What got you here won’t get you there: how Spotify built a new business

Since its inception, Spotify has been, and continues to be, the streaming music market’s lightning rod. This is due to its continued ability to maintain leading market share and the fact it is the only leading global DSP that is independent and therefore has to focus place more focus on commercial sustainability than peers owned by global tech superpowers. Working within the constraints of what music rightsholders will permit, Spotify has balanced testing how far it can push boundaries (the aborted Direct Artists; the audiobook bundle controversy) with launching new formats and business models. Given the constraints, Spotify has managed to institute a remarkable amount of change. So much so that the Spotify that stands on the precipice of the second half of the decade is dramatically different to the one that launched in 2008.

The venture capital mantra, which in turn is the start-up mantra, is “do one thing well”. Spotify did exactly that and stuck at it for many years. But a truism for the evolution of business change is that what got you here won’t get you there. Indeed, as Spotify moved towards IPO and then navigated life as a public company, it needed to change. Investors wanted a path towards profitability and away from what they saw as excessive rightsholder control.

To achieve this, it had to move away from the one thing mindset and adopt a much more maximalist worldview. The first Spotify is still at the core of the new Spotify, but similar to a caterpillar’s metamorphosis, Spotify is spreading its wings as something dramatically different. As these changes have been progressively iterated, the change has sneaked up on the music business and it is only by comparing what Spotify is now versus what it was that we can truly understand what Spotify 2.0 is and what it will become:

·      Spotify 1.0: Version one was very clearly a music service, operating for rightsholders, with a tightly defined licensing model and a minimalist approach to personalisation and curation. It was a tool for people to find the music they knew and for rightsholders to get paid. But the fixed costs model (i.e., Spotify was always going to pay ~70% of its revenue to rightsholders and would always be beholden to their will and wishes) did not leave much room to manoeuvre and investors did not like that. The strategic irony is that if rightsholders had let Spotify do more with music, then it would may have had to look beyond music to grow.

·      Spotify 2.0: Spotify has essentially spent the last few years lessening music rightsholder control. It has fostered a surrounding ecosystem that resulted in: an accelerating proliferation of new music (even if the volume was slightly down in 2024); new music formats (production music / ‘fake artists’; Gen AI); non-music formats (podcasts, audiobooks, video); and a creator economy (especially podcasts). With algorithmic curation and hyper-personalisation, it has shifted the emphasis of the user relationship from being with artists to the platform. The result is a transformation of user proposition, from a place to find the music you like; to a platform that fills your eyes and ears with multi-format content the algorithm chooses for its users. On top of this, different license fees for production music, bundle tiers, direct deals with audio providers, first-party audio content and Discovery Mode mean that Spotify now operates with a blended, variable, and higher margin costs framework. One in which it exercises more control. And, crucially, Discovery Mode reverses the money-flow polarity, turning the rightsholders Spotify was a customer of, into its customers.

This is where Spotify sits now. But do not think of this as ‘job done’. As with all strategic analysis, we need to look at the where the ball is going to be passed to, not where it is now. To do that, we need to look at what paths Spotify’s new assets open up.

If we work under the assumption of continued evolution rather than dramatic change, Spotify 3.0 is likely to be one in which Spotify further increases autonomy via user experience, content strategy, and commercial model:

·      Further emphasis on non-music content through programming and curation

·      Greater emphasis on non-traditional rightsholder music (production music ‘artists’ and generative AI – including in-house AI similar to what Tencent has been doing for years)

·      Increased flattening of the value proposition to one in which ultimately the user relies on the algorithm to determine not just what music a user listens to, but whether the right content at the right time of day is even music at all

Spotify started off as an elegantly simple music service that helped music rightsholders navigate their way out of piracy and into sustained industry growth. Both Spotify and the music industry won. To return to the metamorphosis analogy, if Spotify 1.0 was the caterpillar, and 2.0 was the chrysalis, then 3.0 will be the butterfly. However, this will be a butterfly that no longer flaps its wings to the music industry’s tune.