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Fifteen years ago, Spotify was founded as a go-to destination for music lovers, a place where users could stream whatever tunes they wanted without having to buy them. Since then, the Swedish company has watched its number of subscribers tick past 400 million as it expands into podcasting, live audio, and audio books.
“We want to have a billion users,” Paul Vogel, Spotify’s chief financial officer, told attendees at the 19th annual MIT Sloan CFO Summit last month. “We want to be the No. 1 global streaming audio player, and that means having everything, as much as you could possibly think [of], in audio.”
Spotify’s journey to finding a successful model is applicable for digital companies today that are trying to grow their customer base through subscriptions.
Vogel, who was interviewed bya senior lecturer in Global Economics and Management at MIT Sloan, described how Spotify experimented with its service offerings before settling on a “freemium” subscription model. Users can either pay for the streaming service and listen ad-free or choose to sign up for a free subscription and listen to ads.
Here’s what Vogel had to say about how Spotify plans to grow its business, not just by offering a mix of subscriptions, but through research and development and acquisitions as well. They’re lessons other companies can draw on as they compete in the burgeoning market for platform services.
Maintain multiple revenue streams for maximum market reach
As Spotify continues to grow its subscriber base, the company is paying particular attention to engagement metrics, because “the more often you come back to Spotify and the longer you stay, the higher your retention’s going to be,” Vogel said.
Spotify’s freemium model provides dual benefits to the company. Free subscriptions — populated with advertisements — bring people through the door, while premium subscriptions bring in recurring revenue.
While the company has historically had better revenue growth and better margins on the premium side, Vogel said, at least 60% of subscribers have come on board to Spotify by signing up first for a free subscription.
To that end, Spotify continues to invest in its advertising business.
“What once was a free business that was sort of there to help supplement the growth of the premium business has now evolved into its own standalone business that is still growing and thriving,” Vogel said.
Use research and development to improve the user experience
Spotify is known for its smart algorithms that create curated playlists for users based on what they already like to listen to. The company invests heavily in research and development to improve that playlist experience — an investment it hopes will deliver advantage in a highly competitive market.
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“Our three biggest competitors [are] Apple, Google, Amazon,” Vogel said. (All three companies offer competing ways for users to stream music.) “If you’re going up against those three, you better do something that’s better, and not just a little bit better, but materially better. You need to give people a reason to come to your service when the default service is going to be the easier option, all things being equal.”
Spotify, for example, recently launched a feature that allows users to see the lyrics to the songs they’re listening to. But before it was rolled out, Spotify studied in which geographic markets it made the most sense to launch because “what goes in North America and Europe can be different from Latin America and the rest of the world.”
Vogel said the lyrics feature was tested “in multiple markets around the world to find out how important to users it was.” Questions the company asked: Did it boost engagement? Did factors like geography or a listener’s age influence who used it? “We did all of that testing for years before we said, ‘Okay, it’s worth us to roll it out globally.’”
Open up new lines of business with acquisitions
Spotify’s foray into podcasting with its purchases of Gimlet and Anchor “was a bit risky at the time” but is now paying off, given that “there’s been so little innovation in podcasting,” Vogel said.
“Podcasting was this business that, for 20 years, didn’t change,” said Vogel, “a simple RSS feed.” But Spotify thinks it can provide tailored recommendations — just as it does with its music service — to promote engagement and make podcasting “an even better experience.” In addition, its advertising component of the podcasting business is “helping the margins grow over time.”
Other acquisitions by Spotify include Findaway, a digital audiobook distributor, as well as Greenroom, a live chat audio app similar to Clubhouse — all of which “leads to user growth, better engagement, more time spent, higher lifetime value, and that’s sort of how we think about the business," Vogel said.
Don’t use old paradigms to define new business models
Vogel said that a mistake he’s seen people make in the media space is using old paradigms to understand where businesses and markets are heading.
“When Netflix was growing, people used to say, ‘Well, how big can this company be?’” Vogel said.
Netflix, which had “never existed before,” was often compared to HBO, which turned out to be an inaccurate comparison, Vogel said. Recent estimates show that HBO Max and HBO combined have more than 40 million subscribers whereas Netflix has more than 200 million subscribers.
Spotify’s own subscriber figures continue to climb.
“We've grown from 100 million users to almost 400 million users over a six-year period of time,” Vogel said. “We look at all the trends, and we try and understand how big these things could go.” Noting continued growth in the smartphone market, Vogel said it was reasonable to assume that streaming will continue to grow as well. “The opportunity is limitless,” he said. “It’s limited literally to imagination and how big you think it could be.”
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