “Spotify sessions” now (ironic perhaps that Spotify now has over 500 iTunes exclusive tracks!)

  8. Jussi Mononen Says:

    It will indeed interesting to see how Spotify can find lebensraum in between the big three: Apple, Nokia, and Microsoft, which are all vying for leadership in mobile Music. Microsoft (Zune Pass) and Nokia (Ovi & Comes With Music) suck big time right now but historically it has not been a good idea to bet against these guys.

    One possibility is to find a business model that is appealing to the operators who are really not getting their share (in their minds) from the big fellas. A long-term commitment to an operator could bring free or heavily discounted mobile Spotify access… That would be a differentiator for the bit pipe vendors.

    An intriguing scenario is also Google: will they really be content to be out of the online and mobile music scene with its currently underutilized advertising potential?

    Or how about Liberty Media? They control 49 % of DirectTV and 40 % of Sirius XM (with an option for another 11 %). Spotify would give them access to an entirely new device class and audience. Spotifty would also let them enter the European market in which they are still weak.

    In any case, it is hard to see Spotify survive AND remain independent. Given the geography and market developments, the odds-on favourite buyer to me is Nokia. They want to own the space, they have the war chest, and, badly need a shot in the arm. The factor slowing them down might be the heavy investment in Comes With Music and Ovi and the inability to admit they have mucked it up.

    Cheers, J.

  9. Mika Peltola Says:

    Niko, You’re completely right in pointing out the “firsts”. Let’s see if the players in the telco-space are willing to make those leaps of faith. They might just have to. And as pointed out above, Google is obviously another one that might have a lot to gain from working with Spotify.

    Nice to have someone like Spotify electrifying the whole field..

    Mika

  10. * Says:

    Once again an excellent post!