Music streaming has been the growth engine behind the music industry’s resurgence over the last decade.
Last year, the number of songs U.S. consumers streamed topped one trillion for the first time, climbing around 30% from 2018, according to data from Nielsen Music.
That trend hasn’t gone unnoticed by several big tech companies, including Apple, Alphabet‘s Google, and Amazon. All three have launched services to compete with one of the earliest entrants into the on-demand streaming space: Spotify (NYSE:SPOT).
But what separates services like Apple Music, YouTube Premium, and Amazon Music Unlimited from Spotify is their connection to much larger, more profitable companies. In other words, Spotify’s competitors can afford to operate their music streaming services as loss leaders to support their core businesses; Spotify needs to make music streaming profitable.
But with big competitors willing to take losses, consistent profits may be a “pipe dream,” says Evercore ISI analyst Benjamin Black.
While Spotify posted a surprise profit in its third quarter, management forecast a return to operating losses in the fourth quarter, despite proven operating leverage and expected paid listener growth.
Indeed, if Spotify intended to merely stream music, profitability will surely never come, as negotiations with labels would hit a wall, no matter how many listeners the streamer racks up.
Spotify’s path to profits requires it to create products and services that take advantage of its massive network of creators and listeners. Here’s what it’s doing already.
Building the two-sided marketplace
At Spotify’s investor day in March 2018, ahead of its IPO, management described its idea of a two-sided marketplace. Spotify intends to use its scale to drive greater artist discovery and enable artists to connect with more fans.
Spotify’s main Marketplace offering is Spotify for Artists, which provides analytics, identity management, and promotion tools for musicians on its platform. Spotify reported 465,000 artists use the platform as of the end of the third quarter, up 365% year over year. Artists using the platform represent 80% of listening on Spotify.
Ultimately, Spotify for Artists could enable many musicians to find an audience without the need for a record label. The value record labels provide musicians is promotion and distribution, and Spotify for Artists makes it much easier to do that without a label thanks to its massive audience and ability to put new music in front of those listeners.
Spotify’s curated playlists account for around 15% of total listening on its platform. The company could use those playlists as a platform to feature independent artists that use its Spotify for Artists platform without a traditional label. That should increase profitability for Spotify and for creators.
Other recent Marketplace products include Sponsored Recommendations, a cost-per-click ad product that relies on Spotify’s targeting capabilities to get new music in front of listeners. Most notably, it’s an ad product that works for both paid and free listeners.
Additionally, Spotify recently acquired SoundBetter, an audio production marketplace. SoundBetter connects studio musicians, producers, sound engineers, and other music professionals to collaborate.
Spotify is acquiring and building ancillary products that complement its existing user habits. Users love getting recommendations for new music — Spotify for Artists and Sponsored Recommendations monetizes that behavior. That will lead to better margin expansion than renegotiating deals with record labels.