We all know that Spotify is by far the most successful audio streaming platform in the world. In fact, even during the pandemic itself, the stock price of Spotify went up by 70%.
On the outside, if you look at the numbers while Apple Music has only 72 million users Spotify has more than 345 million users and the rest of the competition is not even close. On top of that, its recommendation and playlist have been so amazing that you’ll agree that it has given you an incredible experience every single time.
But Fortunately or unfortunately, in 2021, Spotify is in deep-deep trouble. While on the one side the losses of the company have been stacking up rapidly On the other side with the giants entering the streaming market Spotify is officially in a business war. And what we are witnessing right now is perhaps one of the most interesting Internet business wars in history. And if you pay very close attention you’ll be able to learn some incredible business lessons that you can apply to your startup. As an investor, if you’re investing in US stocks this streaming war is going to be very very crucial.
The question is-
- What is this business war?
- As an entrepreneur, what are the business lessons that you can learn from this iconic case study?
History of Music Streaming
The music streaming revolution of the world started way back in the 1990s. Now, back then from 1984 to 1999 CDs were the ultimate instrument of the music industry. The distribution channels of the music CDs made the record labels and musicians billions of dollars every single year. But in the 1990s the Internet and the computer revolution began to pick up, resulting in massive penetration of computers and the web into the American household. Now, people if you see this is a fine culmination of technology and connectivity and if you observe closely every time this golden combination happens, it gives rise to a new generation of startups.
Revolution of Napster
In the music industry, it was the company called Napster was started way back in 1999 by “Shawn Fanning” and “Sean Parker”. In simple words, Napster was nothing but a music torrent instead of buying a CD for $20. You can download an MP3 file and share it with your friends. And you know what guys? This invention was a disruption in the making because what followed next was the first wave of music streaming. This wave did not just change the way people listen to music it literally changed the entire music industry. Within a few months, it had 4 million song downloads and in less than a year, Napster had 20 million users.
Initially, people thought that it was no big deal. But in some time, the number of Napster exploded further, to 60 million users by 2001. This is when the record labels began to realize that their stores are incurring losses and when they actually computed it shocked them to see that they were incurring more than $100 million in losses due to Napster. And that’s when hell broke loose for Napster. They got slapped with a lot of lawsuits and what followed next was the historic suit that led Napster to pay millions of dollars to artists, creators, and record label companies eventually they had to shut down their operation for some time.
While most people thought that piracy will be gone and that CDs will be back as it turns out, Napster left the market but the behavioral design of the society had been so strongly altered that people just didn’t go back to CDs at all. The CD stores were still closed down and other piracy websites took the place of Napster. Companies were still incurring millions of dollars of losses because people just wouldn’t pay $20 for an album. And this is where record labels were desperately looking out for an alternative to actually get their distribution channel back on track.
How Steve Jobs become an opportunist and launched iPod
While all of this drama was going on, there was one man who noticed this and decided to become an opportunist during times of chaos. And this man was none other than the legendary “Steve Jobs” himself. The solution that he brought to the table was to give people ultra-cheap music and to give record labels a non-portable distribution channel for their music. And this solution was none other than the iconic iPod and the rest is history.
The record labels again started to make billions of dollars customers fell in love with the iPod as it brought along the second wave of the music streaming revolution. But But But! There were two major problems over here.
- Not everyone owned an iPod or a MacBook
- Not everyone could pay for each album. But everyone had computers and the Internet.
How Spotify filled the Gap left by iPod
So, guess what? This culmination of technology and connectivity, again, gave rise to another generation of startups and the most successful player in this segment turned out to be none other than Spotify which started way back in 2006.
Spotify learned from the pains of the customers and decided to build a music streaming platform that could be used by everyone and could be used by everyone for free. This is where Spotify deploys its freemium model with an option to subscribe but this time it wasn’t easy because they knew what happened to Napster.
The subscription model was way more complex than the discreet model of iTunes. Because when it comes to CDs or iTunes, it was pretty straightforward if you buy a $1 album from iTunes 80% of that goes to record labels and 20% of that is mediator fees and that’s it. Whereas in the case of a subscription, it’s quite difficult because you are giving unlimited access to everyone for a defined fee. So, the revenue distribution itself becomes very very complex. But fortunately, the Spotify guys got through it and they spent about $9.8 billion dollars between 2006 to 2018 just to get the music rights without legal issues and they built the freemium model to make music accessible to everyone.
What followed next was the third wave of music streaming that is, unlimited legal music that could be listened to for free. As a result of this, again, Spotify exploded and today it is a market leader with the highest number of paid subscribers.
But again there were 3 problems.
- Ad revenue was not enough to pay the artists well and because the music is free, very few people actually opted in for a subscription.
- There was no profit for Spotify, in fact, the company suffered massive losses during its rise.
- Things got really ugly with the artists. Taylor Swift and Adele broke up with Spotify over low pay.
Again the third point led to a series of troubles for them from the creators’ side. Now, the company was badly cornered. Massive losses on one side annoyed artists on the other and on top of that, they’ve now got freebie-loving customers. And this gave them no option but to run a lot of ads to push their customers to buy Spotify Premium and hence a lot of interruptions.
Entry of Apple and YouTube into the Music Streaming War
This is when 2 more giants decided to step into the game. In 2015, Apple introduced that it was going to kill iTunes and launch the subscription model which was Apple Music as direct competition to Spotify. And in just 5 months, in November 2015, YouTube entered the streaming wars with YouTube Music.
If you observe this streaming war very very closely guys, you’ll see that both these services, that is, Apple Music and YouTube Music are built over the weaknesses of Spotify. And with just a few moves here and there Spotify could be killed and there could be another wave of social media revolution on YouTube.
The question is- How is that even possible?
If you look at this table, Apple Music deploys a premium model, and it’s only for Apple users while Spotify and YouTube Music are for everyone and they use the freemium model which gives them a wider audience. Now, if you look at the user base, Apple has 1.65 billion users Spotify has 345 million users and YouTube, well it’s got 2.1 billion users. But when it comes to paid subscriptions Spotify is way ahead of Apple because of its accessibility through both Android and Apple. While Apple Music has only 72 million users but all of them are paid Spotify has 345 million users out of which 155 million of them pay. Now, the X factor for Spotify over here is its amazing playlists and podcasts that are integrated into the app.
Spotify Originals
This is where we saw Spotify coming out with Spotify Originals like 22 Yarns and signing up creators like Joe Rogan to become Spotify exclusive. But Apple and YouTube both also have their podcast but separately. YouTube has Google Podcasts and Apple has Apple Podcasts. And now, guys here comes the big difference. While Apple Music generates revenue of $4.1 billion with very less profits because it’s just an ecosystem product. Spotify being a standalone incurred a loss of $698 million in spite of generating a revenue of $9.2 billion. And YouTube? Well, it’s way ahead of the game with $19.7 billion dollars in revenue and this is mainly because of its video service.
How YouTube Music is Winning the Game
Fun fact: YouTube is one of the most popular platforms for discovering musicians and artists.
YouTube can accommodate every single X factor of Spotify and Apple Music in the YouTube app itself.
- You can already search for songs through lyrics from Google and YouTube which is the USP of Apple Music.
- You can ask Google which song is playing and it will find that out for you which is nothing but a Shazam feature.
- And most importantly Google has Google Podcasts and a huge base of creators who are already making podcasts on YouTube.
How Youtube would change the game through Google Podcasts
Every single creator knows that YouTube is by far the best platform for creating content. And users know very well how well YouTube understands them and their preferences.
If YouTube rolls out an update tomorrow saying that Google Podcasts is now integrated into YouTube as YouTube podcasts. Do you realize what’s going to happen?
It is going to lead to another huge wave of creators who will flock to upload their audio content on YouTube. There are already a ton of audio creators who are desperately wanting to be on YouTube. And if given a chance with the YouTube algorithm, it’s going to be a game changer for them.
The best part is because it’s available on both Android and iOS the user base is insanely huge. So, basically, YouTube literally has the best of both Spotify and Apple. And when integrated together, it will become unbeatable in the content space just like Instagram is right now for social media networks. My sense is, one day there will be a grand announcement that’s going to change everything for Spotify.
Business Lessons From this Spotify, Apple Music & YouTube Music Case Study
1. 2nd Movers Build upon mistake made by 1st Movers
Always remember that being the first mover can sometimes be a terrible thing and as far as my observation goes it’s almost every time a terrible thing. And it’s always better to be a second-mover so that you can build upon the mistakes made by the first mover. In this case, if you see, iTunes built over Napster, Spotify built over iTunes, and Apple Music and YouTube music built over Spotify. So, if you’re the first mover, you’ve gotta be very very careful and if you’re the second mover you’ve gotta be very very happy, at the same time, very very sharp about the mistakes that have been made by the first mover.
2. Give Solutions to customers according to their Behavioural Design
Companies might come and go but the behavioral design they leave behind will stay forever. In this case, it was the paradigm shift from CDs to streaming. So, while most people will neglect it and try to reverse it you as an entrepreneur can be an opportunist and can bring about a solution that is forward-looking rather than backward-looking. In this case, the opportunist was none other than the legendary Steve Jobs himself who built upon the behavioral design left behind by Napster.
3. New technology is the sweet spot for innovation
Always remember guys the culmination of technology and connectivity is always the sweet spot for innovation and it will give rise to the most revolutionary startups. In this case, it was the computers and the Internet but in the next 3 years, it’s going to be the green tech and the Internet, blockchain and the Internet, and most importantly Artificial intelligence and the Internet. This is where you can find your greatness to build an incredible company or as an investor find an uprising gem in the stock market.
That’s all from my side for today, if you learned something valuable please do comment.
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