Spotify's Challenges

Spotify is the current leader in the music streaming wars. The real question is will they be able to fend off their competition (mainly Apple Music) as more and more people adopt music streaming. Here are a couple challenges that they are going to face.

Apple looks poised to catch them. Spotify currently has approximately 71 million paying subscribers and where Apple has 40 million paying subscribers. In addition to that, the Wall Street Journal reported earlier this year that Apple’s monthly user subscription growth rate was about 5% and Spotify’s was about 2%. This amounts to Apple acquiring about 500k more users per month. This shows that the subscriber base is converging and Apple is looking like they will eventually catch or surpass Spotify.

Apple has the ability to operate Apple Music at a lower margin. Spotify generates its revenue from two sources. One is its paid subscribers and the second is advertising revenue, which is used to support their free tier. Apple Music on the other hand represents a small portion of their revenues. In their 10-Q, Apple Music is included in their Services business line, which accounts for 15% of their business. The services line also includes: AppleCare, Apple Pay, Digital Content and Services, licensing and other services. What this means is that Apple would get an edge if they ever start to compete on price. The price competition scenario is unlikely, but the threat still stands. A solution to this issue could be for Spotify to branch out and use their relationships to build other revenue streams within the music industry. Examples could include: publishing, merchandising or getting into the ticketing game.

Spotify’s advantages on product could shrink away or could become irrelevant. When it comes to the product, the key aspect for their success is music discovery and curated playlists (algorithmically or user generated). This is something that Apple Music is currently working on bettering. They’ve been investing in improving their music curation and also acquired Shazam last year. As it stands now, this is Spotify’s killer feature and they do it very well. When you move past that, the products are similar feature-wise, the main difference you could say is the amount of content provided and available for offline download. Furthermore, music consumption is becoming a more complementary activity, as people are listening primarily whilst they are doing other activities. This brings up the question of whether subtle differences to the product are really going to build loyalty amongst the average person. If the music you want is available on both services, and the music quality is the same, does it really make a difference if you are using Apple Music or Spotify? Spotify can and is building loyalty with their excellence at music discovery now and Apple has a loyal ecosystem which they can leverage to get more people onto their service. The ability to build loyalty from the customers will be central to the stickiness of their product.

Overall, Spotify right now is in a good position. They are the leaders and it feels like no one is really close to competing with them in music discovery. That being said, there are threats looming and it will be interesting to see how this race shakes out.