Spotify Competitive Analysis 2020-21

9 min readMay 14, 2021

So, I have done a comprehensive analysis of Spotify and its current market position in 2020–21. This will definitely help decision-makers to gain insights into the firm.

Industry Analysis

Global Recorded Music Market

The Internet has changed the music industry radically over the past couple of decades.

Let’s roll from the beginning. Ever since Edison emphasized Phonographs, people started listening to music from the comfort of their homes. Since then the means of consuming music has seen a lot of change from phonographs to flat disks to Vinyl, RCA magnetic taps, and music CDs. Even though software like Napster was controversial and illegal, it rang the bell of sharing music over the internet. iTunes was the pioneer of legal music sharing. Some companies started subscription models for the limited record labels while some went with the internet radio model.

The era of music streaming began when the Swedish company Spotify came into the picture with the licensed library of music. We started renting the music and listening to ads instead of owning and buying the music. Spotify revamped the music industry and provided an excellent way for both artists and consumers to benefit from the digital transformation of the music industry.

The global recorded music market grew by 7.4% in 2020, the sixth consecutive year of growth, according to the Global Music Report 2021 by IFPI.

The report divulged that the leading force of growth was music streaming, especially by paid subscription revenues which increased by 18.5%. Total streaming grew by 19.9% and reached $13.4 billion, i.e. 62.1% of total global recorded music revenues. The growth in streaming revenues more than offset the decline in other formats’ revenues, including physical revenues which declined 4.7%; and revenues from performance rights which declined 10.1%.

According to industry analysis and forecast done by Research and Markets, The Global Music Streaming Market size is expected to reach $60.5 billion by 2026, rising at a market growth of 16% CAGR during the forecast period.

So again, it is safe to state that music streaming is currently leading the market and is the most convenient way to listen to music now. One reason is that now people have access to millions of songs at their fingertips. Pretty much the same concept of service on your demand which runs on the notion that access is better than ownership; which is turning true as we have witnessed the massive growth of music streaming over the years.

Spotify Overview

Spotify is the world’s most popular Swedish audio streaming subscription and media services provider, founded in 2006 by Daniel Ek and Martin Lorentzon. Spotify AB is headquartered in Stockholm, Sweden, which provides music to all the markets.

Spotify has a stronghold on the market with 356m users, including 158m subscribers, across 178 markets as of 1Q21.

Spotify’s Competitive Market Position

Spotify has a first-mover advantage and quickly captured the music market with its alluring offerings. And it seems like Spotify wants to be an all-in-one audio place with music, podcasts, and paid audio, as CEO Daniel Ek thinks there is still 5 to 7 times growth left in the market.

So, it’s clear that Spotify is after capturing as much market as possible rather than leveraging its huge current user base for profits and providing services to every user.

With that being said, competition from behemoths like Apple, Amazon, and Google doesn’t seem healthy.

According to MIDiA research for 1Q20, Spotify remains the standout leader in terms of subscribers with a 32% market share. Despite the strong competition shown by Apple Music, Amazon Music, Tencent Music, Google’s Youtube Music in the streaming market; Spotify’s market share has remained between 32% and 34% every quarter since 2015. Spotify’s growth is both an extension of the wider market and a driver of it.

But that’s the only half party of the story. According to New Constructs research with Spotify is that while MAUs may have increased over the years but the year-over-year (YoY) growth rate in premium subscribers has fallen sharply from 73% in 1Q17 to just 28% in 2Q20.

Not to mention that premium subscribers generated 93% of Spotify’s revenue in 2Q20. Spotify’s average revenue per premium user (ARPU) has steadily declined from EUR 5.32 in 2017 to just EUR 4.41 in 2Q20. Spotify’s 2Q20 ARPU represents a 9% YoY decline. The combination of a slowing premium growth rate and falling ARPU has driven Spotify’s YoY revenue growth rate down from 57% in 2017 to 33% TTM.

Spotify has yet to figure out how to turn profitable. Because Spotify has been paying around 70% of its revenues to music right holders who then pay artists based on their individual agreements (Spotify recently renegotiated its agreements with all of the record labels), And Spotify pays artists just $0.0032 per stream compared to Apple Music at $0.0056 and Amazon Music Unlimited at $0.012, attracting criticism from artists like Taylor Swift and Thom Yorke who temporarily withdrew their music from the service.

So, Simply put Spotify can’t reduce royalties from the artists’ side. They would always want their payments to go up. From the users’ side, it seems like Spotify isn’t ready to lose its leading position by not charging more than its competitors and still providing free ad-supported services. So, the financial situation of Spotify is airtight I would say.

New Constructs research states that, Meanwhile, other peers like Apple, Amazon, Alphabet, Tencent enjoying healthy profit margins, Spotify’s net operating profit after-tax (NOPAT) margin of -3% is the worst among its peer group and is well below the market-cap-weighted peer group average NOPAT margin of 15%.

This shows that the ocean of the music streaming industry is turning red and to remain the dominant player in the industry, Spotify has to work harder than before considering all the discussed facts above. Still, Spotify’s numerous partnerships with firms, acquisitions, and a great amount of focus on podcasts look promising as a step towards their ambition of being an audio browser in the world.

What drives the competitors

Objective: To capture the attractive looking audio market

Assumptions: As music streaming emerged and will continue to be a dominant way to provide music, everyone wants to jump in to capture a fair amount of market share, you know, everybody wants a piece of the pie.

With the growth of music streaming, the growth of audio content is bound to happen.

What the competitor is doing or capable of doing

Big giants like Apple, Google, Amazon are capable of providing seamless integration between their other devices like smart speakers, Smartwatches, TVs, etc.

Moreover, they provide subscriptions for other services too, so bundled subscriptions for every service they provide would make switching cost for users high and thus making giant profits.

On the other side, music label companies can also be considered as competitors because they are enjoying the dominance of the music market and are capable of forward integration.

Other firms like Tidal, Deezer trying to target the market with their niche offering and divergent value propositions or local-regional firms have also captured the vast diverse music audience.

Porter’s Five Forces Analysis for Spotify

Porter’s five forces analysis helps us to identify the key structural features of industries that determine the strength of the competitive forces and hence industry profitability.

The five competitive forces- Threat of entry, the threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among current competitors- jointly determine the intensity of industry competition and profitability, and which strongest force or forces will determine the governing from the point of view of strategy formulation.

Threat of new entrants: Threat of new entrants is low because the dominant industry structure has been established and competition has risen. Especially with the giant players in the game, it’s much more difficult to enter the market. Moreover, to provide streaming services, providers have to partner with multiple parties to create a vast music catalog that requires a lot of investment. Product differentiation is also high as the majority of companies have established or are trying to establish different identification of their product and brand. In short, barriers to entry for the new entrants are high.
Threat of substitution: Threat of substitute products is low. Even though people still like to own the music or listen to radios or maybe pirate music! Still, the market will require innovation to substitute the convenience of dominating on-demand streaming services, giving access to any song in the entire world. People are saying music-streaming is the pinnacle of innovation that has ever happened in the music industry. Let’s see now where upcoming innovation will lead the industry.
Bargaining power of buyers: Customers have a choice to either listen to free music with ads or switch to premium. That makes the bargaining power of buyers low as of now, as all the platforms are providing somewhat similar offerings at similar prices if they are thinking of upgrading to premium. Although, the switching cost is higher for free Spotify users as nobody is providing as many services as Spotify does in the free tier.
Bargaining power of suppliers: Bargaining power of suppliers is high because a music service doesn’t actually own the music. And that’s why companies are trying to bring original content through innovations like AI, or exclusive partnerships with artists. But the fact remains the same that few music-label companies are enjoying a monopoly over the music industry.
Rivalry among current competitors: The intensity of rivalry is high because first simply put the more firms in an industry, the higher the rivalry, period. And the industry is already having big giants in the game as mentioned earlier. Moreover, homogeneity of services and offerings among competitors also raises the prospects for a rivalry to intensify.

Spotify Capabilities Analysis

In my view, the ability to generate and provide the best-personalized experience leveraging a large number of users’ data is the core competency of Spotify. Thus, gaining more user engagement. Spotify is striving to engage more and more users from both sides of the marketplace. Moreover, Spotify remains the only player to offer free music with some advanced features.

Content Hours per MAU (Monthly Active Users) — Engagement matrix for Spotify to evaluate user engagement.

Source: Spotify’s Q4 2020 press release

Spotify VRIO & VRIN Analysis

“VRIO” is a mechanism that integrates two existing theoretical frameworks: the positioning perspective and the resource-based view. It is the primary tool for accomplishing internal analysis. It stands for four questions one must ask about a resource or capability to determine its competitive potential:

The Question of Value: Does a resource enable a firm to exploit an environmental opportunity, and/or neutralize an environmental threat?
The Question of Rarity: Is a resource currently controlled by only a small number of competing firms?
The Question of Imitability: Do firms without a resource face a cost disadvantage in obtaining or developing it?
The Question of Organization: Are a firm’s other policies and procedures organized to support the exploitation of its valuable, rare, and costly to imitate resources?

VRIO: Valuable, Rare, Inimitable, and Organized.

To have a sustainable competitive advantage, your resources must be VRIO.

source: Jay B. Barney, William S. Hesterly

Here’s a most comprehensive Spotify VRION analysis done by Anne Marie Davis, Rancord Society.

Source: Anne Marie Davis, Rancord Society.

VRIO/VRIN analysis assures that Spotify is still having sustained competitive advantage with its core competencies — High Brand Value, Dominant market share, and other strategic alliances and acquisitions, while some of its resources providing a temporary advantage.