On Spotify’s strengths and challenges

Since I wrote a couple of articles about Spotify and streaming recently, I gave the company and business some more thought. To better summarize them, I compiled a SWOT matrix for Spotify, a tabular analysis listing the strengths, weaknesses, opportunities and threats a business is likely to face in the future. These will apply to some extent to any other streaming service.

In addition to grouping these factors in the matrix, it’s also useful to see how they influence each-other:

• The large available catalogue can be threatened by individual artists (especially very famous singers) pulling their music out.
• The availability of the app on multiple platforms (even Windows Phone!) makes it easier to enter strategic partnerships with companies outside the music industry – like the recent collaboration with Uber. These in turn could drive more free users to convert to the premium service.
• The financial situation of the company looks good: they recently announced the 2013 results with strong revenue growth. However, Spotify is still running an operating loss. The margin is improving, but, even if the current trend is continuing, the company will need another two-three years to break even – earliest at the end of 2015.
• The potential market for streaming services is huge; on the other hand, as more people sign up for streaming services and Spotify expands in lower income countries, it will be increasingly difficult to convert people to a paid subscription.
• As I said in the previous article, one of the biggest threats is bundling similar streaming services in the largest mobile platforms. Apple is rumored to add Beats to all iOS devices early next year, Google already did so with YouTube Music Key. It’s unclear if Beats will remain cross-platform, but there’s no question about YouTube, so it’s likely the bigger threat to Spotify. This hits Spotify in a weak spot, having no platform of its own to exploit, also hurts the future growth by drawing in potential customers to a competing strong brand.
• Another weakness is the tense relationship with music labels. I have no direct knowledge of their royalty contracts, but I must assume they are relatively unfavorable to Spotify. As more large companies enter the market, possibly offering better royalty payments, it’s likely that labels will demand renegotiations and higher payments. This will further delay profitability and financial independence.

I first learned about SWOT in college – crazy I can still use that!