Tidal wave of competition forces Spotify to look at future as value increases
14 April 2015 by Thomas Utting
It is reported that Spotify will raise a further $400m dollars from an undisclosed source in its latest funding deal. This will increase its value to $8.4bn, a huge increase from the $5bn that it was valued at in September of 2014. The latest funding round is Spotify’s seventh since its inception in 2006 and is set to close in the next few weeks. It has involved over a dozen investors, some of the most high-profile being Goldman Sachs and Abu Dhabi’s government-managed wealth fund.
Spotify had 60 million users at the end of 2014. Despite this, only 15 million were paying subscribers of the music streaming service which offers a reduced service to users for free, this being a great incentive for those contemplating using the service. This had led to record labels who own a share of the company to put pressure on Spotify to increase its number of paying customers, or alternatively to limit the remit of those songs available for free, in an attempt to persuade people to pay for the full service. Although this was opposed by users of Spotify, from a commercial perspective, many consider this justified considering that 70% of Spotify’s revenue is spent on royalties and barely 25% of users are actually paying for the service.
To make matters worse, it appears as if the future is only going to get tougher for Spotify as a number of new competitors are set to enter the music streaming and download market. Most notable of these new competitors is TIDAL, which was re-launched by Jay-Z at the start of the month with several high-profile investors, many of whom are now making their music, or a large portion of this, exclusive to TIDAL and out of the reaches of Spotify.
Music recommendation service, Pandora Radio, is also on the rise and is currently valued at $3.5bn. Pandora Radio works by playing a selection of songs from a chosen genre and then takes user feedback into account when selecting future songs. In addition to these existing competitors, Apple are set to launch similar services in the near future which will make competition even fiercer.
It is not known whether Apple’s services will require a subscription; however we know that TIDAL requires users to pay at least £9.99 per month. This could work in Spotify’s favour if they are the only, or one of the only, services which allows consumers to use the service for free. Conversely, Spotify might succumb to the pressure and impose a mandatory subscription fee in order to please record labels, a move they may not otherwise have carried out if services like TIDAL weren’t already implementing a similar policy. Alternatively, Spotify may be able to retain its draw by offering subscription fees at a discounted rate to those of TIDAL whilst matching the sound quality and music library that TIDAL currently boasts.
Another issue sparked by the launch of TIDAL as set out above is that artists are now beginning to remove their music from Spotify and launch music exclusively on the new platform. The precedent has already been set as Jay-Z removed his first album ‘Reasonable Doubt’ from Spotify last week and both Rihanna and Beyoncé have launched their new albums exclusively on TIDAL. If a large number of other artists begin to follow suit, Spotify may be in trouble and have to come up with an innovative idea in order to retain its customer base.
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