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Spotify’s plan to beat Apple: sign the rest of the world

Spotify’s plan to beat Apple: sign the rest of the world

Spotify’s plan to beat Apple: sign the rest of the world
January 03
16:21 2019

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Three years ago Danny Ocean, a cheerful Venezuelan with floppy hair and a silky-smooth voice, moved to Miami to start a new life. He scored a job in a pizza shop, but found himself missing the girlfriend he had left back home. As a Valentine’s gift, he wrote a song in his bedroom for her, wistfully crooning against upbeat synthesisers.

He uploaded the song, called “Me Rehúso”, to YouTube and Spotify. It began creeping up Spotify’s viral charts in Colombia, Chile and Peru, which caught the attention of Spotify’s curators — the employees who monitor minute-by-minute listening data. They unanimously agreed to add it to their playlists, such as “Verano Forever”, where Spotify’s users lapped it up. Week by week, Spotify added it to more playlists, each with bigger followings, until two months later the song made it to the holy grail — “¡Viva Latino!” — which has the clout to catapult unknown acts into stardom.

In less than a year and with only one released song, Mr Ocean attracted a bidding war among the world’s largest music labels, before he signed a plum recording contract with Warner Music. The lanky 26-year-old skateboarder was soon labelled the new king of reggaeton, the popular genre that combines Latin music and hip-hop.

Internet fairy tales like this have circulated for some time. Justin Bieber was discovered on YouTube a full decade ago. But in a business now dominated by online streaming, Latin America is having a moment. In 2017, music revenue increased in the region faster than in any other, as a young, internet-savvy population streamed music in the billions, prompting Rolling Stone to declare the year Latin’s “pop takeover”.

Apart from the Danny Oceans of the world, few could be happier about the synergy between music streaming and Latin America than Spotify — whose stock price, and arguably future, depend on repeating the same trick in new markets.

Musician Danny Ocean was discovered on Spotify by Warner Music Latin America © Warner Music

Spotify needs to keep adding subscribers to make Wall Street happy as it battles Apple, one of the richest companies in the world, to dominate how the world listens to music. There is a finite amount of affluent 20-somethings in western cities to pay Spotify $10 a month for its services. However, after growing at a torrid clip in Europe and the US, investors are betting that Spotify can sign up hundreds of millions of people in what the Swedish company bluntly calls the “Rest of the World”.

So far Latin America is the only emerging market where the Spotify model has worked meaningfully — a phenomenon which caught senior executives by surprise when it entered Mexico six years ago. Spotify became the dominant paid streaming service in Latin America with minimal effort; to this day a few dozen employees working out of a Miami WeWork office run the operation for the whole continent.

“No one ever expected it, and we didn’t even have the resources for it. Chile is now one of our fastest-growing markets, and we’ve never even sent an employee there,” says Will Page, Spotify’s director of economics, who expects Mexico and Brazil to overtake the UK and Germany in subscriptions.

Emboldened by the results in Latin America, founder Daniel Ek is convinced that he can replicate this across the globe. In pitching Spotify to investors before going public in April, Mr Ek made grand proclamations about the billions of smartphone owners across the world who do not yet use his music app. “We’re working on launching in some of the biggest markets in the world, places like India, Russia and Africa,” he said.

Spotify has already made strides: in November it debuted in the Middle East, while last year it also entered South Africa, Israel, Vietnam and Romania. Scrolling through the Spotify app, users now see genres titled “Arab” and “Afro” next to “Party” and “Sleep”.

Daniel Ek, chief executive officer of Spotify © Bloomberg

Wall Street has bought into the narrative, with a successful stock market debut and optimistic forecasts for its future. Across the world excluding China, an estimated 6 per cent of people with payment-enabled smartphones pay for Spotify, and Morgan Stanley predicts this percentage will double in the next five years to 220m paid subscribers. By 2023, the bank expects Spotify will have 53m paid subscribers in Asia, the Middle East and Africa, compared with just 11m in 2018.

But that initial enthusiasm has cooled and doubts are creeping in. After soaring in the first three months as a public company, Spotify’s shares have been roiled by a broader rout in technology stocks, dipping below its opening price on the NYSE. “Investors have gotten increasingly nervous,” Morgan Stanley analysts said in October, citing a “lack of new market launches (India & Russia)”.

In the US, the biggest music market, Apple recently ousted Spotify from its throne to become the most popular paid music streaming service. And Spotify has hit a large speed bump in its quest for global domination: India. The country has become a bargaining chip in the jockeying between the tech company and the music industry. After months of talks, the large labels that control the music business have still not given Spotify the green light to license their songs in the country, according to people familiar with the negotiations.

“Now they’re a publicly traded company and they really need to grow,” says a senior executive at a major label. “It’s our one big piece of leverage.”

When asked what they did to conquer Latin America, Spotify executives shrug their shoulders. “We didn’t really do very much at all,” says Mr Page.

When Spotify entered Mexico six years ago, it was still a bootstrapping start-up with a “barely functional HR department”, he says. “We had one woman, without an office, flying around the continent, literally. We were flying by the seat of our pants.”

An economist by day and DJ by night, Mr Page gives his interpretation of what happened. First, licensing was easy because Latin America was still in the throes of piracy, which meant labels were happy to do deals. In the US, the iTunes store had helped thwart piracy, but in Mexico a mafia-run piracy business was still thriving. Music executives in places such as Canada and Japan were hesitant to trust Spotify, resulting in years of painstaking negotiations to launch in those countries.

However, in Mexico “we literally took the money”, says one Mexican executive who was involved in licensing talks at the time. “At that point we were very happy getting $50,000 in a contract,” the executive says. “So all of a sudden a company comes offering us $2m, and we had no experience [with Spotify] at the time, and we took the money.”

That settled, Spotify launched in Mexico in 2013, and then Brazil a year later. It was available in all of Latin America before it entered Canada. The company had a lot of wind in its sails: half the population in Latin America is under 30, which is Spotify’s core audience; a rising middle class was growing, so there were more people able to pay the fee; and the Latin market is radio-driven, which lent itself well to Spotify’s style of inundating users with playlists and suggested songs.

But most of all, executives and analysts attribute the success to word of mouth and endorsements. “They’ve established the Spotify brand as a premium aspirational brand,” says Mark Mulligan, an analyst at Midia Research. “This growth has largely just been due to that . . . they’ve done some marketing, but not really aggressive marketing.”

Spotify lowered its prices in the region: a subscription in Mexico runs for 99 pesos, or about $5 a month, half the fee in the US. While many younger Mexicans balked at the $15-$20 price of a new CD, they were willing to pay this fee for access to 30m songs.

The results were both rapid and dramatic. “Every quarter that we got the reports from Spotify, their user base was growing insanely,” says Kervin Dockendorf, who worked for a music publisher in Mexico City at the time. “Deezer was there, Rdio was also there, but Spotify destroyed everyone.” Spotify had a 64.1 per cent share of the Mexican music streaming market in 2016, well ahead of Google, with 12.3 per cent, and Apple, with 8.1 per cent, according to the Competitive Intelligence Unit.

T-series, the Indian music and film producer, has shown the potential of the market for music there with a YouTube channel which is among the world’s most successful © FT montage

Mia Nygren moved in 2014 from Spotify’s Stockholm headquarters to São Paulo. “It felt like everything here was kind of set up for things to work,” says the Swede. “People knew about this. It was an easy message.”

While CDs were restricted by geography — they had to be pressed and then delivered to shops and online retailers — anyone with a data plan can participate in the global music industry. Just by scooping up the initial group of people in populous countries such as Brazil or Mexico who are wealthy, have credit cards and had heard of Spotify, it was enough to generate a user base on par with that of small European countries. Mexico has grown into Spotify’s largest user base, ahead of the US and UK. For many of the biggest western stars, such as Adele and Radiohead, Mexico City is their number one market on Spotify.

Spotify’s marketing department categorises people into jargony categories: upstreamers, early adopters, laggards, opportunists. For countries such as Mexico, they have now conquered tens of millions of “early adopters”, without spending much money to do so.

Only about 90 Spotify employees, out of 3,500, are working in its Latin America division, even though the region accounts for a fifth of its customer base. Spotify is considering throwing more weight, and money, at the endeavour. In a recent internal presentation about Latin America, one section was devoted to the question: we’ve built a castle, do we need a moat?

“Netflix and Spotify face a similar globalisation challenge, but it’s far cheaper and quicker to build a playlist than a scripted drama series,” says Mr Mulligan. “You can programme playlists in Brazil easily, with a team of Brazilian experts anywhere in the world.”

Spotify has shown that both Latin American stars such as the Colombian singer Shakira and artists from overseas have a huge audience in Mexico © AFP

The $20bn question — Spotify’s current valuation — is whether this can be repeated in the “Rest of the World”. Spotify argues it can. Countries such as South Africa, Indonesia and South Korea also have young, internet-savvy consumers ripe for Spotify.

The tides of media and pop culture are slowly but clearly shifting east. In November, YouTube’s most popular channel was an Indian record label. Netflix has launched a noir television series in Mumbai and chief executive Reed Hastings says the company’s next 100m subscribers will come from India. Universal Music, the world’s largest record label, home to Taylor Swift and Drake, made a big push in November into Africa.

There are local challenges that make India a difficult market for western companies, from Amazon to Walmart. In India, Spotify would compete with Apple, Amazon and YouTube, in addition to local players such as Hungama, Gaana and Saavn. None of these services has had success in persuading people to pay for music in India. Although 216m people were using streaming services in the country at the end of 2017, only 1m of them paid for them, according to Midia. Elsewhere, Spotify faces questionable infrastructure, rampant piracy and powerful rivals such as Anghami in the Middle East.

In India, Spotify’s licensing negotiations reached a stalemate as the major labels pushed back on Spotify’s requests to offer free trials for several months in the country, according to people briefed on the talks. In China, Spotify last year exchanged equity stakes with Tencent Music to gain a foothold in the fast-growing market.

The stakes for Spotify are high. If Mr Ek pulls it off, the service could add hundreds of millions of new customers. If it fails, its Cupertino-based rival is already present in more than 100 countries, where it will be keen to deepen the iPhone’s influence. Apple has seemingly noticed the Latin music craze — in October the company launched a Latin playlist, ¡Dale Play!, to its streaming service.

Spotify will keep looking to shape music culture as it tries to gain subscribers. Cultural clout gives Spotify the capacity to build stars of its own.

A few years ago, Danny Ocean might have had a one in a million shot. Inigo Zabala, the chief executive of Warner Music Latin America who signed him, stumbled upon him “before he was popular” while browsing Spotify. He pulls up YouTube on his computer in his Miami office to deliver the current verdict on “Me Rehúso”: more than 1.2bn views.

“Latin music has always been there, but now the streaming world has made it global,” says Mr Zabala. “Every two years, we had a Latin hit. From Buena Vista Social Club to Gypsy Kings to La Macarena to Ricky Martin. But they were completely random,” he says. “Now we’re thinking about global hits, and they are not random. They are part of the plan.”

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