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Apr 14

Battle of the Bands: Who will win in the Digital Music world?

By Mike Klein

April 7, 2016

With summer approaching and an increasing amount of talk about music festivals, I began to wonder what the future of music looks like. CDs are ancient history. Vinyl is making a comeback. Coachella charges $400 for a weekend pass, while Spotify is essentially free. So, how will people “consume” music in the future, and who will come out on top?

Live music is clearly in a league of its own – it is just as much about the experience as it is about the music itself. As royalties that artists receive from services like Spotify remain low, they are dependent on performing live concerts.

Nevertheless, the strong demand for streaming music makes it a sizeable market, even if artists like Adele and Taylor Swift try to boycott. Companies like Apple and Spotify know this, and it is a constant battle for who will become the biggest music provider.

Before looking at Spotify vs. Apple, it is important to understand how Spotify made it to this point (I don’t think anyone will question Apple’s reasons for getting this far).  After all, there have been plenty of other players, including Pandora, Rdio, Rhapsody, and more.

Why did Rdio fail?

In 2013, CNNMoney called Rdio the Best in Tech for the music streaming industry. Yet, on November 16, 2015, Rdio filed for Chapter 11 bankruptcy, and Pandora bought Rdio’s remaining assets and intellectual property for just $75 million. The Rdio service was officially discontinued only a month later.

What put Rdio on the map was its ability to differentiate itself from competitors with more user control over what they could listen to. As opposed to other options such as Pandora, which provides a randomly-generated playlist based on recommendations, Rdio provided 100% unlimited access to their music database.

Rdio introduced several innovations that allowed user a unique and more enjoyable experience. For example, Rdio provided users a method of building their own library of songs, allowing them to cycle through all of their saved albums and playlists. Even further, the albums were presented in a visual way that made sorting through your collection easier than on other services.

Another one of Rdio’s most important innovations was the social aspect of the online music community. The platform allowed users to follow friends, strangers, musicians, labels, radio stations, etc., and even see what other people were streaming in real time. Furthermore, Rdio provided Pandora-like recommendations based on your own preferences as well as the preferences of those you followed.

In addition to better functionality, Rdio’s design was cleaner and more user-friendly than other services. The app, whether on desktop, mobile, or web, was arguably a much more intuitive user experience, and Rdio prided itself on its simplicity and elegance.

A side-by-side comparison between Rdio and Spotify might indicate that Rdio was a superior service. Why then did Spotify put Rdio out of business?

Enter: Spotify

Spotify’s best form of marketing was its reputation as being “the free iTunes” (foreshadowing for the battle to come?). It is believed that this is what ultimately won the game for Spotify. Unlike Rdio, which required a paid subscription, Spotify offered free on-demand streaming supported by advertising. First of all, this was attractive to potential new customers given that music streaming was still a new market, since people could try out the services without paying $10 a month.

Spotify was known for various promotional tactics to drive trial and ultimately convert users into paid subscribers. By offering a highly discounted three-month trial, users were given a risk-free chance to experience the value of Spotify. Other promotions have included a free Chromecast with a paid three-month subscription.

In contrast to Rdio’s almost non-existent marketing efforts, Spotify has invested heavily in building its customer base. While Rdio was concerned with being profitable too early in their efforts, Spotify raised more than $1 billion in order to generate more users, which would ultimately lead to a sustainable business. Currently, Spotify has a valuation of over $8 billion, with almost 30 million paid subscribers and 75 million active listeners, and still isn’t profitable. At some point, Spotify will have to turn a profit; but until then it will continue to focus on spending money to maintain market share as competitors like Apple Music present considerable threats.

Apple the Behemoth

In just its first six months of existence, Apple Music gained 10 million users, a milestone that took Spotify six years to reach. Spotify clearly demonstrated that a solid customer base is key to success in the music streaming industry, and who is in a better position to take advantage of its loyal customers than Apple?

Simply geographically speaking, Apple Music is available in more than 100 countries, while Spotify took three years to even enter the US. Apple Music is also baked into its entire line of devices, from iPhones to iPads to Macs, giving it a major advantage over other apps that need to be downloaded and paid for separately.

The good news for Spotify is that Apple Music appears to have a few bugs yet to be sorted out, ranging from syncing to music playback, while Spotify is and will continue to be a more refined product.

However, Spotify is still shaking in its shoes. On March 29, 2016, Spotify raised $1 billion in debt, with aggressive deal terms that could cost it a lot of money. Using the spend-first approach on growth and marketing that helped it overtake Rdio, Spotify is doing whatever it takes to sign up customers first before they become Apple Music subscribers.

Can Spotify take on Apple? Will this latest round of debt backfire? Will Spotify acquire SoundCloud? When will Spotify finally IPO? All of these question marks will make the digital music streaming battle an interesting one to watch.

About The Author

The InSITE Fellowship is a highly competitive leadership development program comprised of exceptional graduate students at top universities. InSITE Fellows and alumni make up a global network of entrepreneurs and leaders in technology and venture capital.

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