The Sisqokid

Dominating Freemium - Spotify case study

Like my good friend elsiguy, I’ve fallen in love with Spotify. Over the weekend I decided to take my relationship with it to the next level by upgrading to the premium service for $10/month. For the uninitiated, Spotify’s basic service is free, on-demand desktop music streaming supported by advertising. There are two premium offerings:

1. $5/month removes all ads
2. $10/month removes all ads, offers mobile access to the entire music library, and allows users to sync songs and playlists to devices for offline listening

Spotify is not the first music service to offer a vast music library, on-demand streaming and mobile access. So why has Spotify emerged as the leader of the pack in on-demand streaming when others (Rhapsody, Napster, etc.) have failed to gain serious market traction.

I believe the answer is rooted in Spotify’s implementation of the freemium business model.

Let’s step back for a moment. A freemium model is one in which some basic product or service is given away for free and premium features are offered at a price. 

Freemium models need to satisfy two conditions to be viable:

1. the basic free service needs to be strong enough to attract lots of users
2. the premium offering needs to be compelling enough to incentivize some meaningful subsection of users to pay

Spotify nails freemium. Let’s take a closer look at some of the specific factors that make it so compelling.

Free basic service

Spotify’s free service is an awesome standalone offering. Some factors that contribute to its awesomeness: 

• Library.  Spotify’s music library is vast with licensing deals with all major record labels. You won’t find everything (Metallica, The Beatles, Pink Floyd, Led Zeppelin - absent do to asinine and shortsighted thinking), but you’ll find almost everything. 

• On-demand. On-demand means the user has the flexibility to listen to any song at any time and in any order (and until recently, only music owned/locally stored afforded users this flexibility). Historically, free online music offerings have been constrained by the economics of music licensing and have been unable to combine ‘free’ with ‘on-demand’  (on-demand royalty payments are much higher than those for ‘radio’/non-on-demand streaming). And while the the jury is still out with respect to the economic viability of the Spotify model, the fact that there is a framework that allows free on-demand music streaming is HUGE. Together with mobile access and offline syncing, on-demand streaming is fundamental to move to a more attractive cloud-based streaming universe where there is no need to ever own and locally store music.

• Social. A fundamental part of Spotify’s experience is the innate social integration. For most people the Facebok integration is not only a wonderful tool for music discovery, but also serves to create massive stickiness on the platform. The fact that I can share and benefit from shared playlists creates a strong incentive to be on the same platform as friends. In effect, Spotify is leveraging Facebook to bootstrap the creation of it’s own ‘music social graph’ and will benefit immensely from powerful network effects that emerge from owning it. (Note: Spotify is not the first to integrate social with music listening, but they do it relatively well and make it core to the fabric of the experience. I have a full blog post brewing on this topic…stay tuned.)

• Ad supported. The fact that the free service is ad supported is important, but not all that interesting in and of itself. However, what is important and interesting is Spotify’s specific and unique implementation of ads within the service. First, Spotify does a great job walking the tight rope of making ads intrusive and annoying enough to incentivize users to seriously consider upgrading, but not so much so that it completely interferes with usage of the basic offering. Spotify uses some interesting tricks to walk this line, the most interesting to me is that they constantly rotate the ad unit interface - sometimes vertical, sometimes horizontal, sometimes audio, and sometimes there are no ads at all. Some find this annoying. I find that it actually makes the ads more effective (i.e. I notice them a lot more) and I’m satisfied knowing the ad will shortly move. Second, the quality of Spotify’s audio ad unit is quite impressive. Despite the fact that audio ads cut into the listening experience, Spotify seems to intelligently serve units that are contextually relevant to the user and their listening tastes - making the ads more bearable and less obnoxious. It also serves these ads in a relatively well integrated manner so the audio experience is not jarring to the ear.   

Premium offering

The premium offering is sufficiently differentiated from the free service and offers clear and demonstrable value - a compelling mouse trap to attract users to upgrade and pay. 

• Mobile. A massive amount of music is consumed outside the home and on the go, and as noted above, offering mobile access is a key condition to evolve away from owned/locally stored music to cloud streaming. Having on-demand access to the entire Spotify music library at my fingertips at all times makes my local music collection seem puny and pathetic. 

• Offline. The world is moving towards ubiquitous connectivity, but until we get there offline sync is necessary to replace the owned music paradigm. With offline sync, I have unfettered offline access to all songs, albums and playlists that I have selected to sync locally to my devices. In fact, I’m benefiting from offline sync at this very moment listening to Bon Iver 30,000 feet above the ground while writing this blog post. 

• Ad free. Nuff said.

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Spotify is not the only music streaming service making waves right now - Rdio has a very compelling differentiated service as well (similar to Spotify in many ways and even better in some). The emerging model for these new and hopefully viable music services is to create a killer freemium offering that attracts masses of free users while offering enough premium value to incentivize users to upgrade to the paid subscription. As a die-hard music fan, I’m rooting hard for these guys to make it work.