Monday, July 4, 2016

(The Big Disrupt) Music Streaming: Why the war between Apple and Spotify is already over

Spotify, the ten year old Swedish based music streaming service currently holds a very strong market position with the company recently hitting 100 million users with 30 million paid subscribers and also is planning expansion into other markets such as video and live music. Looking at the company's dominant position in the marketplace, You would think that Spotify would have nothing to fear from a year old music streaming offering given all of its advantages in subscriber base and users but Spotify could end up losing it's strong position in the music streaming market within two years.  

Spotify's founder and CEO Daniel Ek rightly predicted that Apple entering the music streaming market would boost his company growth as well the market as a whole and went as far to publicly thank the Cupertino based company for doing so. Spotify's vice president Jonathan Forster also praised Apple for entering the market while also throwing shade at the competition as he said ""It's great that Apple is in the game. They are definitely raising the profile of streaming. It is hard to build an industry on your own""1. However, what Ek and Forster didn't account for was Apple's music's stunning growth with the service pulling in a reported 15 million paid subscribers within a year. 

While there are commentators that point out that despite Apple Music's fantastic growth, they still trail Spotify in users and paid subscribers, those commentators are also aware that only recently has Spotify mirrored the level of growth Apple Music has achieved in its maiden year. It took Spotify nearly 8 years to reach Apple Music's current paid subscriber user base and another 3 three years to double it and yet may end up trailing the service in paid subscribers should Apple Music make a  few acquisitions and match it's level of growth so far. 

Apple music's growth is quite incredible given the questions from the outset about the quality of the service forcing Apple to launch a redesign of interface just a few months ago. Spotify, an established player in the market, has never had any public complaints about its service and is loved by just about every who uses it (except artists, which we'll talk about later).  

Though he won't publicly admit it, what really must concern Ek is Apple Music's impressive trial to subscriber conversion rate which dwarfs Spotify's comparatively measly 25% free to paid subscriber conversion rate. What this means is that Apple Music is extracting more value from its users than Spotify at a faster rate which is a problem for Spotify and everybody else in the music streaming market. 

Spotify has resisted pressure from labels and artists for years to ditch its ad supported subscriber base and with Apple Music's growth, Spotify maybe forced to charge its free user base which means that Spotify may have to face the tradeoff of losing many of its free users but increase its paid subscriber base.  

However, the main reason why Apple may end up leaving Spotify and its other competitors in the dirt is that it may have the best relationship (maybe save Tidal) with the music streaming market real crown jewels: artists. Spotify has long been positioned as the big bad among artists who have publicly complained in the press and elsewhere about Spotify's paltry royally payouts. Ek in response to calls for Spotify to increase it's royalty payouts by prominent artists has rightly pointed out that their labels were the ones extracting the majority the value through the ownership of their music but his moot point hasn't stopped Spotify from being attacked by major artists. 

Spotify's inability to get artists onside despite their many efforts to do so from opening up its analytics platform to artists to revealing just how badly they're getting screwed by their labels may lead to Apple Music claiming the music streaming market outright. If recent reports of Apple considering taking rival music streaming service Tidal off legendary hip hop artist and mogul Jay Z's hands prove to be trueApple would instantly have a monopoly on album exclusives from popular artists such as Kanye West, Beyonce and Drake which would be terrible news for Spotify. 

Album exclusives have proven to be gold dust for music streaming services as far as boosting subscribers is concerned as a large chunk of Tidal's subscriber base has been generated solely from album exclusives, most notably demonstrated by Beyonce's most recent album release "lemonade" which brought in an incredible 1.2 million subscribers in a week.    

Apple's purchase of Tidal will instantly give Apple a lot of power in the marketplace as they can debut music from popular artists before anyone else and, more importantly, have a big say where it debuts next. While Spotify can easily offer their own exclusives with prominent artists, Apple already have deals with big hitters such as Drake and Taylor Swift (who left Spotify over royalties) and with a Tidal acquisition, would pretty much gobble up the exclusives left worth having. 

We've already written articles on  The Carnage Report outlining why Apple will eventually win the music streaming market through it's marketing machine and ability to hand out big royalty payouts but none of us were expecting Apple Music to gain on Spotify in paid subscribers as fast as it has. However, we do expect Spotify to put up a real fight to the end as Ek has signaled he's not going to sell and revealed his burning ambition to for Spotify to be one of the few European startups to face up with a Valley giant and live to tell the story. 

In sum, Spotify will do everything in their power to stop Apple Music taking over the music streaming market but with the rate Apple Music is acquiring paid subscribers and a Tidal acquisition being considered that would take Spotify out of the lucrative album exclusives market, Spotify have the look of an acquisition target waiting to happen, soon.     

(1) Quotes by  M. Shanley and J. Weber, 2016, Spotify says growth has quickened since Apple Music's launch,

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