Diffusion of Innovation: Spotify Put iTunes to Shame
I remember when I was eight years-old, I begged my older brother for weeks to buy Taylor Swift’s “You Belong with Me” on iTunes so that I could listen to it on the iPod we shared. While paying up to $2 per song was standard when I was growing up, today the practice feels ridiculously outdated. Nearly everyone I know uses Spotify, which was made abundantly clear to a few weeks ago when my Instagram stories were inundated with all of my friend’s “Spotify Wrapped” reports. In fact, for Q1 of this year, Spotify alone was estimated to have 32% of the market share of global music subscribers (128 million paying users), whereas the company’s closest competitor, Apple Music, is only believed to have 18% (72 million). In the early 2000s, iTunes had an enormous advantage as the dominant platform for music consumption, so how did Spotify manage to disrupt the market and attract millions of loyal listeners?
The brains behind Spotify, Swedish entrepreneurs Daniel Ek and Martin Lorentzon, identified a window of opportunity in the music industry back in 2006. Sales of traditional, physical media (e.g. CDs) were dropping and online radio stations hadn’t yet emerged on a wide scale. Another platform called Napster, a widely popular peer-to-peer music sharing software, had recently failed due to copyright infringement. The true genius behind Spotify’s initial success was recognizing their potential to carve out a niche between Napster and iTunes. Spotify took inspiration from the social model of Napster, but improved upon the user experience in every dimension (and did so legally). “We spent an insane amount of time focusing on latency when no one cared,” Ek recalled, “because we were hell bent on making it feel like you had all the world’s music on your hard drive.”
While Spotify’s early developers had engineered an outstanding prototype, the technical excellence of the interface on its own would not have been enough to guarantee success. The determining factor of Spotify’s success lied in how well they could infiltrate the social network. This phenomenon can be explained by “Diffusion of Innovation,” or the theory of how technologies, behaviors, and ideas spread throughout the social network. Through direct examination of network structure, one can glean how influential interpersonal relationships are in the adoption of new innovations. The incentive to adopt a new technology is often characterized by the direct social benefit an individual perceives among their network neighbors rather than the greater population. By this reasoning, the success of an innovation relies on its ability to gain a foothold in the network. Even innovations that are objectively superior to the market standard can fail simply because they are incompatible with the social system in which they are introduced. Spotify was able to secure their initial user base by inviting Swedish music bloggers to test their product. However, one could argue that the majority of the platform’s early adopters were actually acquired via their Freemium business model. This pricing strategy enabled curious individuals to try out the basic version of the app with no monetary cost, and a fraction went on to purchase the Premium subscription. After Spotify managed to penetrate the social network, their next challenge was to facilitate the increase in the scale of their user base.
Spotify’s fundamental premise of music-sharing undeniably contributed to their wildly successful diffusion through the network. Spotify is incredibly conducive to adoption throughout a cluster of individuals given its highly social nature. The app’s community-based features increased the direct benefit of adoption in ways in which iTunes could not compete. For example, if half of your friend group is sharing playlists on Spotify, the social benefit of switching from iTunes may very well outweigh the costs. A pivotal factor of Spotify’s early growth was their introduction to Facebook founder Mark Zuckerberg in 2009. The two companies formed a partnership, officially integrating Spotify into Facebook. This collaboration brought Spotify’s peer-to-peer music sharing to the next level, granting them access to Facebook’s base of 150 million users at the time. At this scale of diffusion, many of those who were initially resistant to trying out this new innovation would now adopt it. When the perceived benefit of aligning with the fraction of one’s social network that has adopted a new technology exceeds the benefit from the fraction that has not, making the switch becomes worthwhile for the middle-stage adopter.
In the final stage of diffusion, Spotify had to appeal to the most traditional and conservative individuals who were extremely reluctant to adopt new technologies. While many teens and young adults would have joined Spotify by this point, much of the older generation lacked the same social incentive. The platform cleverly introduced the family plan, making it more cost effective for entire families to subscribe. Even after the proliferation of Spotify, though, there are indeed people who continue to use other streaming services like Apple Music, Amazon Music, Pandora, and even YouTube. This is unsurprising, as competing technologies can coexist as long as they are used in different clusters, and it is inevitable that some clusters will not be penetrated by Spotify. Nevertheless, I think there is an invaluable lesson to be learned here: you can either be like the record labels who were so overwhelmed by the decline in CD sales that they were blind to the potential of digital music-sharing, or you can be like the founders of Spotify who saw an opportunity and seized it.
Sources:
1. https://www.midiaresearch.com/blog/music-subscriber-market-shares-q1-2020
2. https://producthabits.com/how-spotify-built-a-20-billion-business-by-changing-how-people-listen-to-music/
3. https://www.vox.com/2018/2/28/17064460/spotify-ipo-charts-music-streaming-daniel-ek
4. https://www.statista.com/chart/8399/spotify-apple-music-paid-subscribers/