Music for everyone

Prepared by Sarah Miller on 7/16/2015

Outline

• What is Spotify and why is it a favorite service/app?• What problem does Spotify solve for the consumer?• Demographics• Company Snapshot: Quick Facts & Revenue• Challenges• Desired Features• Additional Thoughts• Conclusion• Appendix

1

What is Spotify?

Spotify is a music streaming service available on web and mobile devices. Music lovers can find their favorite artists and songs, discover new artists, make playlists, and share them with friends. Music can be enjoyed for free with paid advertisements; a monthly subscription without ads is available. Spotify’s direct competitors include Apple properties such as iTunes & Beats, Pandora, Google Play, Deezer, Rhapsody, and Tidal as well as radio streaming services.

2

Why is Spotify my favorite app?

Music is a big part of life, and for me, it represents different rhythms of my day. I’m listening to music at the gym, salsa and swing dancing, driving in my car, in heavy contemplation, when looking for a diversion from heavy contemplation, and walking down the street. All of these activities require good music!

Before Spotify, I was using two platforms, iTunes and Pandora. As someone who has varied tastes in music and a preference for Latin Rock, I could not get the content I was missing, so I would waffle between purchasing and listening to my current Latin songs on iTunes and trying in vain to discover new music on Pandora while trying to bypass ads and recommendations to find something decent and not too “poppy” to listen to.

When Spotify came around, it not only had a much larger library than Pandora (including a more updated list of Latin tunes), but I could connect Spotify with my existing iTunes collection and create my own library with all of my music. What was equally great was the ability to see what my friends were listening to and follow their playlists as I know most of them have great taste and represent diverse styles.

3

What problem does Spotify solve for the consumer?

• Integration with existing music libraries: Unlike most competitors, Spotify allows for a user’s own music library to be uploaded on top of it’s library of 30 million songs. This integration allows the creation of playlists to be seamlessly enjoyed, without switching music platforms.

• Large library: Until very recently, Spotify had a larger library than most competitors, offering more music options than main competitor, Pandora.

• Social collaboration: Spotify allows for the user to connect with friends and collaborate on playlists, which is great for parties, road-trips, or sharing taste profiles.

• Music discovery: Although Spotify has lagged behind competitors in terms of tailored algorithms that create music suggestions, it has released playlists based on mood and tempo to match speeds while running or while active.

• A “default” Facebook music app: Spotify had an exclusive deal with Facebook in 2011 to become it’s only default music app, serving as the launch pad for Spotify. This deal not only allowed for increased exposure, but also allowed social sharing to become a more native activity for Spotify users.

• Piracy: With the freemium service, Spotify safely bridges the gap between free and paid music content providers, curbing the need to “pirate” desirable content and risk government fines, viruses from file sharing, and content quality.

• Playlists: On a personal note, I was recently gearing up for Bottle Rock in Napa and did not know the majority of 40+ bands that would perform. Spotify happened to have a playlist created for the festival, including all of the popular songs from each band performing over the 3 day festival. Additionally, Spotify creates playlists based on mood and activity level so new songs can be discovered in this manner as well as from their algorithm.

4

Who is Spotify for?Age: Research suggests that Spotify is primarily for those between ages 18-34.

Gender: Free reports, such as Alexa, show that it’s a near 50/50 split, skewing slightly female.

Income: Due to higher price point, we could assume that the paid Spotify user may have more discretionary income and fall into the $60-$100k annual salary category.

Education: Alexa puts the education level of the Spotify user at about the same as the general Internet user, slightly over-indexing for college degree and higher.

Geographics: Research suggests that geographically, the paid subscribers that represent 91% of Spotify’s revenue live in the Northern, Central, and Southern coasts and are less represented in the Middle West and Middle South of the USA.

Disclaimer: Answering question “Who do you think this app/service/product is for?” I am providing estimates in addition to data resources to back up this response. Please see subsequent slides for deeper insights and their sources.

5

REVENUE & COMPANY FACTS 6

Snapshot: Quick Facts & Revenue

• Founded in 2008 in Stockholm• Available in 58 countries

• Offices in 18 geographies• Access to 30 million songs• 75mm MAU Worldwide

• 20mm paying subscribers

Funding & Revenue

• Privately Held• $8.4B valuation• $1.1B raised in 9 rounds of

venture funding• 15% of company owned by

licensing companies• 91% revenue from subscription

Quick Company Facts

7

Increases in paid subscriptions and influx of investment capital have pushed Spotify’s revenue past $1B; yet rapid losses trouble investors

2008 2009 2010 2011 2012 2013 2014-400

-200

0

200

400

600

800

1000

1200

1400

0.4 12.7773.85

187.83

430.3

747

1181

-0.33 -18.8 -28.45 -45.4 -86.7 -58

-179

Revenue Net Income

Mill

ion

euro

s

NoteLarger losses reported were said to have been the result of product development, international expansion, and general increases in personnel; personnel increased by on-third Y/Y.

+58% Y/Y

-209% Y/Y8

Challenges and Opportunities

• Costly agreements and small margins. 70% of revenue is paid to license music. More established companies like Pandora have been around longer and have different licensing agreements, making them less susceptible to annual contract changes that could disrupt user experience. Opportunity could be to change licensing agreements for longer-term partnerships to lower fees, especially on older content. If 15% of the company is owned by licensing firms, Spotify may be able to appeal to these investors to drop fees.

• Venture funded. There is a need to appease investors who want to see a rapid increase in paid subscriptions and eliminate the freemium model, which has served as an important “hook” to convert users to paid service.

• Over-reliance on subscription fees: If 91% of revenue comes from paid subscribers and we can assume the other 9% of the revenue comes from ads, then it could be possible to add a third revenue and fourth revenue stream vis a vis (a) paid artist promotion and (b) increasing revenue share fees with companies like Apple if Spotify users are likely to purchase songs on iTunes.

• Over-reliance on Facebook partner: Over 50% of Spotify’s monthly active users (MAUs) come from Facebook. Facebook is a very important partner for Spotify, however, this partnership could be threatening if Spotify is not able to negotiate a good deal for itself or if Facebook decides to dump Spotify when the exclusivity contract ends.

• Music discovery: Radio remains top source for music discovery; there could be an opportunity within music discovery.

• Operations costs: Presence in 18 countries and availability of the service in 58 countries may be weighing heavily on operations costs, using almost all revenue from earnings to expand while relying on investor capital.

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FEATURES & BEHAVIORAL SPENDING 10

Features I would like to see integrated

Concert Notifications and Purchase Options:A few years ago, Spotify sunset the Songkick app from the Spotify platform for reasons unspecified, however, we can assume that the relationship was not profitable. Songkick allowed for Spotify users to discover concerts and purchase tickets.

• Songkick may not have been very prevalent on the site or may have redirected the user out of the Spotify experience and onto an unknown platform; if this were integrated, I would certainly use it!

Social Connections Based on Music for Concert Outings:Due to the nature of my music - Latin - it can be a little more difficult to get friends out to see an amazing band if it’s not Shakira or another successful crossover artist. It would be great if Spotify could increase it’s social sharing prowess to match people or put large groups together that share common music tastes for concert outings. I have dance friends, I have foodie friends, I have foreign language friends, why not concert friends? If music speaks to a part of our soul, I could see making good friends through shared music experiences.

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Important Behavioral Insights: On-demand streamers are heavy event ticket spendersAccording to a Nielsen study, “Users of on-demand music streaming services are 90% more likely than the average consumer to be heavy spenders on music. (They are also 50% more likely to be heavy spenders on event tickets).”

• Consumers spend $109 annually on music activity• Live music accounts for just over half of total music activity spending

• Festival-goers spend more than typical music listeners on all forms of music overall (e.g., digital purchases, streaming, live events, etc.); 32M people attend festivals a year

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ADDITIONAL THOUGHTS 13

New feature that could be a gamble

Spotify is reportedly going to roll out videos based on news that video is growing like crazy on smartphones; however I am hoping they have asked themselves these important questions:

1. What activities are your users participating in while using Spotify? Does the music app have their full attention or are they distracted with other activities?

2. Where are your users when streaming online music content? Alexa notes that Spotify users over-index for usage of the service while at work.

3. Is there a reason that MTV stopped playing music videos to focus on other formats; are music videos still relevant to today’s 18-34 year old audience?

4. Is the possible revenue gain from providing such a service significant?5. Are users on web or mobile device primarily?

1. Video takes up a lot of data and is not always optimal to use on a smartphone without Internet connection as the service is often interrupted.

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CONCLUSION 15

Spotify is a great service that is loved by many, but may have difficulty surviving• Spotify has a rapidly growing product that consumers love and

the industry envies.• Spotify could be adding more features with new partnerships,

including concert ticketing agencies. The challenge will be how to seamlessly integrate the service and notify users. Songkick partnership was likely not profitable due to low usership of Spotify in the USA in the first few years of the US launch.

• Spotify has potential to outpace competitors if it can figure out a more sustainable way to expand.

• Spotify should be cautious about music video feature rollout.• Adding revenue streams would help Spotify to become less

reliant on subscription fees, putting investors more at ease. 16

APPENDIX

Additional information and sources for demographics and behavior of Spotify users and the general population of on-demand music streamers

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Behaviors of music streamers

• 18-35 year olds over-index on Spotify. Although teens slightly over-index as well, they are less likely to spend on music streaming.

• Paid users make up 26% of Spotify users yet supply 91% of Spotify revenue, so we can assume paid users are the target demographic.

• Mobile is important: 88% of Spotify users stream music on a smartphone.

• Hip hop, Rock, and Pop make up 75% of music genres streamed in the US.

• More than half of Spotify’s users are driven from the Facebook app• On-demand music streamers are 50% more likely to be heavy

spenders on event tickets.

*Note: Not all Spotify-specific demographics are available in current resources/data tools; on-demand music streaming industry reports used to reflect likely demographics of Spotify users. See Appendix slides for sources and further details

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Spotify users are 18-34

comScore shows that the US age demographic over-indexes significantly in the 18-34 year old age categories; the 12 – 17 age bracket slightly over-indexes and is more likely to use the free version of Spotify.

Age 12-17 Age 18-24 Age 25-34 Age 35-44 Age 45-54 Age 55-64 Age 65+0

20

40

60

80

100

120

140

160

180

200

105

172152

94 90

54

29

Age group

Inde

x sc

ore

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Paid Music Streaming Penetration Rate Nearly Even Between East & West

West Coast: 16%

Mid & South Atlantic: 10%

East South Central: 5%

E. North Central& New England: 6%

Mountain: 4%

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88% Spotify users stream music on smartphone

Spotify Music Streamers Other MusicStreamers Non-Streamers

88%

69%

44%

% Listen to Music on Smartphone

n = 4,500; 33 streaming platforms were included in the study

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75% of all streamed music lies within 3 popular genres

Other*

Holiday/Seasonal

Christian

Latin

Country

Dance/Electronic

Pop

Rock

Hip Hop/R&B

5%

1%

2%

5%

6%

7%

21%

25%

29%

75%

“Other” category includes Jazz, Children’s, Christian/Gospel, and Holiday/Seasonal music

22

Text messaging/SMSInstagramFacebookSnapchatYouTube

NetflixTwitter

PandoraApple Music/ iTunes/Beats

Facebook MessengerGoogle Plus

SpotifyCable Network Websites or Apps (FX, BravoTV, Comedy Central, etc.)

PinterestOther “Free” 3rd party Music streaming/download service

85.6%

61.4%

60.8%

60.2%

53.6%

39.3%

36.9%

32.5%

29.4%

27.3%

25%

24.2%

21.7%

19%

15.3%

Share of respondents that use app or website daily

Spotify less popular than competitors Apple and Pandora with those entering the 18-24 age bracket, a key segment for Spotify

n = 10,000 college-bound high school seniors

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40 of Spotify’s 75mm MAU’s come from the Facebook app

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0

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45

Monthly active usersDaily active users

Spoti

fy U

sers

in M

illio

ns

40

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