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Napster vs Spotify and the Transformation of the Music Business

spotify vs napster discussion in music industry

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About Napster

Streaming music has now become the primary source of listening, but that hasn’t always been the case. Napster was founded in 1999, and it was a website devoted to peer-to-peer file sharing. The platform allowed people to download free songs, mixtapes, albums, and demos.  It first started to gain traction from college students in America. People were downloading and listening to music for free. After around 4 months of the website’s start, in 2000, Napster faced a lawsuit from the Recording Industry Association of America and artists. By 2001, Napster was forced to shut down based on the grounds of breaching copyright laws. Within the short run, at the time of it’s shutdown, Napster had grown to have over 21 million active users. 

About iTunes

In 2003, Apple launched iTunes. It was a new form of an online music library. The iTunes Store was accessible via a website or application, and it was a downloadable catalog. Users were able to create an Apple account and purchase a song with the average price of a song being $0.99. Albums would range from around $10 – $14. iTunes was able to have a lot of success after Napster. People were now purchasing legal music more often due to the fall of Napster and because other similar websites would give your computer viruses. 

About Pandora

In 2005, a new music streaming service gained public attention called Pandora. This was a revolutionary idea because it influenced what modern streaming services look like today. Pandora is an online service that recommends new music based on a user’s listening history or preferences. This application is free but has advertisements and a limited amount of song skips. 

About Spotify

In 2011, Spotify came into the spotlight as the first true streaming service as we know them today. Spotify uses a freemium revenue model. It makes money from advertisements and subscriptions. A user without a paid subscription can get basic access to the service but with advertisements and a limited number of song skips. A paid subscription allows you to have access to all the features like looking up any song, no advertisements, and unlimited skips. Spotify pays artists and music labels less than a cent per stream. It can range from around $0.003 to $0.0084 per stream. Something to note is that not every country pays the same amount. People who listen in America pay will earn an artist $0.0039 per stream, while a person in Portuguese listening will get the artist $0.0018 per stream.

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Freemium Business Model Within The Music Industry

The music industry has seen a large change in the past decade. Music streaming now accounts for 75% of the total revenue for the music industry. The two biggest names in the music streaming market, Apple Music and Spotify, account for around $4.1 and $9.5 billion respectively. Hundreds of millions of people choose to have a paid membership to a music streaming service. These music streaming services mainly use the freemium business model to create revenue.

When music first became digital, Apple Music’s predecessor, iTunes, was taking over the market. iTunes used the a la carte method, which has proved to be not cost-efficient by users, who much more prefer the new model of the streaming world. The freemium model was first adapted by Spotify in the music streaming market. They begin by allowing members to join for free, creating a large customer base. These free users then get to run a test and see if they would be interested in upgrading, which is where Spotify really shines. Spotify boasts a 46% rate of conversion from their free version to their upgraded premium version. As of 2018, this is much better than any other freemium-based business.

The freemium model of Spotify has been very well received by users of the service. Record breaking amounts of streams for artists’ newly released songs and albums would cause one to believe that artists would like this method more than methods in the past, but that is untrue. Artists have become very vocal about their displeasure with the music streaming services. Taylor Swift and Katy Perry are among these musicians. Taylor Swift even took off her entire catalog of music in 2014, a month after releasing her new, highly-anticipated album. Her reasoning behind this was that she believed her music should not be able to be listened to for free.

Music Streaming Is Here To Stay

Overall, the idea of music streaming is rather new, but it appears it is here to stay for the future. Users love the centralized place for all their music, but artists have voiced their doubts and displeasures. While there are some different ideas that should be worked on for music streaming services, such as the low payout to artists, it seems like music streaming has truly taken over from the different ways of listening to music that came before.

Origin Of Music

One popular story of the origin of music has been given by the manual Summa Musice in the 13th century. In the manual, the author looks at the etymology of different words to attempt to determine what the origin of music was. Ancient people are also said in the manual to have devised music by bringing the different sounds that water makes when it falls on different substances together. While that is mostly legend, there is no dispute that music has been around for a long time. 

Beginning in the 1880s with the phonograph, music began to shift forms from only live music to including music records. The phonograph was just the beginning with lots of innovation and many inventions following which lead to different forms of physical copies of music. Specifically before the music industry was disrupted digitally, there were two different primary methods of listening to physical copies of music. One was CDs (Compact Discs). A CD works by inserting the disc into a reader. A laser beam is then reflected off of the disc which then gets read based on the received reflected beam. The second was vinyl records. Vinyl records work by sound vibrations which are turned into electric signals which then get fed to an electric amplifier.

Market Size & Revenue of Music Industry

According to the Recording Industry Association of America (RIAA), recorded music revenue in the U.S. reached an all-time high of $14.6 billion in 1999 which then fell down to $6.7 billion dollars in 2015 largely due to the disruption of digital into the music industry.

Looking specifically at CD sales, it is easy to see the impact of the digital disruption. Sales peaked right around 2000. Following the sales peak, the rise of MP3 players and file sharing caused CD sales to nearly be cut in half by 2007. Right after this, streaming services and smartphones have continued to drive CD sales to continue to sharply decline. In 2020 according to RIAA, 31.6 million CD albums were sold in the U.S. which accounts for only around 4 percent of music industry revenue.

Vinyl album sales are much more surprising. Vinyl records are also known as LPs from “long play” which describes the nature of the record. Sales for LPs are actually growing for the 15th consecutive year. This is largely driven by a niche crowd who enjoys the physical aspect of vinyl records as well as the musical sound from the record player. In 2020, LPs were up 46 percent when compared to 2019 with 27.5 million records sold. This number is also more than 30 times the amount of records sold compared to 2006 when the comeback started. According to MRC Data’s 2020 Year-End Music report, LPs accounted for 27 percent of album sales in the United States, which is quite substantial. This number, however, does not factor in streaming or downloads of single tracks. Once these are factored in, the percentage of music sales drops to 3.6 percent for vinyl. It is largely unknown if this trend will continue; however, vinyl records continue to be an aspect of physical copies of music that don’t seem to be going away soon.

Radio has also been affected by the digital transformation. According to research from Enders Analysis, from 2010-2018 there were around 840,000 15 to 24-year-olds that decided to no longer listen to the radio. Within the group of 6.5 million listeners in that age group who still listen to the radio, the amount of time that they spend listening has drastically decreased 29% between that same time period. With the BBC specifically, total listening hours from 15 to 24-year-olds has fallen even more at 40%. The BBC admitted in 2017 that it had found for the first time that 15 to 34-year-olds spent more time listening to streaming music services than all of the BBC’s radio services. 

Digital-only stations have also begun to see an increase. In 2010, there were around 192 stations that were digital-only. By 2018, that number had grown to over 450. Radio stations have also started to shift more towards the digital market as well. One primary way that they have done this is by making their radio station available online to listen to no matter the location of the listener.

Music Industry Strengths

The greatest strength that music streaming services have is accessibility. Streaming services are available on multiple devices such as phones, tablets, computers, and so on. As most people at least have one of the devices, it is important to be available on every type of device with this kind of business. In addition, their pricing structure is simple and provides easy entry. They offer freemium so that customers can enjoy the service without being distracted by the advertisement. Listeners can upgrade and get unlimited access to the full music library and download songs onto their local devices. Moreover, they have algorithms that recommend new artists and tracks based on the customer’s past listening history that enables the customer to broaden their music taste and enjoy the service more. Based on the recommendations, customers can also create their own playlists and share those with people. 

Music Industry Weaknesses

However, there are also weaknesses of this business. Despite all the fancy algorithms and service, it highly depends on internet connection. For content to be streamed from wherever and whenever, it must be first downloaded from the library. Without internet connection, it is useless and streaming can be a hassle. Also most streaming apps are similar and not unique. Most music streaming services have a similar library of content that they make available to their users. Premium customers get broader choice but still not much of a difference compared to free users. This means that those services need to work harder to make customers convert to the premium service that will eventually increase the companies’ revenue. The biggest weakness is that the streaming services have low payment to artists. Streaming music platforms pay a tiny fraction of a cent every time a song is streamed, which means that thousands of streams are needed to equal any substantial payout. Overall, the service that pays the most is Amazon Music Unlimited ($0.01196) and the least is Spotify ($0.00318). As a reminder, Spotify’s low pay caused Taylor Swift to pull her entire catalog from Spotify as an act of protest against the service’s ad-funded ‘free’ tier in 2014. 

Music Industry Opportunity

One opportunity for music streaming services is partnerships. Companies could partner with mobile device companies and give a free trial of their service when a consumer buys a new device. This could lead to them purchasing a subscription at the end of trial, giving them more of a market reach. They could also partner with other companies to create a subscription that is a bundle of services gaining more customers. Another opportunity is the growing podcast market. It is predicted the podcasting market will reach approximately 160 million people by the end of 2023. Companies such as Spotify can take advantage of this growing market and expand their podcast content which would in turn bring new consumers. Market expansion is also an opportunity for music streaming services. Streaming services can make their services available in more countries, growing their market. Currently Spotify is operating in more than 178 countries, and they could focus on expanding to even more countries to gain more consumers. 

Music Industry Threats

There are also some threats to music streaming services. One threat is competition. Many companies are coming out with their own music streaming platforms. Specifically, big tech companies are strong competitors because not only do they offer music streaming services, but they also offer many other products and services giving them more resources. For example, Spotify is only a music streaming service where Apple Music is a part of a much bigger company. Another threat is legal issues with artists and labels. Companies have had to deal with expensive lawsuits over the contracts of streaming an artist’s music. A third threat is artists may refuse to collaborate with music streaming services due to low payment. As discussed earlier in the report, artists get paid a small percentage of the money made from their music being streamed. Artists have started to become more frustrated by this lack of pay. This could lead to them removing their content from the streaming service and going with another service or creating a streaming platform of their own. Although piracy of music has decreased some, it is still frequently occurring making it a threat to companies that could result in even more loss for them. If a service has issues with piracy it may result in artists not wanting to risk having their content on that platform and therefore hurting the company.

What Would I Do As The CEO of Spotify

Going off the SWOT analysis, as CEO we would choose to pay artists more. There are growing issues with artists being dissatisfied about how much they are making. If these issues escalate, it could have huge effects on companies. We want to be proactive by making artists happier and making them want to have their music on our streaming service. It would also give us a competitive advantage against other companies because more artists may choose us over other music streaming services. We would also start having more exclusive content like live stream concerts to attract more consumers and gain another source of revenue. Throughout the pandemic, live stream concerts have been popular and attracted a lot of people, so this a new market for us to tap into.

Spotify & Music Industry Predictions

As for predictions focused specifically on the streaming giant Spotify, Spotify is only going to grow in the future. Spotify’s revenue from premium and ad-based subscriptions have only grown since the start in 2011. Spotify predicts that it will have over a 17% increase in monthly active users. It reported 356 million in quarter 1 and expects to have over 400 million at the end of quarter 4.


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