Hi, I’m Saurabh. 👋

I write in-depth analyses on the growth of popular companies. I cover their early-growth strategies, current growth levers, and the business-building lessons we can learn from them.

Hello hello!

The last 2 months have been super exciting. From India winning the T20 cricket World Cup to Ambani’s wedding stories, 2024 is going well!🕺

I’m having a great time writing and thanks for letting me know you are enjoying it too. Feedback like, “Bro, reading How Blinkit Grows was the best 15 minutes of my day. Very engaging, insightful, and quite detailed. I loved your thought flow and the deep dives on the relevant sections - waiting for the next one now!” feels great :)

Now, writing this newsletter is a long affair. It takes me roughly 70 hours to make one and while I’m at it, something else gives me company all along… 

Music!

Getting my favorite music track on while I go deeper into ideas, gets me into the zone.

So, today, we’re looking at a company that brings almost all of the music in the world in one place for 615 million people across 184 countries. The startup was the first to offer completely legal, on-demand music - swaying customers away from pirated music. Today, we’re going deep on Spotify.

Alright, here’s what to expect today

• How Spotify started

• Spotify’s early-growth strategy → from 0 to 10 million users

• How Spotify grows today

Let’s get to it.

How it started

Music consumption has changed drastically over the last 50 years. It started in the 70’s when music lovers listened to melodies on vinyl records turning music appreciation into ritualistic experiences. Then came the era of cassettes and compact discs in the 80s and 90s, which allowed users to curate their music journeys and started bridging the gap between analog device-based listening and digital music streaming. 

Then, in the Early 2000s, Napster burst onto the scene. It disrupted the market by enabling peer-to-peer music sharing causing ripples across the established music distribution order. This was very much illegal but the service was too good not to use. Napster made all the existing songs available to every internet user in the world. Soon, it had a row with the law due to copyright infringement and was shut down in 2001. (for my friends in India - remember songs.pk? - It got banned for the same reason - piracy)

However, it didn’t go down without making a significant shift in the regulated album market. The global album sales saw a decline from $14.6 billion in 1999 to a mere $6.3 billion in 2009.

The big players saw the signs. Apple came up with iTunes. A couple of other websites like Pandora and Rhapsody started gaining traction. Amazon also jumped in later. The market potential was obvious. But all these platforms had their challenges. On Pandora, you could not choose the songs you wished to listen to. On iTunes, you had to purchase songs to listen to them. In short, music was readily available but users had no control over their experiences.

This is when 2 Swedish individuals, Daniel Ek and Martin Lorenzton also observed how difficult it was to get desired content with control despite the technology being available in the market. They decided to enter the market with a tool that restores the control to the listeners while being very much legal.

They aimed to fill the gap left by Napster by acquiring copyright-restricted audio content from music labels and offering this content to users. Let’s take a look at how Spotify broke into the world of established record labels.

Negotiating with the big guns

Most  2-sided marketplace startups have the luxury to go around existing supply networks and disrupt their industries - such as Uber didn’t have to work with taxis, Airbnb didn’t have to work with Hotels, etc. On the other hand, Spotify absolutely had to confront the existing network, if it didn’t want to suffer the same demise as Napster and Pirate Bay. To get the music record labels onboard and give their users access to music legally, Daniel did two things:

Go after markets shrunk by piracy: Record labels in Sweden were losing 80% of their licensing revenue to piracy. This was accelerated by the Swedish government's heavy investment in fair access to high bandwidth (which meant folks were able to download pirated music in minutes rather than hours). They started their journey by discussing agreements with Swedish record companies.

Take risks and show commitment: Daniel guaranteed music record labels a 1-year revenue upfront, no matter what happened to Spotify. As he saw the model working in Europe, Daniel also allowed all major record labels to take a combined stake of almost 20% in Spotify (part of their Series A-B round) in part of a global copyright deal.

Right to Win: the moat of speed

The next challenge for Daniel was to convince people to buy something that they were getting for free. How do you even do that?

Daniel’s answer was Speed

To set the scene, this was when the iPhone had hit the market just a year ago and the internet broadband was probably one-tenth of what it is today. In the music industry, all the other players had the forbidden problem of buffering. Daniel’s team put thousands of hours into creating the “instant” magical feel. For starters, they made the music bar move immediately upon hitting play - no loading icon. Next, they downloaded the first 15 seconds of the song from the internet and complemented the rest from nearby Spotify users who had already downloaded the song (called p2p sharing). They also pre-fetched the next song towards the end of the track.

All in all, they brought their median playback time to ~265 ms in the first two and half years (the human brain conceives anything that happens in less than 200ms as “instant”)

Another feature of delivering a frictionless experience was making it super convenient for the users to switch to Spotify. Users could upload local tracks on Spotify, which meant they did not have to leave their libraries and playlists behind. One less reason to open iTunes again!

To summarize, Spotify stood out amongst its competitors by delivering an on-demand, customer-friendly, and completely legal music experience.

Next, let’s see Spotify’s early go-to-market strategy and understand how it snowballed digital music streaming into a global sensation over the first 3 years.

Spotify’s early growth and GTM strategy

We’ll be looking at Spotify’s go-to-market strategy in this section, covering important GTM concepts - with the first one coming from World War 2. The tactics we’ll unpack here gave Spotify some incredible growth and gives great lessons for builders.

Beachhead Strategy

To make sense of Spotify’s go-to market, let’s first look at a market-development framework widely discussed in Silicon Valley, called Crossing the Chasm. The framework is an adaptation of the diffusion of innovations model which explains how, why, and at what rate new ideas and technologies spread. 

Let’s understand this with a visual

The kind of consumers that are attracted by novel products move from left to right. On the far left, you will see innovators. These are people who seek out new technology. It’s like a hobby for them. This is followed by early adopters, who are willing to take high risks and invest in something they believe to be a revolutionary breakthrough. The first 2 adopter groups together belong to the “Early Market” group. However, to become truly successful, a company must win over the ‘Mainstream Market‘ starting with the Early Majority. These Pragmatists share some of the Early Adopters’ ability to relate to technology, but ultimately they are driven by a strong sense of practicality. They know that many inventions end up as passing fads, so they are content to wait and see how other people are reacting before they buy in themselves.

Between the early market and the mainstream market, you see a big intimidating chasm - it’s where most startups die.

The chasm represents the big gap between the two distinct markets

Early Market (Innovators and early adopters AKA visionaries): People who are quick to appreciate the benefits of a new product, have the tolerance for product issues, and can see the product taking a strategic leap in the future.

Mainstream market (Early majority, late majority, and laggards AKA pragmatists): The people who are more interested in the market’s response to the product than the product itself 

Crossing the chasm requires a niche market strategy.

Finding a beachhead

To put it differently, the core strategy for crossing the chasm is “positioning” and securing "beachhead" in a mainstream market.

Beachhead? What do you mean by that?

Well, beachhead is a market entry strategy where you capture a small target segment, establish a strong base, and turn it into your point of attack into the main market.

While I read about beachhead strategy in an article on Amazon about how books were their beachhead, the concept goes back to World War II.

The term refers to the 1944 invasion of Normandy where Allied troops organized a direct assault on the Normandy beaches, which they used to stage counter-invasion of Europe and win the Second World War.

To illustrate…

The strategy can be summarized like this:

Select your beachhead: The idea is to find your high-expectation customer. Someone who will enjoy and acknowledge your product for its greatest benefit. This is how you keep it super niche and specific.

Get your product offer right for them:  Find what would make them select your product over the competition. These are people who would piece together your whole product to show their worth to the mainstream market. You need to be laser-focused on this customer set and build the product they need. 

Nail your distribution: Figure out the best way to reach this segment. Find out how they discover information, whom they meet, where they meet, and get there. 

Move to your next wave of target customers: Once you’ve got your foot in the door, use their leverage and push onward to the next set of users.

Coming back to Spotify -  they did exactly this.

At a macro level, Daniel knew there was a massive market available for ethical digital streaming. However, he found Spotify’s beachhead in notable techies and music bloggers. This approach helped them understand their audience deeply and craft a better product. 

In April 2007, Spotify launched its beta version and invited influential music bloggers and tech-reporters to try it. The promotion strategy worked wonders for them. The beta users were thrilled with their product. They spoke highly about Spotify in their blogs - reaching the right audience that Spotify was hoping for. Eventually, people read blogs and got equally excited about the ultimate launch.

On 7 October 2008, Spotify officially launched in Scandinavian countries, the United Kingdom, France and Spain.

Using invitations to hype demand: Going Mainstream

Upon official European public launch, these beta accounts were immediately transitioned to free Spotify accounts, and access to paid Spotify accounts was made instantly available.

Now, people want nothing more than what they can’t have. Spotify, knowing this, played another brilliant card on their release. They kept the premium subscription open for everyone but limited the free version to invite-only -  making people jump hoops to get access. Facebook used a similar strategy to get started, Google used it while launching Gmail, and later, Oneplus used it while launching their phone. 

For Spotify, invitations worked like wildfire. It created a cycle where you could invite people you like, and feel good about what you have done for them, getting you even more excited about the ‘golden ticket’ you own. - it’s a flywheel growing endlessly.  If you want a taste of the power of invitations, check this article by Rob Lowe on what it felt like to be invited by Hugh Hefner to his Playboy mansion. 

It wasn’t until February 2009 that Spotify tried offering no-invitation-required free accounts in the UK. Spotify’s Andres Sehr explains via the company blog

Looking at Spotify’s Invite-only model, there are several takeaways on how to create a successful one:

Build trusted word of mouth showing the product’s worth: Collaborate with influencers and PR firms building a positive share of voice

Make sharing easy: Put in links to share on socials, with an auto-populated message. 

Have solid messaging and a clear call to action on joining: Thank people for signing up, ideally with a personal note from the founder.

Limit Invites: Keep playing on scarcity. Show users the number of invites left and how their invitees are enjoying the experience.

Instant value for the new joiners: Make the onboarding process feel like it’s worth it.

The intrinsic DNA of sharing

Spotify, in many ways, is a reflection of Andrew Chen’s 80/20 rule - that is, products that copy the fundamentals(80%) of a successful product and reinvent the remaining 20% can significantly shorten the time it takes to product market fit.

In Spotify’s case, that 20% was embedding sharing as a core DNA in their product.

Every playlist, every song on Spotify was by default, a URL from day one. To give perspective, here’s what Lifehacker had to say about Spotify in one of the very first product reviews about the company

On Spotify, once you’ve created a playlist, right-click on the sidebar, copy the URL, and share it with your friends. Smooth as butter!

They also had an option to build a collaborative playlist with your friends. Just turn the mode on and your friends could add songs to a common playlist. I know, it seems like the default sharing mode today but at that time, it was completely new.

Now let’s see how the sharing DNA axled the growth flywheels of Spotify over time.

Bloody brilliant growth loops

Spotify used the network effect to build multiple growth loops - where most of the new users came in from existing users.

Normally, companies put a ton of money into getting new customers. Take ecommerce for example, you open the app for shopping but that doesn’t directly lead to new people coming to their app.

But at Spotify,  impressive flywheels emerge

Spotify’s referral flywheel

1. You take Spotify premium

2. You invite friends through social media or direct links.

3. Spotify extends benefits like exclusive features, premium tenure extension for  you, and upgrades your referee to a trial premium period

4. Your friends become referrers, perpetuating growth

Spotify’s content flywheel

1. You discover Spotify's vast music library and personalized playlists

2. You create and share playlists, and interact with others’ playlists such as Top 50 Global and Nike Run Club

3. You enjoy music tailored to your tastes and gain followers.

4. Your interactions promote content discovery, attracting more users via social media.

These loops create great growth engines because they are self-sustaining. The more people come onboard, the larger the flywheel becomes!

Now that we are talking about loops, there’s another loop inside this loop. The kind of stuff that gets Christopher Nolan excited about. 

I’m talking about the feedback loop.

With every new signup, Spotify gets information on onboarding experience and relevant recommendations. This enables them to do different A/B tests, identifying opportunities to improve the onboarding experience and curate their Spotify journey.

It feels like we are in a big loopy roller coaster ride!

Okay, too many loops. My head’s spinning. 😵‍💫 Let’s move forward.

Early partnerships fueling discovery and sharing

Spotify was inherently built to facilitate the social nature of music. Partnerships with multiple everyday-use apps further magnified their social growth path. 

Spotify <> Facebook Integration

At Facebook's f8 developer conference in September 2011, the social network unveiled a new partnership with Spotify that would allow users to share their listening activities on their timelines. Though this is considered the way people share music today, at that time, it was totally novel. For the first time, you could compare your music tastes with your friends and connect with people of similar music interests.

This integration became deeper over time. Today, Spotify users, once connected with Facebook, can see their friends’ activity within the app—including what they’re listening to, who they follow, and any public playlists they’ve created—as well as in the Facebook News Feed if they’ve chosen to share it. Pretty cool stuff!

By 2011, Spotify had 6.67 million users and 1 million subscribers.

Spotify <> Uber Integration

In 2014, Spotify announced another way to delight its users by integrating with Uber. With the partnership, premium users could link their Uber with Spotify accounts and listen to their music on the go. Going forward, Spotify also collaborated with automobile companies like BMW, Tesla, and Ford, which supported a carplay feature.

And that’s how Spotify kickstarted their early growth and got an impressive 1 million subscribers in the first three years. 13 years later, they’ve gone 245X. How? 👇

How Spotify grows today

As far as I can tell, there are 4 main forces behind Spotify’s growth today.

1. Localizing globally

2. Strategic partnerships integrating music into everyday lives

3. Diversifying across new channels

4. Leveraging communities

We will go deeper into the localization and new channels since they are core to embedding social+music and creating some sort of network effects and lightly touch upon the other two.

Spotify’s deep localization strategy

A large part of Spotify’s success can be attributed to its global expansion strategy which relies heavily on localization. To put it simply, it is the process of tailoring the experience as per the needs, expectations, and habits of specific markets. 

Localization requires understanding the cultural differences and designing for them.

Unlike other tech giants which can move to new markets quickly, to become relevant to specific markets, Spotify has to constantly engage with large record labels of the specific market and go through massive corporation bureaucracy - meaning, a slower localization process. However, this little more time on preparedness lays the groundwork for their international expansion.

Spotify succeeds by putting 3 important localization strategies into motion:

Strategy 1: Target mobile channels for distribution

Most users today are predominantly mobile-first. Spotify partners with large messaging apps like Line in Japan to enable the sharing of Spotify tracks. Next, they tie up with large telecom companies for deals on their paid subscriptions. For example, you buy a Maxis data pack and get Spotify Premium for free for the first month.

Strategy 2: Speak the local language

Nobody likes a brand that doesn’t speak their tongue on their own turf. Users expect their experience to be local even if they are interacting with an international company. Before launching to any specific market, Spotify appeals to local audiences by creating local language advertising - both print and digital. The videos are culturally on point featuring different funny scenes of everyday life in India. 

Before the launch into a new geography, Spotify invests heavily in building an expert localization team to improve local content. For example, in Southeast Asia, they prioritized licensing Korean Pop Music before the launch.

Spotify is available in 74 languages today.

Strategy 3: Stay relevant to local communities

Spotify invests in building social communities in each of its markets. Every market has a Spotify group on Instagram and Facebook. They engage with their customers there through local trends and news. For example, when Malaysia and Singapore were affected by Smoke from neighboring Indonesia’s forest fires, Spotify responded with a cheeky playlist “Hazed and Confused” featuring tracks like “We didn’t Start the Fire” and “Harder to Breathe”.

Beyond local trends, Spotify also researches what might be deemed sensitive in certain countries and regions and changes images based on these norms. For example, the “Pure Seduction” playlist in the USA was rebranded as the “Love” playlist in Saudi Arabia, with an image of two people kissing replaced with hands touching. This ensures that audiences in Saudi Arabia are still able to access the same content, but in a way that fits better with their values.

Partnerships powerpack

While the Facebook partnership opened the door of music sharing for Spotify, over the years, Spotify has integrated itself deeply into the consumer ecosystem with multiple partnerships.

They have understood how their consumers stream different kinds of music at different times, and more importantly, on different devices. Spotify has taken strides to make it’s product accessible at all times.

Samsung

With Samsung, Spotify is the go-to music service provider. It comes pre-installed in millions of Samsung devices globally. This means everything from smartphones to TVs, tablets, watches, and speakers - users can get a personalized music experience. Additionally, there’s Samsung’s voice search app Bixby, which integrates with Spotify for music. When users search for music, Bixby looks to Spotify - even if the user has not used Spotify before.

FC Barcelona

In the 2022-2023 season, Spotify became the main partner of the club, building new opportunities for the artists to connect with their fans. When you interact with the club, be it at Camp Nou stadium, watching their game on TV, or engaging with the Club’s content online, Spotify is there.

Fans could listen to striker Robert Lewandowski’s matchday playlist as they get excited for the next big game. While watching the match, fans could see LEDs promoting music from global artists and switch to Pedri’s Playlist to celebrate a win.

Netflix

Trending shows on Netflix become internet-wide obsessions. For example, within 2 weeks of Squid Games launch, Spotify listeners had created more than 22500 playlists to keep the experience going. So, Spotify partnered with Netflix to launch an all-new Netflix hub on Spotify where fans could get the full audio experience of the shows they love.

Starbucks and Delta Airlines

Spotify has partnered with Starbucks’s popular loyalty program app, enabling coffee lovers to play curated playlists on their Starbucks app while they sip their coffee. Similarly, in partnership with Delta Airlines, Spotify has created a docuseries called "The Passport Sessions", where performers travel from their home cities to a Delta destination and collaborate with local artists to record music. Delta Flyers can listen to the passport sessions on their in-flight entertainment systems and head to Spotify’s curated boarding music and podcasts on the move.

And that’s the high-level view of how Spotify is using partnerships to grow. The next driver of growth we’ll look at (very briefly) is how Spotify is hitting high notes with other audio tunes.

Diversifying beyond music: Podcasts, Videos and more

Most tech media consumer models have a single media model like videos or podcasts. If they do have multiple business lines, they support them with multiple apps. Why? Because different business lines have their own nuances and multiple apps makes the software-building process easy. But if you look at it differently, it asks users to adapt to different software instead of the software adapting to users' needs. Moreover, it requires immense acquisition effort to grow from scratch. 

Spotify uses a single experience model to approach its customers in a simple and intuitive way. Instead of creating a stand-alone podcast or video app, Spotify has integrated the new business lines of podcasts and video snippets into the same app. This means handling complexities of different business lines, and multiple media formats into the same feed - one app-one experience for all. 

This expands the market for Spotify and increases the lifetime value for users. Podcast creators can reach out to music users and music creators can reach out to podcast listeners - immediate business value. Parallely, this creates new avenues for Spotify to personalize feeds of both podcast and music listeners to make the best of both worlds.

The newest addition to the Spotify playbook is the audiobook channel which is currently 8-9% of the total $140B books market growing at 20% YoY.

To accelerate this business line, Spotify has acquired Findaway, a platform that allows users to create, distribute, and monetize their audiobooks. The platform turbocharges Spotify’s capability of turning books into audiobooks and bringing unmissable conversations to its user base.

The multi-format feed of music, videos, podcasts, and audiobooks makes Spotify the number one destination to discover new things, and the best part, 

it is Repeatable, Scaleable, and Compounds.

Here’s a youtube video presenting new discoveries with multi-feed format on Spotify

Leveraging Communities

Over the last 12 years, Spotify has cultivated its online community of 600 million users - evolving into a space where users can create, share, learn, and express themselves. Spotify has nurtured a team of highly engaged superusers who go beyond Q&A’s and engage with millions of artists creating music, podcasts, and audiobooks. With communities, Spotify builds a place where users spend time experiencing their product and engaging with friends, family, and peers. Superusers also share their own discoveries with the users connecting them with Spotify deeply.

Here’s a June 2024 community post that shows how superusers add value to the customers

And that’s a wrap on Spotify! If you find this newsletter valuable, feel free to share it with friends, and consider subscribing if you haven’t already.