Business Case Study: Spotify vs Apple Music vs YouTube Music War

Business Case Study: Spotify vs Apple Music vs YouTube Music

Jan 15

We all know that Spotify is by far the most successful audio streaming platform in the world. In fact, even during the pandemic itself, the stock price of Spotify went up by 70%. Now, on the outside, if you look at the numbers, while apple music has only 72 million users, Spotify has more than 345 million users and the rest of the competition is not even close. On top of that, its recommendation and playlist have been so amazing that we all agree that it gave us a miraculous experience every single time.

But, fortunately, or unfortunately, in 2021, Spotify is in very deep trouble. While on one side, the losses of the company have been stacking up rapidly, on the other side, with the giants entering the streaming market, Spotify is officially in a business war. And, what we are witnessing right now is perhaps one of the most interesting business wars in history. And, if we pay very close attention, we will be able to learn some spectacular business lessons that one can apply to their start-ups.

What is this business war?

The music streaming revolution of the world started way back in the 1990s. Now, back then, that is from 1984 to1999, CDs were the ultimate instrument of the music streaming industry. The distribution channel of the music CDs made the record labels and the musicians, billions of dollars every single year. But, in the 1990s, the internet of the computer revolution began to pick up, resulting in the massive penetration of both computers and the web into American households.

Now, if we see, it is the fine culmination of technology and connectivity and if we observe closely, every time this golden combination happens, it gives rise to a new generation of start-ups. In the music industry, it was a company called Napster, which was started way back in 1999 by an 18-year-old kid called Shawn Fanning and Sean Parker. In simple words, Napster was nothing but a music torrent, i.e., instead of buying a CD for 20 dollars, one can download an MP3 file for free and share it with your friends.

But this invention was a disruption in making because what followed next was the first wave of music streaming. And, this way did not just change the way people listened to music, it literally changes the entire music industry. Within a few months, it has 4 million song downloads and in less than a year, Napster had 20 million users. Now, initially people thought that it’s no big deal. But, in some time, the number of Napster exploded further to 60 million users by 2001.

And, this is when the record label began to realize that their stores are incurring losses. And, when they actually computed, it shocked them to see that they were incurring more than 100 million dollars in losses due to Napster. And, that’s when hell broke loose for Napster. They got slapped with a lot of lawsuits and what followed next was the history that led Napster to pay millions of dollars to artists, creators, and record label companies. Eventually, they had to shut down their operations sometime.

Now, while most people thought that piracy will be gone and that CDs will be back as it turns out, Napster left the market but the behavioral design of the society had been so strongly altered that people just didn’t go back to CDs at all. The CD stores were still closing down and other piracy websites took the place of Napster. Companies were still incurring millions of dollars of losses because people just wouldn’t pay $20 for an album. And, this is where record labels were desperately looking out for an alternative to actually get their distribution channel back on track.

And while all of this drama was going on, there was one man who noticed this and decided to become an opportunist during the times of chaos. And this man was none other than the legendary Steve Jobs himself. And, the solution that he bought to the table was to give people ultra-cheap music and to give record labels a non-pirate distribution channel for their music. And, this solution was none other than the iconic iPod and the rest is history.

The record labels again started to make billions of dollars; customers fell in love with the iPod as it brought along the second wave of the music streaming revolution. But there were 2 major problems over here:

Not everyone owned an iPod or MacBook.
Not everyone could pay for each album

But everybody had computers and the internet. Guess what, this culmination of technology and connectivity, again, gave rise to another generation of start-ups and the most successful player in this segment turned out to be none other than Spotify which started way back in 2006. Spotify learns from the pain of the customers and decided to build a music streaming platform that could be used by everyone and for free.

And this is where Spotify deploys its freemium model with an option to subscribe. But this time, it wasn’t easy because they knew what happened to Napster and the subscription model was way more complex than the discreet model of iTunes. Because when it comes to CDs or iTunes, it was pretty straightforward, if you buy a $1 album from iTunes, 80% of that goes to record labels, 20% of that is meditator fees and that’s it. Whereas in the case of subscription, it’s quite difficult because you are giving unlimited access to everyone for a defined fee. So, the revenue distribution itself becomes very complex.

But fortunately, the Spotify guys got through it and they spent about 9.8 billion dollars between 2006 to 2018 just to get the music rights without legal issues and they built the freemium model to make it accessible to everyone. And what followed next was the third wave of music streaming, i.e., unlimited legal music which could be listened to for free. As a result of which, again, Spotify exploded and today it is a market leader with the highest number of paid subscribers.

But again, there were 3 problems.,

The Ad revenue was not enough to pay the artists well and because the music is free, very few people actually opted in a subscription
There was no profit for Spotify. In fact, the company suffered massive losses during its rise.
And most importantly, things got really ugly with the artists. Taylor Swift and Adele broke up with Spotify over low pay. And again, it led to a series of trouble for them from the creator’s side.

Now, the company was badly cornered with massive losses on one side, annoyed artists on the other, and on top of that, they have now got freebie-loving customers. And, this gave them no option but to run a lot of ads to push their customers to buy Spotify premium and hence a lot of interruptions. And this is when 2 more Giants decided to step into the game. In 2015, Apple introduced that it’s going to kill iTunes and launched the subscription model which was Apple music as a direct competition to Spotify. And, in just 5 months, in November 2015, YouTube entered the streaming wars with YouTube music. Now, if we observe the streaming wars very closely, that is, Apple Music and YouTube music, both of these services are built over the weakness of Spotify. And just a few moves, here and there, Spotify could be killed and there could be another wave of social media revolution on YouTube.

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How is that possible?

If we look at the above table, Apple music is only for premium customers but Spotify and YouTube music is for everyone and they use the freemium model which gives them a wider audience. Now, if we look at the user base, Apple music has 1.65 billion users, Spotify has 345 million users and YouTube got 2.1 billion users. But when it comes to paid subscriptions, Spotify is way ahead of Apple because of its accessibility through both Android and Apple. While Apple Music has only 72 million users but all of them are paid, Spotify has 345 million uses out of which 155 million of them pay.

Now, the X factor over here for Spotify is its amazing playlists and podcast that is integrated into the app. And this is where we saw Spotify coming out with Spotify Originals like 22 yarns and signing up creators like Joe Rogan to become Spotify exclusive. But, Apple and YouTube, both also have their Podcasts but separately. YouTube has Google Podcasts and Apple has Apple Podcasts. And now, here comes the big difference, while Apple Music generates revenue of 4.2 billion dollars with very fewer profits because it’s just an ecosystem product, Spotify being a standalone incurred a loss of 698 million dollars in spite of generating a revenue of 9.2 billion dollars, and YouTube, its way ahead of the game with 19.7 billion dollar in revenue and this is mainly because of its video service. YouTube is also one of the most popular platforms to discover musicians and artists.

YouTube accommodates every single X factor of Spotify and Apple music in the YouTube app itself.

We already search for songs and lyrics from Google and YouTube which is the USP of the Apple Music
We can ask Google which song is playing and it will find that out for you which is nothing but a Shazam feature. And, most importantly, Google has Google Podcasts and a huge base of creators who are already making Podcasts on YouTube.

Now, every single creator knows that YouTube is by far the best platform for creating content. And user knows very well, how well YouTube understands them and their preferences. Now, if YouTube rolls out an update tomorrow saying that Google Podcasts is now integrated into YouTube as YouTube Podcasts. It is going to lead another huge wave of creators who will flock to upload their audio content on YouTube because there are already a ton of audio creators who are desperately wanting to be on YouTube. And if given a chance with YouTube algorithm, it’s going to be a game-changer for them. And the best part is because it’s available on both Android and iOS, the user base is insanely huge. So, basically, YouTube literally has the best of Spotify and Apple. And when integrated together, it will become unbeatable in the content space just like Instagram is right now for social media networks. And some people say that one day there will be a grand announcement that is going to change everything for Spotify.

Important Business Lessons

This brings us to the most important part of this case study, i.e., what are the lessons that we can learn from this case study,

Always remember that being a first mover can be a terrible thing. Its always better to be a second-mover, so that you can build upon the mistakes made by the first-mover. In this case, if you see, iTunes built over Napster, Spotify built over iTunes and Apple Music and YouTube music built over Spotify.
Companies might come and go, but, the behavioral design they leave behind will stay forever. In this case, it is a paradigm shift from CDs to streaming. So, while most people neglect it and try to reverse it, one as an entrepreneur/PM can be an opportunist and can bring about a solution that is forward-looking rather than backward-looking. In this case, it was none other than the legendary Steve Jobs himself who built upon the behavioral design left behind by Napster.
The culmination of technology and connectivity is always the sweet spot for innovation and it will give rise to revolutionary start-ups. In this case, these were the computers and the internet, but, in the next 3 years, it’s going to be green tech and the internet, blockchain and the internet, and most importantly Artificial Intelligence and the internet. And, this is where one can find its greatness to build a breathtaking company or as an investor find an uprising gem in the stock market.