Listening to đ” The Jackie by J. Cole, Lil Tjay
In our last article we examined vital Career Advice, and how to be optimistic in challenging times. Today we return to our series on Spotify.
This is the 4th review of the 9-part series - Spotify: A Product Story.
In this series, you would learn about how to build a great product, transform an industry, and grow a business from scratch to 300m users. You would also learn about making strategic decisions, choosing the right business model, and partnerships.
INTRODUCTION
In the last article How do you charge for nothing? We learnt about how Spotify transitioned from a free desktop app to a mobile app that users happily paid for.
Today weâll cover how faced with the global transition from desktop to mobile, Spotify had to reinvent its business model for mobile, or be extinct.
2012
According to the data, in 2012, smartphone sales were going to outpace PCs for the first time. Up to this point, Spotifyâs conversion strategy and business model was built on their popular âad-supportedâ free desktop app.
Previously, free users âwho spent enough time building up their Spotify libraries on the desktop app â would eventually convert themselves into paid users on their phone, for convenienceâ. But if people went straight to the mobile app, they wouldnât be able to try out the app and build their libraries before paying and would simply go back to pirating music onto their mobile phones.
âThe macro winds â those massive global trends that are much bigger than any one company or even industry â were changing. And whether we liked it or not, we had some tough choices to makeâ
Spotify had two years to invent an entirely new business model if they were to survive.
This brings us to lesson 1.
Lesson #1: Never try to fight a macro wind, you will lose! Get the wind at your back instead of in your face.
âYou canât control the way the wind blows. But you can control how you position yourselfâ.
You want to put yourself in a position where the âwind is in your sailsâ driving you ahead, rather than pushing you backwards.
Luckily for Spotify, they had previously created a great paid mobile experience for the small smartphone market. But now that the market had accelerated to become the main market, they needed to create a freemium (free âcappedâ) mobile experience, without âcannibalizingâ or devaluing the paid experience.
So, the challenge was finding the right tipping point â where you had played enough songs, and experienced the product, that you would want to transition to the paid service. The risk at the time was that if the freemium service was too good, why would anyone make the conversion? Which could kill the premium business.
So, what Spotify did was to design different version of the free service and test it with different cohorts of users, track their retention, whilst keeping the premium version the same. This is also known as A/B testing. The idea is to identify the one that has the best result.
Listening to đ” Beggie Beggie by Ayra Starr, CKay
Which brings us to lesson 2.
Lesson #2: Test big or go home
But and this is a BIG BUT!! You need to test AS DIFFERENT as possible, not AS MUCH as possible. The goal is rather than going deep on one idea, to try out different ideas.
So, Spotify tested different kinds of caps and limitations such as a time limit for listening to songs, or a cap on the number of tracks you can listen to, and based on your location.
The result of the test was that any kind of capped usage would drive listeners away, and the more listeners used the Spotify the more likely they would convert to the premium plan. Users wanted a free plan that was unlimited forever, and a convincing value proposition on why they should upgrade to the premium plan.
While these tests were going on, another team at Spotify took the opposite approach. They looked at the data to see what paying users were already doing that could be given away for free to new users, without eroding the incentive of premium users to keep subscribing.
They found out that most premium users selected their playlist and set it on shuffle. Even though they could listen to any song they wanted, theyâll rather let the algorithm choose for them - shuffle play.
Armed with this insight, Spotify looked at what its competitors were doing. This brings us to our 3rd lesson.
Lesson #3: Look at the competition, and then do something completely different.
âCompetitors were either releasing paid-only mobile apps (which was what Spotify was trying to avoid) or launching free radio-like servicesâ.
In the aftermath of music piracy, record labels refused to let any company stream their music on any mobile device without a paid subscription attached to it.
But due to a US legislation known as the Digital Millennium Copyright Act (or D-M-C-A), you could let users stream music for free, provided they couldnât predict or control the order of the songs played. Just like a radio.
So, while one team iterated on the shuffle-play free tier (to see the one that converted users the most), the legal team negotiated âa brand-new radio-style licenseâ agreement with the record companies.
âAfter two brutal years of nerve-wracking uncertainty, we went from actually losing users to growing by almost 200% in less than a year. And that growth continued - unabated - for two years straight. We hit 100 million monthly users in May of 2016 - a huge milestone for any companyâ.
âWe had saved the company again, and this time we had a sustainable business modelâ.
Machine Learning and AI
After a few years of this service, a new macro wind had started to blow. It was machine learning and AI.
âThe world was moving from curation (like Facebook and Pinterest) where you did all the work by following people and building collections to recommendation (like YouTube) where the service does the work for youâ.
This meant that the free playlisting product, wasnât enough for a machine learning world.
Leveraging the lessons from the previous test, the team realized that ârather than asking the labels for the entire catalog of 40 million songs on-demand, they could ask for just a small part of catalogue on demand for each user â say 300 songs per person â algorithmically selected for that specific userâ.
Which brings us to our 4th and final lesson.
Lesson #4: Itâs better to be lower on a taller mountain, than higher on a smaller mountain.
The important thing is to make sure youâre on the right mountain â the one with the greatest potential â so that you can keep climbing to reach a higher peak. What might look like a setback might just be a necessary step to achieving new heights.
Spotify had landed on a different mountain: the mountain of personalization and machine learning.
âUnlike the original mobile free tier playlist, the machine learning based ones lets you listen to tracks on demand, as long as they appear on certain, algorithmically generated playlists that are personalized to you, such as Discover Weeklyâ.
Listening to đ” Pray by Victony
SUMMARY
Lesson #1: Never try to fight a macro wind, you will lose! Get the wind at your back instead of in your face.
Lesson #2: Test big or go home - but remember: test as different as possible.
Lesson #3: Look at the competition, and then do something completely different. Studying the competition isnât a bad thing, as long as youâre using those insights to chart a different path.
Lesson #4: Itâs better to be lower on a taller mountain, than higher on a smaller mountain - because you have more potential, but itâs really scary to make the jump! Follow your convictions, check the data to back them up, and make sure that you have enough patience for the climb!
In the next article, we would explore this macro wind: machine learning and AI, in greater detail.
I hope you found this informative and relevant.
You can catch up with past articles in this series: Part 0, Part 1, Â Part 2, Part 3.
If youâre finding this newsletter valuable, consider sharing it with friends, or subscribing if you havenât already.
Also, if you have any questions about any topic you would like me to tackle, kindly email me at notesbynero@gmail.com .
Thank you Nero for this piece. It is so germane. I particularly like the lessons with the philosophical spine to it- ..."test as different as possible not as much as possible". "It's better to be lower on a taller mountain than higher on a smaller mountain" "the important thing is to make sure you're on the right mountain..."