Spotify reaches critical mass (and the anatomy of an ecosystem)

Written by on June 29, 2016 in Guest Blog with 0 Comments

Male figure running100m users begins to tip the scale in Spotify’s favour. Spotify has announced that it has past 100m users of which 30m are paying subscribers. Admittedly, it has taken Spotify a little longer than I anticipated to get there, but it has now reached a level of scale that should enable it to begin improving its profitability.

  • RFM’s ecosystem research has highlighted 2 key thresholds for digital ecosystems
    • First 100m users. This is the key threshold when an ecosystem will gain critical mass.
    • For an ecosystem relying solely on advertising, this is the point at which it will begin to cover the costs of its investments.
    • This threshold can be lower if the ecosystem or network service in question has other forms of monetisation such as subscription or on demand services.
    • Second 300m users. This is the point where the ecosystem really begins to monetise its assets effectively and make good returns.
    • It comes as no surprise to me whatsoever that all of the money in this industry today is being made by companies with 300m users or more.
    • For example: Apple, Google. Facebook, Baidu, Alibaba and Tencent.
  • 100m is significant for Spotify because I think this is the point at which the balance of power between it and the record labels begins to shift.
  • Spotify has to pay away 70% of the revenues that it makes to the record labels and this is the single biggest reason why the company is still losing money.
  • This split is historical and comes from a time when revenue from streaming had no impact on the total level of music sales for the industry.
  • However in 2015, streaming single-handedly kicked the music industry back to growth underlining its growing importance.
  • Furthermore, Spotify is rapidly reaching the point at which the record labels will need Spotify more than Spotify needs the labels.
  • At that point, I think that negotiations with the labels will have a very different tone and this is when I think that gross margins will begin to improve.
  • I continue to believe that Spotify is first and foremost a data company with the music that it offers being incidental.
  • This is because everyone offers 40m tracks and a search box but Spotify uses its understanding of its users to make the service significantly better than that of its competitors.
  • This is why I think that Spotify will continue to fare well despite its biggest competitor being the largest and best funded technology company in the world.
  • I still think that the market is big enough for two players and with spots filled I remain concerned for the outlook of the smaller players like Tidal, Deezer, Pandora and so on.

This article was first published on RadioFreeMobile.

Tags: , ,

About the Author

About the Author: Dr Richard Windsor is the founder of Radio Free Mobile which is an independent research provider. The research helps clients to understand and evaluate the players in the digital ecosystem and presents a unique perspective on how all the pieces fit together in an easy to read and digest way. The product is available on a subscription basis and counts members of the handset, telecom carrier, Internet, semiconductor and financial industries as its subscribers. RFM is the land of the one man band meaning that Dr. W. also makes the tea. .


If you enjoyed this article, subscribe now to receive more just like it.

Subscribe via RSS Feed

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.