Thursday, July 25, 2024
Business

Spotify Business Model (2022) |How Does Spotify Make Money?

Remember the days when we used to struggle real bad by searching for songs on various sites and then finally able to download the music? 

I’m pretty sure every music lover would have done that. Gone are those days of struggle, now you won’t have to worry like before. 

These days you just have to tap 2 to 3 times on your mobile app and you are all set to listen to your favorite music! All thanks to music streaming platforms like Spotify!

In this article, let’s try to understand Spotify business model and how does Spotify make money. 

But before moving into that, let’s check out a bit about Spotify, how it started, and Spotify’s success story. 

What is Spotify?

There are plenty of music streaming sites and Spotify is the most famous and biggest music streaming platform!

As Spotify’s tagline says “Music for everyone”, it has more than 70 Million tracks (including 3.2M+ podcasts) which you can listen for absolutely free!

Did You Know?

“Spotify has more than 422M users as of the first quarter of 2022. And out of those 422M users, 182M are premium users!”

Spotify has 4 Billion + playlists with more than 50 Million songs and has its presence in 178 countries!

How Spotify Started?

Daniel Ek and Martin Lorentzon founded Spotify in the year 2006 and was launched in 2008. Its headquarters are located in Stockholm, Sweden. As of 2022, the Swedish Billionaire Daniel Ek is the CEO of Spotify.

Daniel Ek developed the Spotify platform to get rid of the piracy issues that were affecting the music industry very badly. 

People used to download the music for free from sites such as Pirate Bay and others. 

So as you are downloading the music without paying the music artists, it led to a huge loss for the music industry.

So Daniel Ek wanted to create a platform that is way better than using these unethical ways of downloading music that can be a win-win for both music artists and music listeners! 

So that’s when Spotify was born.

So that’s it about Spotify and a little bit about how Spotify started and now let’s get into the main topic i.e business model of Spotify.

Spotify Business Model

Spotify’s business model works on the freemium business model. This is one of the common business models which major companies adopt in their business.

Spotify has both free and premium services for its users. When a platform provides both free and paid plans to its users it is known as the freemium model.

Spotify generates more than 90% of its revenue from its premium members! And that’s why when you are using a free Spotify you will hear a lot of ads from Spotify asking you to opt for their premium service!

Now that you know the business model of Spotify let’s check out how exactly Spotify makes money.

How Does Spotify Make Money?

Spotify makes money from 2 main sources. One is through advertisements and another via their premium service.

Advertisements

Adverstimnets is the common source of income for any business and even Spotify makes use of this revenue source. 

As I told you earlier that Spotify has both free and premium plans, the users who use the free version of Spotify will listen to a lot of ads.

But unlike other businesses, advertisements aren’t their main source of income. Spotify only generates a peanut of money from advertisements.

Advertisements are only shown for their nonpremium users. The users with premium access to Spotify can have uninterrupted access when listening to music or podcasts. 

As of 2022, the free users of Spotify are more than 209M, so advertisers make good use of this to advertise their products and services to improve their sales.

There are several advertising options provided by Spotify. Let’s have a look at them:

Audio Ads

Audio ads are placed between the songs so that the users will have a complete view of your ad without any distractions.

Video Ads

Spotify offers its advertisers to place their video ads on the platform so that the users can watch and hear the ad for better engagement.

There are 2 types of video ads provided by Spotify:

  • Video Takeover Ads

Video Takeover Ads pops up when you are listening to a piece of music and they will have a maximum length of 30 seconds.

  • Sponsored Session Ads

The sponsored session video ads will let Spotify users get uninterrupted Spotify usage for 30 minutes.

Users also have the option to reject the video ad if they don’t want to watch and benefit from the 30mins of the ad-free session.

Podcast Ads

Spotify along with music streaming also streams podcasts and for advertisers, they have the option to advertise their ads during the podcasts.

Sponsored Playlists

Spotify also offers sponsored playlists for their brands to promote their playlist and reach more people. The more times their songs are streamed, the more money artists will get.

Overlay Display Ads

Overlay ads are presented to the users when they open the Spotify app. That means they will see these ads before landing on the Spotify app. 

These ads will be bigger and cover the whole size of your mobile screen.

Homepage Takeover Display Ads

These ads will show only for desktop Spotify users. These ads will be displayed on the top of the Spotify homepage and will remain there for 24hrs.

Leaderboard Display Ads

This kind of display ad is shown both on the mobile app and desktop Spotify. Your ad will be displayed for 30 seconds.

Even though Spotify has varieties of advertisement options for its advertisers, the revenue generated from it is very minimal.

Paid Subscriptions 

Paid subscriptions are Spotify’s main source of revenue. As said before, Spotify earns more than 90% of its money from its premium subscribers. 

By this, you can imagine how much people hate ads and distractions while listening to music. 

Yes, one needs to have a distraction-less environment when listening to music and Spotify has been very successful in bringing this premium feature to its users.

There are 4 premium plans offered by Spotify as you can see from the below image. 

Spotify premium plans

There are plans for individuals, Duos, Families, and for students. And the plan price will vary from country to country.

Read: How Fiverr Makes money?

Spotify Premium Features

Ad-free Music

With Spotify premium, you get the ability to listen to music without any intervention. 

Users wouldn’t prefer an ad being shown when they are listening to their favorite songs. It would totally spoil the moment.

Download Songs

You can only stream music with free Spotify but with premium, you can download the music and listen to it whenever you want even without an internet connection. Moreover, It will help you to save data.

Get Instant Access

You can instantly access the new songs which are being released with Spotify premium but with the free version, you have to wait at least 2 weeks to get access to the new songs.

Group Session

Spotify premium users can have group sessions with their loved ones. You can invite your friends for the group session and add up to 5 people to listen to the music simultaneously.

Read: Bumble Business Model

How Record Labels Get Paid From Spotify’s Business Model?

Music labels get paid every time their songs are played on Spotify. On average, it will be $2 to $4 for every 1K streams. 

The pay also depends from country to country. Top-tier countries will pay more and further premium users pay more per stream.

Record labels will get paid monthly based on the number of streams on each of their songs. 

The more times artists’ songs are streamed, the more they’ll get paid. And later the money will be distributed to the artists based on their agreements.

A popular artist will get more money because usually their songs will be streamed more often!

Did You Know?

As of 2022, Ed Sheeran’s “Shape of You” is the highest-streamed Spotify song which has more than 3 Billion music streams. Spotify had shared the video of Ed Sheeran sharing his thoughts on reaching 3 Billion streams. Below is the Twitter video shared by Spotify:

Why Spotify is Still Not profitable?

Spotify has made 8.5 billion euros in revenue from their premium service and around 1208 million from the ads in the year 2022 but still wasn’t profitable. It had lost an $810M loss in the year 2020.

Well, in spite of this huge revenue Spotify still couldn’t make a profit. That is because the majority of these money will be paid to the artists as royalties. 

And their other expenses include sales & marketing, R & D, employee expenses and all other stuff. 

However, investors are funding money on Spotify in the hope that Spotify will become profitable in the future. Spotify is still not profitable in 2022 but business analysis experts say Spotify is going to be profitable by the end of 2022!

As lots and lots of youngsters love listening to music, there is a definite chance Spotify will be in profit very soon. 

It’s understandable that music and podcasts are here to stay and the industry is only going to be bigger in the coming years.

But the first quarter of 2022 was good for Spotify as they made €23m net profit but never made a full-year net profit since its launch in 2008!

When a business is successful having rivalries is common. 

There are a lot of Spotify competitors and the major ones include Apple, Soundcloud, Pandora, Tidal, TuneIn, etc.

Spotify went public in 2018 and listed $165.90 per share on NYSE.

Spotify has 51 investors and has made 18 rounds of funding, raising $2.1B in funding. It also has made 21 acquisitions so far including the famous podcasting platform Anchor.

Check out: Zoom Business Model

Takeaways

It took a lot of time, ups and downs to become the market leader in the music streaming industry! 

Beating top players like Apple and attracting customers to use Spotify is an extraordinary work. Even Taylor Swift had gone against Spotify and dint partner with Spotify for almost 3 years.

It’s not easy running a business you know; things will go against you, people will speak against you but you got to have that positive mindset and of course, work hard!

Hope from this article you got insights into Spotify business model and the way it is making money!

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Some FAQs About Spotify

When was Spotify Launched?

Spotify was launched in the year 2006.

Where is Spotify From?

Spotify is a music streaming platform from Sweden and its headquarters are located in Stockholm.

Which Is The Most Streamed Song On Spotify?

Ever heard of the song “Shape of You”? Yeah, that’s right. Shape of you has got a lot of love from Spotify users with 3.1B streams to date. Ed Sheeran, take a bow for that amazing song!

Who Founded Spotify?

Spotify was founded by 2 Swedish gentlemen named Daniel Ek and Martin Lorentzon.

Who Is The CEO of Spotify?

Since the establishment of Spotify in 2006, Mr. Daniel Ek has been serving as the CEO of Spotify.

Is Spotify Safe?

Spotify is being used by billions of people but that doesn’t mean that it can be truly safe but if you ask me I never had any problems using Spotify!

Is Spotify Free?

Yeah, Spotify is absolutely FREE but free always comes with distractions (annoying ads!)

Is Spotify Profitable In 2022?

Spotify has seen steady growth in 2022 but it’s not yet profitable though but keep an eye.

Is Spotify Premium Worth It?

I use Spotify premium because there is no damn way I’m gonna listen to stupid ads when listening to music! So if you ask me, Yes! Spotify premium is worth the money!

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