“The brands that will thrive in the coming years are the ones that have a purpose beyond profit.” Sir Richard Branson, Founder of Virgin Group Ever since the launch of Branding Nerd in April 2021, we’ve featured notable local...

“The brands that will thrive in the coming years are the ones that have a purpose beyond profit.”

Sir Richard Branson, Founder of Virgin Group

Ever since the launch of Branding Nerd in April 2021, we’ve featured notable local and international brands who are profitable and have engaged in rather ‘traditional‘ competitive environments. By ‘traditional‘, I mean brands competing against other brands.

In a recent business news clip I watched on cable, I saw a feature on Spotify® which mentioned that the brand was created to combat piracy. I found that quite intriguing and was inspired on this Philippine Independence Day to feature a brand that started a revolution against an illegitimate adversary, similar to what the Filipino revolutionaries did 125 years ago.

While the brand has yet to realize a profit in all its years of operations, investors remain bullish on the brand. Spotify®’s fortunes in 2023 have taken a positive turn amid investor confidence following its Q4 2022 earnings report. Despite impressive user growth, with monthly active users (MAUs) increasing 20% YoY to 489M and premium subscribers up 14% YoY to 205M, the company is still struggling to generate an operating profit due to rising expenses. Nevertheless, Spotify®’s stock is up 62% YTD, as of April 2023, thanks to an overall resurgence in growth stocks and strong Q4 2022 user growth. In Q4 2022, revenue surged by 18% hitting 3.2 billion euros ($3.4 billion).

Revisiting the Open Hole Concept

Before we go ahead with this blog on Spotify®, I thought it might be useful to revisit the concept of ‘Open Hole‘.

In the first module of The Brand Architecture course, I dwell on the importance of finding the ‘open hole‘ as the first and most critical step in building a brand for the long haul.

At its core, finding the open hole involves understanding two main areas of your chosen market:

First, a company needs to understand what are the most important factors that your customers are looking for. This is critical in ensuring that a brand stays relevant to its target market.

Second, a thorough analysis is needed on how your direct competitors are positioned and what strategies they employ based on their positioning in the market. This information will enable your brand to identify any areas in the market to avoid, preventing the perception of being a copycat and ensuring its uniqueness.

It is the in-depth and thorough understanding and analysis of these two main areas taken together that will enable a company to find the open hole in the market wherein it can then choose to position its brand in. Once that open hole is found, a brand can position itself in that space which makes it automatically both relevant and unique.

Finding the Open Hole in the Online Music Distribution Industry

Let’s apply the above in the case of online music distribution.

First, let’s look at the consumers of music thru online channels.

According to research, (1) music selection, (2) ease of use, and (3) sound quality are the primary reasons for customers liking or disliking an online music service.

Furthermore, interestingly, with regards to online access to music, the British Music Rights survey conducted in 2008 showed that 80% of people in Britain wanted a legal P2P service.

This finding was consistent with the results of earlier research conducted in the United States, upon which the Open Music Model was based. I will go back to the ‘Open Music Model‘ later in this blog.

Therefore, while there were existing online channels that provided consumers free and convenient access to music in the early 2000s, much of these were illegal. What the research has shown is that yes, consumers want the convenience and quality, but also wanted to enjoy these through legal means.

Now let’s look at the ‘competitors‘ in the online music service.

P2P (Peer-to-Peer) networks have historically been associated with illegal sharing of copyrighted material like music, movies, software, and games online. These networks use end-user computers as both clients and servers, making them a popular method for sharing electronic media. During their height in 2007, P2P networks contributed to nearly 40% of total internet data exchange, solidifying their position as the most prevalent file-sharing method at the time.

Therefore, with regards to competition, the most serious competitive threat in the distribution and consumption of content in the music industry was not your traditional rival brand in the market. Rather, its biggest competitor was piracy itself.

The Piracy Problem

Piracy exploded when Napster® was introduced in June of 1999, a website which allowed people to easily search and download music from a central server. In two years Napster® assisted the illegal download of over 80 million songs. Although Napster® shut in 2001, it opened up a wave of other services which used peer-to-peer (P2P) technology, which provided the ability for users to download music from one another rather than a central server. This included other players such as Gnutella, Freenet, FastTrack, and Soulseek. Some services and software, like AudioGalaxy, LimeWire, Scour, Kazaa / Grokster, Madster, and eDonkey2000, were also closed down or required to change their operation in order to avoid legal issues. Roxio acquired Napster’s assets and relaunched it as an online music store. Best Buy later acquired Napster and merged it with Rhapsody on December 1, 2011, rebranding it back as Napster®.

While the music industry experienced a steady growth during the 1990s, it was followed by a decline in compact disc sales in the early 2000s. While other factors contributed to the decline in sales, the industry primarily attributed it to physical and digital piracy. With the digitalisation of the music environment and the rise of file sharing activities, the industry shifted towards online music distribution, mostly illicit.

In 2010, Professor Darryl Woolley from the University of Idaho published in the Academy of Information and Management Sciences Journal an estimate of a $12.5 billion annual loss due to file sharing and music piracy, with $5 billion of that loss directly impacting the music industry’s profits. Consequently, the industry has been forced to reduce its workforce. Music piracy has become a significant problem, compelling the industry to adapt to change for survival.

The Open Music Model

As I mentioned earlier, in 2002, the Open Music Model was created based on research from Massachusetts Institute of Technology. It proposed that prerecorded music should be considered a service instead of a product. It asserted that the only viable digital distribution system against piracy is a subscription-based model that supports file sharing and is free of digital rights management. Research suggested a market clearing price of US$9 per month for unlimited use, but recommended $5 per month as the long-term optimal price.

Since its creation in 2002, a number of its principles have been adopted throughout the recording industry, and it has been cited as the basis for the business model of many music subscription services.

In summary, the open hole for Spotify® was quite simply, the space in the market that was the very antithesis of piracy which consumers were actually looking for, patterned after the Open Music Model.

This is precisely the purpose for which Spotify® was born.

Spotify®: The Anti-Piracy Brand

Spotify® was founded in 2006 in Stockholm, Sweden, by Daniel Ek, former CTO of Stardoll, and Martin Lorentzon, co-founder of Tradedoubler. Spotify® is a proprietary Swedish audio streaming and media services provider founded on 23 April 2006. Today, it is one of the largest music streaming service providers, with over 527 million monthly active users, including 210 million paying subscribers, as of March 2023.

Spotify® offers 100+ million songs and 5+ million podcasts with digital copyright restrictions from labels and media companies. It employs a freemium business model offering free features with ads and limited control and paid subscriptions for features like ad-free and offline listening. Search by artist, album, genre and create, edit, share playlists is available.

“Spotify was designed from the ground up to combat piracy. Founded in Sweden, the home of The Pirate Bay, we believed that if we could build a service which was better than piracy, then we could convince people to stop illegal file-sharing, and start consuming music legally again.”

Spotify

Spotify®’s growth has been remarkable since its launch, with both active users and premium members increasing significantly. Statista reported that as of the third quarter of 2022, Spotify hosts 195 million premium users, which is a staggering 930% increase from 2015.

Growth Fueled by Innovation

Whilst its original mission of fighting piracy was undoubtedly a key reason for its massive growth, the Spotify®’s commitment to relentless innovation from its inception was critical in enabling the brand to sustain itself in the ensuing years after its launch in 2006.

In the third module of The Brand Architecture, I emphasize to my students that the key to sustaining the success of a brand for the long haul is relentless innovation while having a laser-focus on building upon the brand’s battlecry after it is launched.

A key factor that differentiated the brand from the outset was its robust user account customization options. Spotify® has allowed users to create playlists and build personalized music libraries since day one, making it a core feature of their platform.

But it didn’t stop there.

The brand continued with innovation upon innovation through the years, all focused on its battlecry which is ‘Music for Everyone‘.

While Spotify has a host of various innovations, I’d like to feature two notable ones in this blog, namely ‘Discover Weekly‘ and ‘Wrapped‘.

Innovation: Discover Weekly

Originally launched in 2012 as ‘Discover,’ this feature was designed to create a playlist of a user’s favorite artists using data from their listening habits and preferences.

Over time, it evolved to suggest more songs of a similar genre after a playlist was completed, simplifying music discovery for users. Today, this feature has evolved into ‘Discover Weekly‘, which provides a weekly personalized playlist aligned with a user’s preferences featuring only new, previously unheard songs.

Innovation: Wrapped

Spotify’s Wrapped initiative began in 2015 as ‘Your Year in Music‘, allowing users to reflect on their top music and artists via a playful slideshow accompanied by specific listening statistics.

Each year, early December, subscribers receive a personalized report based on their past year’s music preferences. The concept saw a major upgrade two years later, incorporating customizable graphics and gaining popularity. Wrapped, an exemplary data implementation, offers categories such as top 5 artists and time spent listening, as well as personalized fun facts. It is the epitome of hyper-personalization, presenting each user as the protagonist. The report is immediately shareable, further fueling its trend-creating power.

Reducing Piracy & Empowering Rights Holders & Artists

There is clear evidence that Spotify has successfully reversed the growth of piracy and have instead attracted millions of listeners to its platform instead.

According to RouteNote Blog in 2020: “A study last year by anti-piracy firm Muso found that in recent years, music piracy has seen a huge decline in the EU. They found that between 2017 and 2018 visits to music piracy sites had fallen by a whopping 59.4%. Helped as well by recent efforts within the EU to block access to piracy sites and criminalise piracy. We also shared an infographic at the time, which showed the huge parity in streaming’s rise and piracy’s decline in Norway across the best part of a decade.”

And of course, because of this, the music rights holders and artists themselves began to benefit commercially. At the height of piracy of online music, the biggest losers were these very stakeholders since they received zero revenue for the music consumed that they own.

Contrast this to the nearly US$40billion that Spotify® has paid out to these stakeholders from its inception. Spotify®’s continuous payment of increasing streaming royalties annually has not only led to record revenues but also remarkable growth for rights holders such as record labels, publishers, independent distributors, performance rights organizations, and collecting societies on behalf of artists and songwriters.

“In 2022, for the very first time, 10,100 artists generated at least $100,000 on Spotify alone. That’s up from 4,300 artists five years ago.

What’s more, these artists hail from more than 100 different countries around the world. Streaming has lowered barriers to entry. Artists who—in the past—might have struggled for opportunities are now finding their audiences. 

Loud & Clear Website

Clearly, the brand is fulfilling its ‘purpose beyond profit‘.

There are two key lessons to learn from this brilliant brand:

First, a clear-eyed view of the market based on customer and competitive analysis provides the best way for a brand to properly position itself. However, in some cases, like with Spotify, the open hole could be the antithesis of status quo itself, but still with an in-depth understanding of the key drivers of customer preference and competitive forces.

Second, there is no substitute for constant, relevant and focused innovation in order for a brand to barrel on in the market against all odds. All successful brands that have defied severe headwinds in the past have executed such innovations through the decades and can be expected to continue with such creative vigor in the years and decades to come.

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