‘How digital distributors deliver unique value and manage
ever-changing customer preferences in the digitized music industry:
exploring the disparity between YouTube (Music) and Spotify’
Supervisor | Michele Piazzai Student | Liz Engelberts Student nr. | 11228768
Date | 25-06-2019
Statement of Originality
This thesis is written by student Liz Engelberts who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Abstract
The digital distribution of music has grown immensely over the past two decades. Spotify has worn the crown as a market leader for several years now, but YouTube Music is lurking in the back. As YouTube Music has been set up in 2015 and hosts a similar service as Spotify, the two are competing with each other in numerous ways. This paper researches these two companies and gives theoretical insights on their competition on the basis of an extensive literature review. First, a historical review will be provided based on the conceptual model. To investigate which company will outrun the other one, it must be determined how Spotify or YouTube Music can obtain a competitive advantage. The two platforms are tested upon their characteristics, their features and their adaptation to predicted trends in the music industry. Currently, Spotify stays on top of the hill, having more experience and knowledge as a digital music streaming service with a freemium model.
Table of contents
Introduction……….5 Literature Review……...……….7 Conceptual Model……...………8 Research Design………12 Results………...14Discussion & Conclusion ..……….………..22
Interpretations……...………22 Implications……...………23 Limitations……...………...23 Recommendations……...………..24 Conclusion……...………..25 References………...………..26
Introduction
Spotify and YouTube belong to the most popular and best known online platforms in the world for listening to music, as they are the world leaders in digital music distribution. Since YouTube started with their music streaming subscriber service ‘YouTube Music’ in 2015, it became a direct competitor of Spotify. Spotify and YouTube Music are examples of digital distributors, which both work with a ‘freemium’ model. This means the service can be used for free, but with some restrictions and advertisements, while customers can also pay for a premium version where these restrictions and advertisements are eliminated (Waelbroeck, 2013).
Initially, when Spotify was founded in 2006, it did not focus on digital content, but aimed to develop a more general platform to distribute media, based on peer-to-peer technology (Vonderau, 2019). Whereas in 2013 only 15% of Spotify’s users was paying for its services (Swanson, 2013), at the end of 2018 more than 45% of Spotify’s users was paying for the premium version (Wang, 2018). On the other hand, the Google-owned platform YouTube Music started in 2015 and in the first half year of its existence it grew 60% harder than all other music streaming services combined (Apple Music, Spotify, TIDAL, Xbox Music, etc.) (Resnikoff, 2015). As a consequence, Wagoner (2018) discusses in her article that the biggest name in streaming video (YouTube) can take over the biggest name in streaming music (Spotify).
YouTube and Spotify differed a lot from each other when they started out, which is why I want to present a historical overview of the paths that these companies followed, including their policies on e.g. the discoverability for new artists.
Problem definition
Currently, Spotify is streaming videos alongside their songs, while YouTube participated in the ‘servicification’ phenomenon by adding a paid subscription service (YouTube Music) for streaming music (offline) without advertisements. Now that their services are beginning to look more and more alike, how do they try to outcompete each other?
According to Mercer-Blackman & Ablaza (2018), ‘the music industry was reclassified from
producing goods to producing services’, which is why it is interesting to analyse the
competitiveness and the additional value of YouTube and Spotify, which changed drastically in the past decade(s). Why do customers choose one service over the other?
As radio stations tried to outcompete each other in the 90s, digital distributors of music are outcompeting each other right now: system versus system. According to Sanchez (2018), 35% of people who do not pay for streaming music services claim YouTube is the reason. But how can YouTube convince its users to pay for the premium version?
The three sub-questions stated above evolve from the research question: ‘How do digital distributors deliver unique value and manage ever-changing customer preferences in the digitized music industry?’ Regarding this research question, the focus will mainly lie on the two platforms discussed in this paragraph: Spotify and YouTube.
In order to answer the research question, a literature review will be conducted. Several insights, figures and perceptions will be obtained from existing literature, published interviews, case studies, press releases and contemporary news. This will make up for an extensive collection of intelligence in music streaming services and will be analysed and compared in the Literature Review, which will lay down a conceptual framework and theoretical concepts that help to understand the research question. Besides, it gives insights in who tried to answer a similar research question before. Then, the methodology used for this research will be explained in the Research Design. Next, the Results section will present the outcomes of the online research. Lastly, the discussion will be constructed on the insights of this paper and will answer the research question and sub-questions, after which the conclusion will be assembled.
Literature Review
There are numerous articles, press releases, interviews, historical accounts and case studies on the topic of digital distributors in streaming music. In order to provide an overview of the relevant theoretical and empirical literature, a literature review is composed.
The extent to which the research builds on previous research of others is relatively small, as the comparison between YouTube and Spotify has not been researched a lot yet in the academic literature. According to Liikkanen (2014), despite the popularity of streaming music, ‘it has received surprisingly little attention in human-computer interaction studies’, which is why he used public and proprietary data to reveal that there are high correlations between the popularity of YouTube and Spotify. Liikkanen (2014) is one of the few researchers who compared Spotify to YouTube in his research, which he did by looking for similarities in the most popular content and the temporal patterns in accessing music in Finland. I can connect my research to existing literature, as Liikkanen (2014) calls for further qualitative research and Swanson (2013) distinguishes the basis for a historical overview of the digitization of music. Besides, there is a lot of information about the case study on Spotify and YouTube Music in the so-called grey literature, which will be elaborated on in the Research Design.
Being able to listen to music can be characterized as a service (Kok, 2016). However, there is no acquisition of property rights involved, so people actually rent the music (Doerr, et al., 2010). YouTube Music and Spotify are both platforms which provide the service of listening to music, while they make deals with record companies and pay a fee per stream (Kok, 2016). In order to be a sustainable platform, a decent foundation has to be in place. When the use of mobile devices grew in the past decades, the way of listening to music was influenced greatly, as vinyl records made way for CDs and CDs were overrun by MP3 files. Since this change, streaming services gave a new dimension to the materiality of music (Kok, 2016).
This new dimension is characterized by not having to buy property rights to listen to music. Spotify is a multi-sided market, where different stakeholders are concentrated (Kok, 2016). Content providers, developers, advertisers and users are brought together, which creates value for all of them, as music is shared among big audiences. According to Jones (2002), the internet and new media technologies have expanded the contexts and places of popular music, which has consequences for the customers of the digital music industry: ‘’network technologies used for music distribution are technologies of audiences and of geography’’.
This covers a part of one of the macro trends, as Carnihan & Baqués (2018) laid down ‘5 Global Music Trends for 2019’: technology will play a big part in it, expanding contexts and places and disrupting the music industry with Blockchain technology, artificial intelligence and virtual reality. The other trends are: more direct-to-fan communication and interactivity with audiences, regional artists gaining success in different areas, booming live music attendance, and giving back to society. Companies that can adjust best to these macro trends are the companies that can outperform other ones. Either Spotify or YouTube will surpass the other platforms and gain a competitive advantage in the upcoming years, depending on what their strategies are. This is going to be evaluated in the results section, where the research question will be answered.
Conceptual model
The conceptual model presented below in Fig. 1.0 will form the foundation for my research. It adheres to the research question ‘How do digital distributors deliver unique value and how are they trying to outcompete each other?’ and will be built on academic and grey literature (see Research Design).
The first section is an historical overview of both Spotify and YouTube. This is the path that these companies took in order to grow into the world’s biggest digital distributors of music and how they can deliver unique value. This concept
encompasses facets like the companies’ characteristics and features, as the accessibility and brand power differ between Spotify and YouTube. Furthermore, it will include important macro trends in the music industry, which could be associated with the growth of either (or both) YouTube or Spotify and will be elaborated on in the Results section.
Spotify started out in 2006 in Sweden, by offering a digital music streaming service as a technological solution for the piracy problem record labels suffered from (Fleischer & Snickars, 2017). According to Porter (2019), this piracy problem caused the global music revenues to decline by 40% from 23.8 billion dollars in 1999 to 14.3 billion dollars in 2014. After Spotify provided ‘the inflection point’ in the music industry, global music revenues reached the highest annual growth rate in 20 years in 2016 (Porter, 2019). Spotify uses the previously mentioned freemium model, which created an incentive to scale up and attract
music listeners worldwide. Currently, Spotify is available in 60 countries and it is transforming into a global media company, whereas Spotify only began as a Swedish technology company (Fleischer & Snickars, 2017). Now, Spotify has over 100 million paying users worldwide and tailors its services to local tastes. However, according to Sanchez (2017), Apple Music is in 59 countries that Spotify is not, which makes Apple Music Spotify’s current biggest competitor (although only having 56 million paying subscribers and not having a freemium model) (Statista, 2018).
YouTube Music is an extension of YouTube, which is owned by Google, and launched in 2015. As YouTube is the global leading internet video service, YouTube Music shows a great potential for growing fast (Liikkanen & Salovaara, 2015). According to Verhagen (2018), the International Federation of the Phonographic Industry (IFPI) noted that YouTube is the most important and most popular channel to listen to music, as YouTube is accountable for twice as much consumed music streaming as all the other streaming services combined. YouTube is owned by Google, so via the path of YouTube Music Google is going to compete with Spotify and Apple Music (Verhagen, 2018). Likewise, it is relatively remarkable that YouTube Music looks a lot like Spotify, by having a similar design. Both platforms offer tailored playlists, radio stations and millions of songs, however, YouTube Music beats Spotify in the number of songs, as it also offers covers, mashups, live performances, remixes and songs of new, undiscovered artists. YouTube Music is trying to distinguish itself by adding videos to its music and by having a more developed search engine, as it is possible to look for a ‘hipster song with a whistle’ (Verhagen, 2018).
The need for an intermediary within the music industry grew in the past two decades and it will be interesting to see what services, such as YouTube and Spotify, did to tailor their supply to shifting customer demands. For example, they both implemented automated suggestions within their systems that influence decision-making processes (Airoldi, et al., 2016). However, YouTube offers professionally-generated content along with user-generated content, while on Spotify only distributors and record labels deliver content. This has an effect on the discoverability of new artists and the accessibility of the two platforms, as it is harder to publish a new song, made by an unknown artist, on Spotify than on YouTube Music. Furthermore, Spotify only holds forty million tracks, while YouTube Music tops this with a more extensive inventory. YouTube Music did not publish a number for their amount of music, but it will surely surpass Spotify’s number. Joining YouTube is easier as a new artist than joining Spotify, so YouTube Music also houses non-label tracks (Agarwal, 2019). Artists
on Spotify are, however, more exclusive.
Additionally, small artists are not able to earn a lot of money via Spotify. According to the Guardian, the top 10% of artists dominate 99% of the streams (Beaumont-Thomas & Snapes, 2018). Spotify pays about $0.006-$0.0084 per stream to the holder of music rights, which has to be split among the songwriters, producers, artists and the record label (Seghal, 2018). Another calculation, made by Castillo (2015), is that for one million views, there is 7000 Euros to be earned. For YouTube, this is more controversial, as YouTube says it pays three dollars for one thousand views, but in reality this number seems to be much lower and there is no real transparency on this subject (Resnikoff, 2017). However, this could be a consequence of living in another country than the United States, as in developing countries the payout will be much lower. According to the IFPI, artists and labels annually earn 20 dollars per Spotify user and only 1 dollar per YouTube user (Verhagen, 2018).
At the same time, YouTube tries to be transparent about this. According to Resnikoff (2017), Lyor Cohen, YouTube’s Head of Music, said:
‘’Artists and songwriters need to truly understand what they’re making on different
platforms. It’s not enough for YouTube to say that it’s paid over $1 billion to the industry from ads. We (the labels, publishers and YouTube) must shine a light on artist royalties, show them how much they make from ads compared to subscriptions by geography and see how high their revenue is in the U.S. and compared to other services.’’
According to Waelbroeck (2013), free online services in digital music monetize their audiences rather than the content. Because P2P (Peer to Peer) & B2C (Business to Consumer) platforms like Spotify and YouTube Music are based on advertisements, they are constrained by competing formats. This is why they can offer music for a low price and use the advertisements to generate money. However, the concentration of digital distribution is in the hands of only a couple of large retailers due to economies of scale. Small services cannot compete with Spotify. Since YouTube Music came into being, Spotify gained a new realistic competitor, because of their brand awareness and their history (Wagoner, 2018).
Moving on to the concept of servicification, it is important to understand the value of services before evaluating servicification in the music industry. Services make up for 70% of the world’s GDP (Lanz & Maurer, 2015). The process of becoming increasingly more dependent
on services is called servicification (Lodefalk, 2013). For example, in the manufacturing industry, where companies want to be the quickest with reacting to shifting customer preferences, mass customisation can be of great value. According to Sundin, et al. (2009), mass customisation can be achieved by adding more services to the customised products. Lodefalk (2015) even thinks servicification provides the solution for the loss of jobs due to outsourcing of manufacturing industries to developing countries, as an increase in the produce, use and sales of services can generate jobs. Likewise, servicification has also proven its value in the digital music industry, as platforms like Spotify provide the service of listening to music for a certain monthly payment.
The concept of servicification has been researched thoroughly in previous research, but has not often been related to specifically the music industry. Some articles (Mercer-Blackman & Ablaza, 2018; Nagata, et al., 2012) mention the music industry in their analysis of servicification, but they are mainly focussed on the manufacturing industry as a whole. However, according to Lodefalk (2015), servicification received limited attention, regarding its role in the manufacturing industry for foreign trade and policymaking. Servicification is an important aspect in the music industry, as the industry has been digitized completely in the first decade of this century (relating to the history of the music industry) and people are now buying online subscriptions instead of ownership of particular records. The companies that adapted to this transformation are the only ones still standing, most of them making use of a service model. Therefore, this concept of servicification will lead to customers choosing between different services.
In order to answer the research question, the choice of customers for a particular service will be analysed and predicted: YouTube or Spotify? Can YouTube take over Spotify or is Spotify going to continue to outcompete YouTube in streaming music worldwide? Shifting customer preferences will most likely have some kind of influence on this as well, as people consciously make a choice for which service they want to use to listen to music. This concept will also lead to perspectives for the future of the music industry, which could in turn predict macro trends and give arguments for which service could outperform others. According to Waelbroeck (2013), the data obtained by the large retailers in the music streaming industry will be of great value in predicting demand for the future. This could be the source of a competitive advantage for platforms like Spotify and YouTube Music.
Research Design
Since the main focus of this thesis is on digital distribution in the music streaming industry and on the competitiveness between and the stakeholders regarding YouTube Music and Spotify, I will base my analysis largely on the networks and organizations around YouTube Music and Spotify and on the ongoing trends and features of the (digital) music industry. The Literature Review explained the most important concepts within this research and gave background information about the histories behind YouTube and Spotify. The conceptual model shows the most crucial relationships, which will be analysed in the Results section. Together with the sub-questions mentioned in the Introduction, the research question: ‘How do digital distributors deliver unique value and manage ever-changing customer preferences in the digitized music industry?’ will be answered.
In order to answer the research question, qualitative data will be analysed and compared. The case study in this research consists of two market leaders in streaming music and streaming videos: Spotify and YouTube. This represents why a case study is suitable to answer the research question, as Spotify and YouTube resemble one of the few big digital distributors of music. In order to analyse the competitiveness and the race for a monopoly, it will be interesting to investigate what recent articles and news releases have to say about the two platforms.
In contrast to the academic peer-reviewed literature, I will also make use of so-called grey literature. Grey literature is published research outside the traditional academic publishing channels. I will mainly make use of descriptive design, trying to describe the current status of digital distributors in the music industry. Via this way, my data collection is observational in nature, where I will analyse articles, published interviews, historical accounts, press releases, published UvA theses and contemporary news that relates to digital distributors, and in particular to Spotify and YouTube. As mentioned before, academic literature on the disparity between digital distributors in the music industry is hard to find, which is why I will research a lot of grey literature as well (e.g.: Carnihan & Baqués, 2018; Resnikoff, 2015; Sanchez, 2018; Wang, 2018; Wagoner, 2018), as there is much more up-to-date knowledge on digital distributors and music industry trends. Of course, grey literature is less reliable than published, peer-reviewed journals, which means I have to be careful and always keep in mind that it is not an academic paper. Websites like www.digitalmusicnews.com,
YouTube (Music), which is why I will thoroughly analyse them and compare figures and texts. As this information will form the basis for my research, I will analyse as much websites, news articles, press releases and literature as possible to get a complete view of the market of streaming music. When comparing texts and figures, it is also important to bear in mind that e.g. the number of users of Spotify changes continuously, so there will be a lot of different explanations and illustrations. In order to solve this problem, I look for papers and articles from the same time period, for example from Quarter 1 and Quarter 2 from 2019, so those can be compared.
As mentioned before, the extent to which the research builds on previous academic research of others is relatively small. Therefore, the use of public and proprietary data is unavoidable and necessary. In order to find this data, I will use search engines like Google and Google Scholar and apply keywords like ‘YouTube Music’, ‘Spotify’, ‘Discoverability’, ‘Digital Distributors in the Music Industry’, ‘Servicification’, ‘Subscriptions’, ‘Vertical integration’, ‘Freemium model’, ‘Platforms’, ‘Royalty rate’, ‘Advertisements’ and ‘Brand awareness’. When analysing sources, it is important to contrast and compare them with each other, as there might be contradictory or affirmative findings.
Results
This section will answer the research question by laying out a case study on Spotify and YouTube. There are several sources which compare and contrast Spotify and YouTube Music, stating which one could become the market leader. Agarwal (2019) thinks that although YouTube Music has the potential to dethrone Spotify as the biggest company in digital music streaming, that is not going to happen in the near future due to the underdevelopment of YouTube Music. However, Wagoner (2018) states that YouTube Music is already the big winner, because of the worldwide brand awareness and worldwide usage of YouTube. YouTube has started to ride along the freemium train, as they provide a service since 2015 which blocks ads and lets you listen to music unconditionally and without having to keep your screen unlocked. Wagoner (2018) illustrates: ‘You already use YouTube for
music. Now Google just needs to convince you to pay for it.’ YouTube’s brand awareness is
also visible in the Netherlands, as 86% of the respondents between 15 and 19 years old uses Youtube (Fig. 1.1).
Fig. 1.1 Share of respondents using YouTube per age group in the Netherlands. Retrieved from Statista on 27/05/2019 via https://www.statista.com/statistics/828838/youtube-penetration-rate-in-the-netherlands-by-age-group/
The contrasts and similarities between Spotify and YouTube Music are laid down below in Fig. 1.2, constructed by Reviews.com (2018) on music streaming services. As is shown, YouTube Music (also known as YouTube Premium) has an unlimited number of tracks and has unofficial content, which Spotify does not have. This could be a source of competitive advantage for them, especially with regards to the discoverability of new artists and the availability to songs of less popular artists. However, there are still some logistics and
infrastructure issues that have to be improved for YouTube Music, according to Agarwal (2019). Some examples: YouTube’s free service is less compelling than Spotify’s free service; the extra features, like reading lyrics, allowing crossfade between tracks and behind-the-scenes facts, in Spotify are further developed; Spotify houses podcasts; Spotify’s algorithms to search for songs that clients personally like are better developed; Spotify’s very practical design and Spotify’s enormous supply of playlists (Agarwal, 2019). These are the probable reasons for Spotify being the market leader according to Fig. 1.3.
Fig 1.2 Comparison chart between three big music streaming services according to
www.reviews.com (2018).
Spotify accounted for almost 64% of the total revenue of streaming music in the Netherlands in 2017, which rounds up to 108.6 million euros (Statista, 2019). However, worldwide Spotify has a share of 36% of music streaming subscribers in 2018, as shown in Fig. 1.3.
Fig. 1.3 Share of music streaming subscribers worldwide in the first half of 2018 (Statista, 2019, retrieved from: https://www.statista.com/statistics/653926/music-streaming-service-subscriber-share/)
Spotify is expecting a loss of 200-360 million euros in 2019 (Soderpalm & Swahnberg, 2019). Nevertheless, their sales are expected to grow with 21-29%, which is in line with their strategy, as Spotify prioritizes growth over profitability. Because of Spotify’s enormous losses, it is heavily dependent on injections of venture capital (Fleischer & Snickars, 2017). In order to attract investors, Spotify is always busy innovating and creating a buzz around their company. Its public relations strategy has led investors into funding Spotify, which Fleischer & Snickars divided into different rounds, starting with the first round of 20 million dollars to the round in 2017 of 1 billion dollars. These investments supported Spotify’s international expansion and the development of the streaming platform. Because of these monetary injections, Spotify is able to make a loss, but still grow extremely hard, which is how they see their road to a monopoly in the digital music streaming market (Fleischer & Snickars, 2017). Since April this year, Spotify has more than 100 million paid subscribers and is the first and only music streaming platform with this number of subscribers (Porter, 2019). The closest competitor is currently Apple Music, with around 50 million paid subscribers.
The streaming business model is not profitable (Seghal, 2018). Spotify is making a loss every year, despite their growth rate of nearly 35% per year (Seghal, 2018; Porter, 2019). Currently, record labels can gain up to 70% of the royalties which are paid out. In order to get profitable and give artists a fairer wage, Spotify and YouTube Music should become record labels themselves, according to Seghal (2018). This is the way Netflix works as well, as Netflix Originals came into existence in 2013. In order to gain a competitive advantage, Spotify and YouTube Music should consider to ‘cut out the middleman’ and get rid of record labels. To some extent Spotify already did this, as artists can go to companies that handle their music distribution on Spotify or artists can try themselves to handle the entire recording process. At the same time this is a problem, as Spotify has valuable agreements with the biggest three record labels, Sony, Warner and Universal, and these record labels are also shareholders in Spotify (Verhagen, 2018). 87% of Spotify’s songs are licensed by Warner Music Group, Sony Music Group, Universal Music Group and Merlin (Porter, 2019). This means that Spotify is mainly doing business with the record labels and not with publishers or with artists themselves, which gives record labels the largest cut of money. According to Verhagen (2018), complicated music legislation forms a barrier for new artists, which results in less
innovation and less money earned by smaller artists.
According to Kopf (2019), labels gain up to 75% of Spotify’s revenue, which is why he also thinks Spotify should produce its own content. In 2017, Spotify did not really have own content, except for a few videos with artist interviews and lyrics pop-ups (Fleischer & Snickars, 2017). In 2018, Spotify started to explore the podcast branch, as Spotify’s founder Daniel Ek thinks 20% of the content people listen to will be non-music. In 2018-2019 Spotify spent over 300 million dollars on three podcast firms: Parcast, Gimlet and Anchor (Jolly & Sweney, 2019). This will help Spotify in moving away from low-margins deals with record labels.
When finding out which streaming service will be the market leader, it is important to keep the entire music industry in mind. According to Verhagen (2018) and Gijssel (2018), the music industry is currently doing very well, partly by the success of streaming services like Spotify (Fig. 1.4). The decrease in the music market around 2000 is caused by illegal downloading and piracy, after which the music industry needed new business models. These new business model established themselves in platforms such as Apple Music and Spotify. According to the British Phonographic Industry, revenues for digital streaming platforms have increased with over 40% in 2017, which means record companies and artists get significantly increasing earnings (Gijssel, 2018). Music streaming services produced more than half of the income of record labels in the United Kingdom in 2018, which shows their importance (Jolly & Sweney, 2019). Although artists could be more easily satisfied with the pay they earn from Spotify, this is not the case for YouTube and YouTube Music, as they pay far less. Therefore, the Dutch director of the Association for Music Authors Erwin Angad-Gaur pleads for a fairer division of the payouts, as artists get a very small share (Verhagen, 2018).
Fig 1.4 The music market is recovering due to music streaming services. Revenue in the music industry in the United States in billion dollars. Retrieved on 16/06/2019 via
https://www.volkskrant.nl/cultuur-media/het-klopt-dat-artiesten-weinig-verdienen-aan-onlinemuziek-al-zijn-streamingdiensten-niet-de-grootste-boosdoener~b7e35a50/
Currently, YouTube Music has not published public figures about their subscribers or number of users, but below in Fig. 1.5 it is shown what the total number of downloads of the YouTube Music App is in the Netherlands. Spotify has over 100 million paying users, which makes it the fourth largest platform for digital music distribution, behind YouTube (1.5 billion users), the Chinese NetEase (400 million users) and Soundcloud (175 million users) (McIntyre, 2018). However, these users are not paying for their service, so these platforms are somewhat different, as Spotify has 217 million users in total (Porter, 2019).
from Statista on 27/05/2019 via https://www.statista.com/statistics/1000085/monthly-youtube-music-app-downloads-in-the-netherlands/
So which streaming service delivers the most unique value and manages ever-changing customer preferences the best? Spotify has more official songs, whereas YouTube Music has more music available (Wagoner, 2018). According to Reviews.com (2018), Spotify is the best platform for new music discovery, whereas YouTube Music is the best for original content. Spotify will win this battle at this very moment, but when YouTube Music is developed further it could possibly dethrone Spotify, due to their extensive brand awareness and 1.5 billion YouTube users (Wagoner, 2018). Despite this number, Turner (2018) says YouTube Music does not stand a chance in beating Spotify in the global music streaming market, because the app looks too much like Spotify and there are no innovations or new ideas applied. This means YouTube Music does not offer anything new or advanced, which would make the service superfluous and non-sustainable. However, Spotify its users are not evenly dispersed over the world, as 40% of its subscribers are in Europe, 30% of its subscribers are North Americans, 20% of its subscribers are based in Latin America and only 10% is spread among the rest of the world (Iqpal, 2019). This could be of great importance for YouTube Music, as YouTube already has 1.5 billion users worldwide and YouTube Music could try to become the market leader in the African and Asian music streaming markets.
This forms the answer to the research question, as Spotify is currently more developed and advanced than YouTube Music, and thus adds more value. Companies that adjust best to the macro trends in the music industry can outperform other companies. In Table 1.1, the macro trends are displayed which were described in the literature review by Carnihan & Baqués (2018), supplemented with trends applicable for the digital music industry by Porter (2019), Owinski (2018) and Frometa (2019). Trends which conform with each other are placed in the same row. Based on these trends and the historical review, a winner of being the best digital music streaming service can be determined: Spotify.
In order to substantiate the title-holder of best music streaming service, Porter’s (2019) three winning strategies will be discussed. The first strategy is ‘Harness social platforms to
increase distribution and drive networks’, which is illustrated by Fig. 1.6. The sharing and
discovery of smaller artists is driven by Spotify’s playlists and ‘Spotify created a viral loop
that increased the value of the market and network with each new user’ (Porter, 2019).
with social media, like with Facebook in 2011 (Fig. 1.6).
Fig. 1.6 The growth timeline of Spotify by Porter (2019).
The second strategy is to disrupt existing models with new and innovative ones which align better with customer preferences (Porter, 2019). Spotify apparently does a good job at this, while it has the highest Net Promoter Score among streaming services (Porter, 2019). Customer engagement and new music discovery are supported by Spotify’s data driven personalization, benefiting not solely the creators of music, but also the consumers and creating a two-sided marketplace (Porter, 2019).
The third winning strategy is about introducing new paradigms in large markets (Porter, 2019). When the music market declined only further and further, Spotify came at exactly the right timing, as piracy became a big problem for record labels and artists. Consequently, Spotify was embraced by the record labels, as there was finally a new way to earn money. In short, the experience Spotify has in digital music distribution, together with its highly personalized nature and its advanced access-based model, makes the platform the best one for streaming music. Concluding from Table 1.1, Spotify is also predicted to being the best fit for trends that are expected in the future. In 2019, Spotify’s revenue represents 30% of the global music market and 42% of the streaming market (Porter, 2019). This will probably increase further in the future, if Spotify keeps on innovating and attracting investors.
Trends according to Carnihan & Baqués (2018) Trends according to Porter (2019) Trends according to Owsinski (2018) Trends according to Frometa (2019) Winner Technology: Blockchain, artificial intelligence and virtual reality Data-driven personalization and increasing engagement
The charts mean less and less
Technology will keep improving
Spotify, as it has more experience in distributing digital music as a paid service and has better technological features (Agarwal, 2019). YouTube Music obtains more data via Google, but they have not used this yet to create a competitive advantage. Direct-to-fan communication and interactivity with audiences - - Chatbots and social media messaging
Tie; YouTube Music provides videos and a more extensive library including e.g. non-label tracks and remixes. However, Spotify is eager to make deals with social media channels, like they did with Facebook. Regional artists
gaining success in different areas
- Major labels lose
their Mojo
Merging musical styles and regional artists
Tie; it is easier to access YouTube Music as a new artist, but Spotify is more exclusive, which makes it easier to stand out in different areas (e.g. Dutch artist Pip Blom gained popularity in England through Spotify) (Verhagen, 2018).
Booming live music attendance
- Live music legards
are replaced by new faces: the live music industry continues to grow
- YouTube Music, as YouTube Music enables you to
watch live music performances.
Giving back to society - - The music industry will give back more
Spotify: the highest payout rate (Seghal, 2018). If artists earn more, they can give back more.
- On-demand access
rather than ownership
- - Spotify, as they both offer on-demand access rather than
ownership, but Spotify’s algorithms, technology and designs beat Youtube Music’s features.
- Content unbundling:
unbundling albums into songs into playlists
- - Spotify, as their personalised playlists are ahead of
YouTube Music’s playlists. E.g. Spotify’s Discover Weekly playlist or Spotify’s Daily Mix.
Carnihan & Baqués (2018), Porter (2019), Owinski (2018) and Frometa (2019) and which service is the furthest in complying with these trends.
Discussion & Conclusion
InterpretationsAlthough Spotify is currently the biggest in the Netherlands and is the global market leader in digital music distribution, YouTube Music has a great growing potential. YouTube Music has some advantages relative to Spotify, like the more extensive library of songs, remixes and covers. Besides, another advantage is the availability of videos when music is being streamed. Although Spotify is leaping towards using videos as well, YouTube has a lot more experience in the field of video streaming, which in particularly attracts young people (Fig. 1.1). This could be valuable for YouTube Music, as youngsters may be interested in consuming music, while at the same time watching videos, making YouTube Music the best option.
My expectation regarding the answer to my research question was that Spotify was by far the most used streaming platform, because everyone I know uses Spotify and nobody uses YouTube Music. However, that is based on my relatively small network and I did not keep in mind the far-reaching brand awareness of YouTube, which could get YouTube Music to the throne of digital music streaming in countries like India or countries in Africa, as Spotify was only introduced in the Middle East and North Africa in 2018 (Iqbal, 2019).
Therefore, Spotify is on the path to an eventual monopolistic status, if they win over the Asian and African music streaming markets. There are various articles which pointed out that Spotify is the best performing music streaming service. While Spotify already started out in 2006, YouTube Music only existed from 2015 onwards. This gives Spotify an advantage in experience, knowledge, and understanding of the market, developing superior technology and designs.
Furthermore, the findings suggest that Spotify provided the solution for record companies when piracy and illegal downloading became a big problem around 2000-2005. Although Castillo (2015) said the streaming music industry could be destined to leave artists unhappy, Spotify provided the inflection point for artists and record labels in that period. Spotify is more transparent about the earnings record labels and artists get than YouTube, which automatically makes Spotify the preferred service for streaming music by people who care about artist recognition and artist support. Transparency is valued more and more in our current society, as sustainability, the environment and social challenges are gaining
awareness. This may be the reason why Daniel Ek, the founder of Spotify has been named ‘the most important man in music by Forbes (Fleischer & Snickars, 2017). Therefore, I think that Spotify makes a good chance of starting a monopoly in the music streaming industry when it keeps on innovating and being transparent about its facts and figures. Besides, transparency and innovation attract investors, leading to more innovation, development and growth.
Implications
One interesting finding was that Spotify and YouTube Music should focus more on producing their own content. A useful way to bypass the record labels and to get around the complicated music legislation, they should build their own record label: Spotify Studios or YouTube Music Studios. Via this way the platforms can vertically integrate and operate independent from the big three record labels Warner Music Group, Universal Music Group and Sony Music Group. As a consequence, the entire recording process will fall in the hands of the distributors, so they first have to obtain knowledge and experience about music legislation and music recording. Spotify already started its vertical integration by purchasing podcast companies in 2018. Likewise, Spotify can enjoy higher margins and keep on competing with the giants Apple and Google, which do not only compete in the music market, but in several others. For example, Google does not solely own Youtube, but also Google Wallet, Google Shopping, Google Delivery service, Google Maps, Google Scholar, etc., which lets Google control basically every type of digital platform. This generates a lot of data, which makes Google and its daughter company YouTube Music a skilled competitor, in combination with their brand awareness and worldwide users. The data obtained from consumers will be of great importance in predicting demand for the future, also for the music industry. So this could become a source of a competitive advantage for YouTube Music in the future.
Keeping in mind other creative and non-creative industries, the competition of Spotify for Google and Apple in the music streaming market is valuable for innovation and transparency, as Google and Apple already have a lot of control over data and product choices people make. For example, a smart speaker, an internet enabled speaker which can communicate with other devices and is controlled by voice commands, has been introduced by both Google and Apple. Of course, Spotify cannot rely on products from these brands, as they might not be compatible with Spotify, so Spotify should diversify into another market as well and make their own smart speaker. Likewise, Spotify can legitimately compete with the gigantic brands of Google and Apple and does not have to rely on other markets, brands or products.
Limitations
The limitations to this research will mainly relate to the time and resources, as my thesis course only took two months. Therefore, I chose to do a literature review instead of interviews or a quantitative research, as these research methods require a lot more time when done properly. I want my research to be comprehensive and extensive, so that is why I chose to do a broad literature review, instead of taking one or two interviews. If there would be more time available, I could for example have done five interviews with experts in the field of digital music distribution. Another aspect of taking interviews which held me back of doing it, was that I do not know anyone in my network who is experienced or invested in music distribution.
A limitation regarding the literature review done in this research, is that numbers and figures change very fast over time and that it is important to put articles in the right perspective and time period. As Spotify and YouTube Music are digital platforms, their user and subscriber numbers change continuously. Therefore, I mainly chose articles and studies from 2017-2019, but there might also be important information in earlier articles, although not presenting the contemporary information, numbers and statistics.
There were quite some contradictory findings regarding this research, mostly relating to the number of users of Spotify and other streaming services. For example, Suh (2019) claims Spotify has over 200 million users, while Prey (2019) says Spotify has 140 million users. Several articles which were written in the same time period contradict each other, however the most articles referred to the benchmark Spotify passed in the first quarter of 2019: 100 million paying subscribers (Porter, 2019; Statista, 2019; Jolly & Sweney, 2019).
Recommendations
In order to learn more about the competition in the digital music industry, it would be interesting to do interviews with experts in the field or to do a global quantitative study with regards to the opinions on and perspective of YouTube Music. YouTube Music has the resources and the brand awareness of overthrowing Spotify, as YouTube itself has much more users than Spotify, but they still have to find a way to dethrone Spotify and become the most popular service for streaming music. It will be interesting to find out what YouTube Music specifically and concretely has to do in order to become the market leader. Does it have to be more transparent? Does it have to invest more in marketing and advertising? Besides, it will be interesting to see how different regions react to different streaming platforms. Would
Spotify, Apple Music or YouTube Music have more success in the plains of Africa? What would Spotify or YouTube Music have to do in order to gain popularity by the inhabitants of a million city of Asia?
For future research it will also be interesting to see what happened to Spotify and its stakeholders when they went public in 2018 at thirty billion dollars (O’Malley Greenburg, 2018). Does this e.g. mean anything for the future of the careers of artists? Did it change their position in relation to YouTube Music or other streaming services?
Besides, an experiment with hundred Spotify users and hundred YouTube Music users could give more advanced knowledge about the differences and similarities between the two platforms and provide insights in what could be improved in the future. A focus group with people who used both Spotify and Youtube Music can also add value to this, as this contributes to quantitative research as well.
Conclusion
In conclusion, based on this particular study, Spotify is currently the market leader in streaming digital music, adds the most unique value and manages changing customer preferences the best, which is also widely supported by the research that I analysed. Spotify adds the most value for all its stakeholders, as content providers and developers seem to earn more money from Spotify than from YouTube (Music) and the most people who want to stream music choose Spotify. However, in order remain the market leader, Spotify should be aware of YouTube Music and the steps that they make in order to win over the African and Asian music streaming markets. For example, Google could use their data harvest from all the markets they are in, in order to personalize YouTube Music further and adapt more quickly to shifting customer preferences. To be one step ahead, Spotify should vertically integrate and become their own record label and produce original content, in combination with diversifying and producing their own products, like a smart speaker. Regarding diversification, YouTube Music has a big advantage, as Google, its parent company, has already diversified into many markets and is able to obtain a lot of consumer data. Spotify should remain transparent and keep on attracting investors by its innovation and its development, if it wants to continue as the market leader. Spotify has been the largest and fastest growing music streaming service for the past ten years, offering the turning point for the music industry when a big part of their revenues collapsed due to piracy and illegal downloading. Currently, Spotify has a competitive advantage, but this could change when YouTube Music makes real steps in
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