How Does Spotify Make Money? Business Model Explained!

Spotify is a Swedish multimedia services company founded in 2006, whose product is the eponymous application for playing music via streaming. Its business model is called freemium, which consists of offering a free basic service with advertising and another with additional features – such as better audio quality, ad-free and unlimited use – via a paid subscription.

The program was launched in the European market on October 7, 2008, while the launch in other countries took place in 2009. It is available for Microsoft Windows, Mac OS X, Linux, Windows Phone, Symbian, and iOS operating systems, as well as Android.

The Swedish-American company, based in Stockholm, Sweden, and New York, United States, has signed deals with record labels Universal Music, Sony Music, EMI Music (dissolved in 2012), Hollywood Records, Interscope Records, and Warner Music. , among others.

On November 21, 2019, they announced their first awards show, the Spotify Awards, via Twitter. On March 9, 2020, the platform launched Radar, its program for emerging artists. 

In November 2020, Spotify acquired podcast publishing and advertising platform Megaphone for $235 million. An acquisition that increased the company’s focus on audio monetization and simplified the process for podcast producers.

As of April 2019, the service had 217 million active users, of which 100 million were paying users. As of December 2020, the previous numbers had grown to 345 million active users, of which 155 million were paying subscribers. This represents a 27% increase compared to the first nine months of 2019, positioning the service as one of the largest music streaming providers in the world.

Unlike physical or download sales, which pay artists an apartment price per song or album sold, Spotify pays royalties based on the number of times artists stream relative to the total songs streamed. 

Spotify distributes about 70% of its total revenue to rights holders (mostly record labels), who then pay artists based on individual contracts. According to Ben Sisario of the New York Times, about 13,000 of the seven million artists on Spotify – less than 0.2% – generated revenues of $50,000 or more in 2020.

Spotify Business Model

Spotify operates on a freemium model, where the basic service is free, while additional features are provided through a paid subscription. Spotify derives its revenue from streaming subscriptions for premium users and third-party advertising.

Spotify’s primary source of revenue is user subscriptions. The paid version of the premium subscription removes ads and restrictions and adds higher-quality songs at 320 kbps. It not only improves the sound quality of the music but also allows the subscriber to download it for offline listening. In addition, there is a premium subscription for the family version that can be used by six accounts and has the same features but different pricing. 

Tim Ingham, editor-in-chief of BBC Music Week, said, “Unlike buying CDs or music downloads, streaming music is not a one-time monetary payment to the musician, but hundreds of millions of streaming music streams that are clicked on every day and delivered quickly. The potential income that musicians need. This income provides musicians with a stable and long-term source of income.”

Spotify offers free users seven different types of ads, including music ads, display ads, advertiser ads, homepage ads, branded playlists, lightboxes, and advertiser pages, with the size, type, and user engagement of these ads varying. 

In February 2009, the ad was 15 seconds long for non-paying users. In May 2009, the website Neowin reported that this had increased to about 30 seconds.

Nearly 70% of Spotify’s revenue goes to copyright holders (record labels), which is also Spotify’s largest expense.

How Does Spotify Make Money?

Spotify can be downloaded from the Spotify website and used in four ways.

The “Free” and “Open” versions are free and are financed by the advertising that the player sporadically offers. Originally, the difference between the two versions was that the “Free” version was accessible only by invitation and there was no problem with restrictions, while the “Open” version was accessible to everyone, with the disadvantage that it only allowed twenty hours of playback. monthly.

Since May 1, 2011, both versions have exactly the same features: a limit of 10 hours of playback per month and the playback of each title a maximum of five times.

By paying a monthly fee, each user can purchase the “Premium” state (9.99 €/month or $9.99 USD/month ) or “Unlimited” (4.99 €/month or $4.99 USD/month).

“Premium” allows members to hear the new tracks before they are released and before users of the free Spotify, options can hear them. The music catalog can be listened to on mobile devices running iOS, Android, Windows Phone, and Symbian OS; offline listening to certain pre-selected tracks is possible and offers higher playback quality. 

With Spotify Unlimited, you can listen to the songs only on a computer and always with an Internet connection. The difference between the free version and the Unlimited version is that the latter does not include advertisements, time limits, or playback restrictions.

These are the types of Spotify subscriptions (as of June 2016):

Today, Spotify offers 3 different premium services with a monthly subscription. Spotify Individual provides the service for a single customer. Spotify Premium Duo is designed for couples or friends. With this plan, you get 2 individual accounts at a lower price than 2 individual subscriptions.

Finally, Spotify offers Family Premium, which allows up to 6 accounts to live in the same house. Duet and Family have a better price/performance ratio than Spotify Individual. With all Premium subscriptions, you have the option to subscribe for free for one month. After that, the service will be automatically deducted if not canceled.

The advantages that the Premium version of Spotify offers today are the removal of advertisements, the possibility to choose the track you want (in the free format you can only play random tracks), create your own tracks, download music to listen to it without being connected, and also offers a higher audio quality for both PC and the mobile version.

The free Spotify uses a default mobile data rate of 96 kbps, while the desktop app and web use a slightly higher speed of 160 kbps. If you opt for a monthly subscription instead, you’ll get a data transfer speed of 320 kbps, which means high quality on computers and very high quality on mobile devices.

How Does Spotify work?

Spotify offers the transmission of audio files over the Internet through a combination of dedicated streaming servers and peer-to-peer (P2P) transmission in which users participate. An Internet connection of 256 kbit /s is sufficient, and the bit rate of the tracks is 320 kbit/s. 

Audio files can be played on-demand as if they were on the user’s hard drive. Songs are cached by the software to avoid using more bandwidth by repeating songs. The software uses the Vorbis (Ogg) audio codec.

Premium mode users have access to higher quality audio (q9). The content of the software’s cache is based on an index used by Spotify to connect to the service. This index is used to inform other clients about other users who can connect to the data to play the desired tracks.

This is done for each client that uses the program. When launched, it acts as a server that listens for incoming connections from other Spotify users and, if necessary, intuitively connects to other users for the exchange of cached data. 

There is currently no official information from the developers about how many connections and how much bandwidth each user provides to the system; the software does not offer the user a way to configure these parameters.

The system requirements are at least Mac OS X 10.7, Windows Vista, or higher. It is also possible to run the program on GNU /Linux. The size of the cache can be limited by the user and the location of the cache can be chosen. At least 1 GB of free space for the cache is recommended.

The user must create an account to use the application. This account can be used on multiple devices, but can only play music on one device at a time.

Spotify’s Competitors

When comparing Spotify’s products and services to many other competing brands such as Deezer, Rdio (defunct), Napster, TIDAL, Google Music, YouTube Music, Apple Music, Qobuz, Pandora, and iHeart Radio, there are several features that play an important role in a potential customer’s decision. 

The most important characteristics include the type or purpose of the streaming service, whether there are free options, the presence or absence of advertising, platforms or applications that support each service, the subscription cost, and the size of the music library offered.

Spotify has an on-demand library where users can create playlists and follow other music lovers. Spotify also offers Spotify Radio, which allows users to access numerous stations organized by artists and music genres. 

Spotify offers a free version of its streaming service that includes ads and is accessible through a desktop, laptop, or mobile device (6 skips per hour). 

However, if you pay $9.99 or $4.99 if you are a student, you can use all Spotify features online or offline, without ads, and on any device. Spotify offers a music library with over 30 million songs.

Pandora has an extensive list of online radio stations, whose sole purpose is to help its users discover new artists and new music.

The free and paid versions of Pandora are available on any device that supports the Pandora Music app. Unlike most other music services that charge $9.99 for a monthly subscription, Pandora offers a premium service for $4.99 that does not include ads, offers the better sound quality, and skips music. Pandora offers a music library of about 1 million songs.

iHeart Radio has a wide selection of online music stations to help its users discover new artists and new music. 

In addition, iHeart Radio offers live radio streaming so users can access and listen to their favorite radio stations. live and all in one place. iHeart Radio only offers free services, but only allows 15 combined skips per day and 6 skips per radio station per hour.

There are ads on the website itself as well as local ads that play individually on each local radio station. iHeart Radio is available on any device that supports the iHeart Radio app. iHeart Radio offers a music library of nearly 20 million songs for free.

Criticism of Spotify

Spotify and the rest of the streaming industry have come under fire for the decline in physical album sales caused by streaming. This has led to claims that singers, songwriters, and music producers are being paid unfairly for their work.

Spotify will split the revenue with the singer in a 3:7 ratio, meaning the record label and singer will receive 70% of the revenue, while Spotify will receive 30%. Spotify will calculate all royalties to be paid together through an algorithm to determine the share each artist should receive. It’s simple to explain, but not easy to use.

In addition to the differences in royalty payments mentioned above, labels and singers argue that free services are a bigger problem because Spotify pays too little royalties for such services.

In 2014, American singer-songwriter Taylor Swift announced that she would pull all of her music from Spotify after the release of her album in 1989. Commenting on Spotify’s freemium business model, Swift said she doesn’t agree with the idea that music should be free.

Sunita Kaur, Asia-Pacific director, clarified that Spotify’s permission only applies to copyright holders, i.e., record labels, distributors, copyright collective management groups, etc., which are centralized and content aggregating entities. 

The copyright owner will share in the profits. Sunita Kaur emphasized that the platform does not deal directly with singers, bands, or songwriters. These copyright holders negotiate with the musicians about the profit, and Spotify has always been unable to say anything.

In recent years, Spotify has faithfully paid more than 70% of its revenue to copyright holders as royalties. So how profit sharing and the relationship between copyright owners and musicians is communicated is not Spotify’s responsibility, but because of such collegial agreements, behavioral platforms have no right to interfere at all. 

In order to be open and transparent, Spotify has been offering musicians the option to request an account to take a back seat and browse the dashboard since 2013. 

This allows musicians to directly track how many times their works have been streamed and view other data, which is handy for making payments with rights holders. After verification, musicians who have doubts can request this service on their own initiative.

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