In a surprisingly candid post on Spotify’s blog, company co-founder Daniel Ek recently shared his thoughts about where the popular streaming music company stands today and where he hopes it can go in the future. The main point of his post was to clarify that Spotify, despite being a media darling these days, is nowhere near becoming a sustainable company with a stable revenue model. However, that’s their end goal, Ek says, and they’re in it “for the long haul” with no intention of simply “flipping” the company after the hype reaches its crescendo. But in the meantime, the company struggles with the exorbitant per-play fees enforced by the music industry while not finding success with an ad-supported model.
Don’t Count on Overnight Success
According to Ek, the notion of overnight success is “very misleading and actually rather harmful to any hope for long term and sustainable growth in this industry.” Despite this fact, he calls out the music industry for doing just that and expecting to see business models proven “within months of inception.” That’s just not how it works, he says, reminding us how iTunes was not initially the powerhouse it is today. In its first year, the company missed its revenue targets by 30% and most label executives doubted its staying power at the time.
While Ek realizes that comparing iTunes to Spotify is wrong given the very different business models for each company, it does prove the overall point: success in this industry takes time.
Spotify, which is currently hugely popular in Europe, has yet to launch in the U.S. due to contract negotiations over licensing agreements. However, as popular as the service is, it still has a long way to go in terms of both product and monetization. Ek acknowledges that one thing which needs to be addressed is how difficult it is for Spotify users to actually buy the music they’re listening to. Yet despite the fact that nearly 80% of the company’s users are unaware that they can purchase the tunes they’re hearing, Spotify is still one of the biggest affiliates to music downloads.
Another challenge facing the company is how to earn a profit considering the large costs of licensing the music it plays… especially when reliant on an ad-supported model. (Spotify offers multiple service levels, one being ad-supported. It also offers subscriptions.) Earlier this year, another streaming service, Last.fm, had to do away with its ad-supported model for the same reason.
The Music Industry Needs to Change
If it was up to Spotify, the music industry would be embracing the future instead of constantly fighting against it. Ek says that in order for the industry to find success, it needs to realize that the new business model is “a mix between ad-supported music, downloads, subscriptions, merchandising and ticketing where the user comes first and where the key to monetization comes from portability and packaging access rights.” If willing to adapt, the music industry could then have the potential to become a $40-50 billion industry and one that could grow stronger than it ever was.
Until that time, it looks like Spotify has a long road ahead of it, but it’s good to know that it is up for the challenge. “We aren’t interested in just trying to hype the company and then flipping it,” Ek says. “We are in this for the long haul.”