Spotify – Data Differentiation.

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Music is now incidental to Spotify.

• Spotify is moving beyond the simple delivery of streaming music in order to keep ahead of its competition.
• It has added Seed Scientific to its portfolio of data analysis assets that already includes The Echo Nest that Spotify acquired in 2014.
• Both of these companies have offered data analytics services to Beats (now Apple Music) but now will be exclusive to Spotify.
• This makes it very clear that Spotify means to compete against Apple Music using its significantly more advanced user experience backed up by the huge amount of user data and the algorithms to meaningfully enhance that user experience.
• There is little doubt that Apple Music represents the biggest threat that Spotify has faced in recent years.
• Google, Microsoft and several others have all tried to gain traction in this space and have spent vast sums doing so, but its Apple’s installed base that represents the real threat.
• From the 30^th June 2015, Apple Music will be available to all iOS users who update their devices to the latest version.
• I expect that at least 33% of the user base will update their devices within 2 days meaning that by July 2^nd 2015, there will be at least 110m users who can start their trial with the push of a button.
• Apple purchased Beats for its streaming technology, its leading position in premium headphones but also for its curation of music for its listeners.
• Furthermore, its three month free trial is significantly longer than Spotify’s representing enough time for a user to upload or create playlists and to become hooked on the service.
• I am hopeful that Spotify will increase its free trial period with a special promotion and up its marketing spend to navigate this tricky period.
• In the long-term, Spotify has the advantage as I believe that music streaming is becoming a commodity with the real differentiation moving to features and services that are offered on top of the music.
• Good data analytics allows for better suggestions, more automated curation and the ability to understand what individual users are going to like.
• There are also many other possibilities such as being able to reach significant numbers of users to new acts get discovered.
• This combined with good innovations in the user experience such as track preview and Spotify Running keeps it significantly ahead of Apple Music.
• Furthermore, its user base is closing in on 100m, giving it a significant first mover advantage.
• The sheer might of Apple makes it a formidable competitor and I suspect that the end result will be Apple and Spotify carving up the market between them.
• I think that from a pure user experience perspective, Spotify is head and shoulders better than Apple but Apple has very deep pockets and can easily outspend Spotify when it comes to marketing.
• I can’t see existing users switching to Apple Music but subscriber additions may slow down as a result of this new competitor.
• RFM predicts that there will 2.8bn smartphone and tablet users by the end of 2016E meaning that there is plenty of space for both of these offerings to co-exist, leading me not to worry too much about the outlook for Spotify.
• I would be more concerned with the outlook for Pandora, Rdio and Sirius XM where the value that they offer to users for far less obvious.