[Case Study] How Spotify beat iTunes.

From 1999-2001, 2 companies were fighting for the future of the music industry.

Napster, founded in 1999, was sued by Tower Records for illegally giving away music without paying the musicians.

At the time the music industry was set in CDs, but Napster allowed people to send mp3 files of music files. It set the music industry on fire and the record labels hated Napster. From 1999-2001, legal battles consumed the music industry.

In 2002, Napster filed for bankruptcy but the shift towards digital music was complete.

Digital Music was the future.

Apple saw Napster’s fall and launched iTunes in 2001.

It offered affordable pricing at $9.99/album or $0.99/song. It was a great platform that outshined CDs, Pandora, Tower Records with its quality platform and convenience. By 2008, iTunes was the largest music vendor in the U.S and by 2010, the largest in the world. They owned 70% market share of the legal music downloads. No one could touch them not even the record labels or Pandora. When the iPod was created, iTunes fit like a glove.

iTunes was ruler of the music industry until 2011.

“Napster—but Legal”

Europe’s music industry was dying.

Napster’s piracy and file-sharing ransacked sales for CDs. Revenue was plummeting. But there was no alternative. Most people wanted specific songs rather than entire albums. It was either pirate the specific track or buy CDs for a single song.

Daniel Ek and Martin Lorentzon wanted to solve piracy issues in the music industry by creating a legal streaming platform where users could access music while compensating artists and record labels.

On October 7, 2008, Spotify was launched in Europe.

Within 2 years it expanded throughout Europe. Their demos revitalized Europe’s music industry. Access to millions of songs without fear of piracy was the key differentiator.

When Forbes interviewed Co-Founder Daniel Ek on Spotify’s success, they found that the duo—Daniel and Martin— wanted to build a music site that mixed the ease of iTunes, the speed of Google, the sharing of Facebook and the massive music library of Napster—but legal.

And in 2011, Spotify stepped into the US market after securing the licensing deals.

“It’s no exaggeration to say that Daniel saved the music industry.”

Spotify was tiptoeing around giants like iTunes, Pandora, and Tower Records.

They started with a simple model: a free 6-month trial with ad-supported songs. It worked. It was so popular that by January 2012, they made $300,000,000 in sales. But everyone thought Spotify would get destroyed by iTunes due to the popularity with iPod and Mac devices.

Yet Apple couldn’t touch the 170 million paying subscribers Spotify amassed.

How Spotify beat iTunes.

Spotify’s advantage wasn’t playing Apple’s game, it was playing their own.

Instead of charging per download like Apple, Spotify made the freemium model: a 6-month free trial with ads. Before Spotify, ad-supported music was an onboarding to subscriptions, but Spotify changed the game by allowing some people to listen to music for free forever.

They carved their own niche in the streaming sector.

Data-Driven focus:

Spotify gathered information fast. Their team was 500 employees at the time —small fish compared with Apple. They could move and adapt their design based on data they had. Serice and experience were critical components for them.

User-Experience First:

With this freemium, Spotify got user feedback about their interface. They took that feedback seriously and made changes to make the music experience elegant and fun. A simple navigation system with an easy spot to create playlists. They also allowed for cross-platform consistency for users to use it on their android or apple devices and computers.

Sharing & Personalization:

Users could share playlists. Their algorithm took the data gather on user music selection; they created personalized playlists like "Discover Weekly”. They also went further of mixing other user preferences to create “blends” building a community on the platform. At the end of each year, they give a “Year in Review” which gave a great personalized year-end recap.

Diversification:

Once Spotify conquered the music industry, the expanded into podcasts and audiobooks. They introduced “Spotify Wrapped”, “Daily Mix”, and radio stations for any song, album, artist or playlist. They created more avenues to enjoy content.

Now they’re a global audio streaming powerhouse.

“Audio is ours to win.”

Spotify wants to go even bigger: they want to own the audio space.

Radio is still in use in the US and throughout the world, but the industry is fragmented and antique. Yet radio still reaches around 3 billion people every year and ads pull revenue of $30,000,000,000. Majority of audio ad spending goes to radio.

Using AI-powered algorithms, they plan on delivering personalized audio content to listeners. Shaping Spotify into the go-to destination for all digital sound: not just music but news, storytelling, live talk, audiobooks and education.