Spotify’s Evolution: Unveiling Platform Strategies and Future Trends

Good morning. This summer, I traveled back to my home in Germany. Although my old room in my parents' house underwent some remodeling, some parts remain untouched. One of those is the shelf with my collection of CDs. They are nicely organized by genre and year. They are primarily samplers of electronic music. But that’s not the point.

My old CD shelf gives me nostalgia. It reminds me of a time long past. Symbolic, the year my collection ended was the year we got broadband internet. And just like that, I left behind the analog world of scarcity and entered the new world of digital abundance.

In an age of abundance and access to more content than we could ever consume, a new challenge emerged: finding what we like.

This was the opportunity for new services. One of them, which sits plum in the middle as the leader for music discovery, is Spotify.

With some 600+ million monthly active users and a 30% market share, it is double the size of the next largest competitor.

Let’s look at the numbers:

• 615 million monthly active users

• 30% market share (double of its next-largest competitor)

• Millions of new subscribers every month (14% growth Y/Y)

• 239 million premium subscribers

• $1 billion gross profit in Q1 2024

Spotify is an excellent example of how the music industry changed from exclusive supplier relationships to user experience-focused competition. Over the years, Spotify transformed how users discover music with a deliberate personalization strategy.

I want to take a closer look because it’s a beautiful example of a platform business that leverages network effects and utilizes data to create more user value.

5-minute-read

The Pre-Internet Landscape

Traditional content distributors secured their competitive advantages in the market through exclusive supplier relationships. For customers, that meant limitations on how content could be accessed. The power was with those distributing the scarce goods.

The Internet’s Transformative Impact

When the internet transitioned, access to everything shifted, which means the power shifted to those who could help people discover what they wanted to see.

This shift created new opportunities in the market. What mattered now was to keep users engaged by showing them what they liked. With that, a competitive shift emerged from exclusive supplier relationships to user experience.

Finding the right music for a specific occasion causes me to experience decision fatigue. I started searching for a song, and the next thing I knew, I discovered a whole new genre. Some of my favorites:

• Chat-Hop: British hip-hop with a Victorian twist and aristocratic accents.

• Pirate Metal: Heavy metal with lyrics about pirates, featuring accordion.

• Wizard Rock: Yes, it’s a thing. Rock music inspired by Harry Potter books.

You should put on some Wizard Rock for your next work session.

Spotify became the leader in online music streaming because it understood this transformation and made personalization the focus of its platform strategy. Fun fact: the name “Spotify” comes from combining “Spot” and “Identify,” reflecting its mission to help users discover music.

Pipelines and Platforms

A pipeline business creates value in a linear series of activities—the classic value chain. Input on one side of the system, transformation in the middle that adds value and the outcome is a finished product that consumers get from a distributor.

In a pipeline business, businesses control the activities. In contrast, Spotify created a platform for bringing producers and consumers together. Players in a platform can shift between roles, and their relationships with each other can shift effortlessly.

Below is one of my favorite reads on this topic if you want to dive deeper into pipeline vs platform businesses:

Spotify’s Strategy: Platform Personalization

Let’s look at what makes Spotify successful in building a platform its users love.

Spotify’s Platform Model

Spotify has built a multi-sided platform model that connects artists, listeners, and advertisers.

It leverages a platform's network effects. By attracting new users with the free offer, it becomes valuable for artists and advertisers. More listeners attract more artists and advertisers, and more artists attract more listeners.

It is a freemium revenue model that offers a basic experience supported by ads. A subscription model kicks in for a premium service. The model is not foreign but worth summarizing:

Though Spotify’s premium subscriber percentage is slightly falling, possibly due to consumer cost-cutting, they remain exceptionally high compared to other freemium providers.

The Beginnings of Personalization

Users are facing the paradox of choice. The more content at our disposal, the harder it becomes to select precisely what we want.

Over time, Spotify understood this problem so well that it started experimenting with showing users that it understood their taste. In 2011, it created a “Year in Music” feature that created a personalized playlist of the user’s most played songs.

In 2014, they evolved the feature into “Play it forward,” which included music new to the listener. In 2015, both features collided into a mix of both, and they called it “Discover Weekly.”

The first 1,500 users they tested it with absolutely loved it. Once rolled out to all users, it reportedly increased user engagement by 30%.

The value for users came when Spotify started to offer personalization based on what they knew their users liked—an algorithm-driven experience.

Spotify created experiences that massively increased the value for its users by experimenting with new features and analyzing the resulting user behavior.

Data utilization

Spotify started by allowing users to create their own playlists. It quickly learned that analyzing this data (2 billion created playlists) would give it datasets that let it discover trends and changes in preferences not just on an individual user base but on a massive scale. Spotify can stay ahead of global trends and discover and predict evolving music genres.

Understanding these macro shifts helps Spotify decide how its platform should evolve.

A nice side effect of this is mixing macro trends with weekly discoveries. Many times, this has helped lesser-known artists gain momentum. Billie Eilish is an example. Her “Ocean Eyes” breakout single gained first traction through these discover playlists.

Spotify’s Gravity

Over recent years, it has become clear that Spotify has nailed its platform approach. It deployed structures for effective data utilization and excellent user experience that solves precisely what users want, and they can upsell premium features.

However, these pillars were not enough to sustain growth. In parallel, another pillar that focused on the platform's gravity needed to be developed.

More value can be gained from content network effects.

Adding content diversity gave them exposure to a wider audience. Adding podcasts and audiobooks gives users no more reason to leave the platform for their audio needs. This, in turn, makes it a must for artists and audio creators to be on the platform if they are seeing discovery by the masses.

A self-reinforcing cycle of growth.

Trends and developments for the music industry around Spotify

Based on my analysis, Spotify will continue to grow its offering in 3 areas. Continued content partnerships, expert consulting services around music (Spotify Aux), and leveraging AI for more personalization and curation.

Content partnerships

There will be additional content. Video is clearly working for them, so they will expand on this offering. Spotify now offers more than 250,000 video podcasts on its platform, and more than 170 million users have watched them.

Adding videos for podcasts was a considerable engagement driver. More than 70% of video podcast users watch them in the foreground.

Expanding into VR concerts might be on their roadmap, but I assume that the market is still too small to be worth the effort.

Spotify knows, based on data, that podcasts are a great entry point for audiobook listeners. Spotify audiobooks just recently expanded into the free ad-supported segment in the US. I am sure it will drive further content expansion if it converts more users to premium. It will be interesting to see Audible’s answer to Spotify’s strategy.

I am also curious to see how deep Spotify will want to enter YouTube’s world. Adding long-form videos for specific content types paired with discovery features and playlists could attract users. I don’t think YouTube has nailed the playlist feature, and there might be an opportunity.

Music advisory agency

Using a unique set of data can be valuable for many players in the music industry. Artists, labels, movie productions, and brands come to mind. For the latter, Spotify launched an advisory service in Q1—Spotify Aux.

Here comes a white glove service advising brands on which type of music could fit what the brand wants to communicate.

Predictive modeling can help artists time the release of a new song or advise them which regions would be ideal for launching a new album.

AI-based personalization, curation, and maybe even creation

AI can go through large amounts of data and speed up discovery based on particular preferences, such as season, activity, time of day, or whatever pattern AI can find.

Based on trends and predictive modeling, AI can help lesser-known artists get discovered.

The most controversial will be music creation. Of course, AI can create song lyrics based on current trends, such as lyrics becoming a generational trend, and find the right mood for a song to pair with the lyrics.

However, should Spotify consider this, it would likely get pushback from artists. I am curious how this will develop as services like Soundraw, Google’s Magenta and Musicify.lol evolve.

Key takeaways

• Monitoring engagement: Closely monitoring user engagement was the metric that helped Spotify experiment with features that would impact this metric. Only an engaged user will become or stay a paying user.

• Drive personalization: Introducing the “Discovery Weekly” feature boosted user engagement. But only after a series of experiments did they discover that THIS is the right feature to push.

• Data for growth: Spotify understands how to leverage its data for growth. Understanding trends and changes in user behavior can be turned around into recommendations or content expansions. (Example: Podcast listeners likely become audiobook listeners)

• Content diversity as a strategy: Maintain engagement with a diverse and wide audience - a big growth lever for Spotify that caters to varied needs.

• Expandable platform architecture: A platform architecture should be designed to grow beyond the initial offering, such as Spotify adding podcasts and audiobooks, AirBnB adding Experiences, or Uber adding Uber Eats.

While learning about Spotify, the vigilant reader might find many parallels to other entertainment services. For the end consumer, this means many different entertainment options.

Below is an overview that compares costs per medium.

I am a happy and engaged Spotify user. But this weekend, for nostalgia reasons, I will be sure to enjoy one of my old EDM samplers playing on my old CD player. There is something about haptic interfaces. But they are slowly disappearing. It’s almost a shame.

Have a great rest of the week,