audio streaming

How can Spotify keep growing in 2021 and beyond?

An in-depth strategic analysis of Spotify’s growth options

Jiten Chablani
9 min readJan 3, 2021


Spotify is an audio streaming service, whose value proposition is to provide “music for everyone”. The audio streaming industry is a fairly infant but highly competitive market, and it’s rapidly expanding — CAGR between 2020–2027 is expected to be 17.8% (Citation 1).

Exhibit 1: Market share of audio streaming — Citation 2

As seen in Exhibit 1 and Exhibit 2 below, Spotify is the largest audio streaming provider in the industry, with around 36% global market share (Citation 2) and revenue of €6.7bn in 2019 (Citation 3). Additionally, according to Exhibit 3, as of Q3 2020, it boasts from approximately 320 million users (Citation 4), 144 million of them being premium subscribers (Citation 5).

Exhibit 2: Spotify’s revenue, costs and % change — Citation 3
Exhibit 2: Spotify’s revenue, costs and % change — Citation 3, Citation 23
Exhibit 3: Spotify users data and % change — Citation 4, Citation 5
Exhibit 3: Spotify users data and % change — Citation 4, Citation 5, Citation 23

Spotify has been growing very quickly and has been pursuing a number of growth strategies. Firstly, through scaling. Between Q4 2016 and Q4 2019:

  • Revenue has increased YoY by an average of 31.9% (Citation 3)
  • Costs of revenue are increasing YoY slower than revenue, which suggests that Spotify’s cost structure is getting more efficient (Exhibit 2).
  • Monthly average users (MAU) both free and premium, have increased YoY by an average 30.1% (Citation 4)
  • Premium users have increased YoY by an average of 37.4% (Citation 5)
  • Growth of premium users has slowed down, both in total, and compared to all the MAUs (Exhibit 3)

Additionally, Spotify is also growing through market entry. Currently, it operates in 79 markets (Citation 3) and is planning to launch in South Korea in H1 2021 (Citation 6).

Furthermore, Spotify is also carrying extensive R&D to further their innovative capabilities, for example through research of audio intelligence capabilities to enhance how music is created, identified, and consumed (Citation 7).

Finally, Spotify is also pursuing growth through acquisition — further explained in the Growth Through Acquisition: Analysis section below.


In order to continue its expansion, Spotify should consider exploring other growth alternatives to scaling.

Scenario Analysis: Trends (Scenario Planning)

In recent years, the audio streaming industry has been marked by several trends:

  • Within the music industry, globally, most streams come from video, with video streaming accounting for 66% of the global share VS. 33% of share coming from audio. This is largely driven by YouTube as it’s the preferred consumption platform for international music genres (e.g. K-pop in South Korea, Bollywood in India) due to its freemium model (Citation 9)
  • Live music is becoming increasingly popular, with the live-music industry expecting to have generated $28.8 billion in revenue in 2020 had Covid19 not occurred. (Citation 10). The industry will likely pick up post-pandemic
  • Vinyl LPs have seen a revival in recent years, with sales increasing between 11% and 15% annually (Citation 9)
  • The Spotify effect — pop songs are getting shorter by an average of 1 minute and 13 seconds compared to 20 years ago (Citation 11). This could be explained by how an artist secures a royalty fee from streaming services only when songs are played for at least 30 seconds
  • The podcast market is rapidly growing, with sales expected to increase to $11.07 billion in 2020, up from $9.28 billion in 2019 (Citation 12). Global CAGR between 2020–2027 is expected to be 27.5% (Citation 12)

Particularly during the Covid19 pandemic,

  • A large increase in the creation of playlists for home activities (Citation 13), such as:
  • +50% in-home haircut playlists
  • +430% garden-themed playlists
  • +40% cleaning-themed playlists
  • Streams of mental health and wellbeing content have increased, by 57% for playlists, and 122% for podcasts (Citation 14)

Scenario Analysis: Uncertainties (Scenario Planning)

However, the audio streaming industry faces several uncertainties:

  • Which existing trends will stick after the Covid19 pandemic and which won’t?
  • Will artists demand more royalties in the future due to the perceived unfairness of royalties? (Citation 15)
  • Will Spotify develop its own content in-house by signing its own artists?
  • How hard will it be to convert users to the premium membership?

In Exhibit 4 and Exhibit 5 (below), I have selected 2 uncertainties in the audio streaming industry and plotted potential future scenarios, and a payoff matrix for each scenario. The timeframe selected will be 2 years for two reasons:

  1. Music license agreements signed typically have a duration of 2 years (Citation 3).
  2. Incumbents are technology players, which means that the industry is rapidly changing and is prone to disruption.
Exhibit 4: Scenario planning growth scenarios in the audio streaming industry
Exhibit 5: Payoff Matrix for different growth scenarios

If we look at Exhibit 4 and Exhibit 5, Scenario A is currently the industry status quo, and where Spotify operates — content is licensed from 3rd party content creators through 2-year contracts (Citation 3), and royalty fees are not expected to change, with Spotify currently paying a 70/30 revenue split in favour of content creators (Citation 16). This scenario poses a problem for incumbents as it keeps the costs of revenue high and hinders profitability.

In Scenario B, content creators would be demanding more royalty fees to increase their top line. This would pose a huge problem for incumbents as it would further increase the costs of revenue in an already unprofitable industry. Larger incumbents like Spotify have a tactical advantage here and can potentially hold off from paying higher royalties due to their large user base (or strong bargaining power).

In Scenario C, content would be developed in-house by streaming services. This would:

  • Reduce the costs of revenue and potentially increase profitability, and
  • Give incumbents a larger bargaining power over suppliers and therefore strengthen their competitive position.

In Scenario D, we’d observe a big shift in the industry, where content creators would demand more royalty fees, and incumbents would attempt backwards vertical integration in order to cushion the hit to their costs.

Game Theory Analysis

When considering the payoffs for each scenario, streaming services gain more in Scenarios C and D, when developing in-house content, as this significantly reduces their cost of revenue.

In order to explore Scenarios C and D further, I illustrate in Exhibit 6 the payoffs of acquiring content creators for Apple Music and Spotify and what effect this move would have on the other firm.

Exhibit 6: Payoff Matrix for vertical integration of Spotify Vs Apple

Currently, the top left quadrant is the status quo, and neither firm would gain anything if they do not backwards integrate with content creators.

Either firm would see massive gains if they started creating content, at the cost of the other firm’s competitive position. This is because the “entering” firm would vastly strengthen their competitive position through a lower cost structure, stronger bargaining power of suppliers, and profitability which it would be able to invest back to further develop their capabilities.

If both firms “enter”, they will see optimal gains, however, each firm’s gains will neutralise the other’s. It is therefore in both firm’s interest to move towards content creation. In Spotify’s case, making the first move will be beneficial to them as they will be able to capture a valuable market position by maximising market share gain.

Growth: Acquisitions Analysis

Spotify has pursued an acquisition strategy to grow into the content creation market, and has acquired a number of firms that specialise in content creation of podcasts:

  • Parcast (2019) for $56 million (Citation 17) — a premier storytelling podcast network focused on creating scripted, story-driven programming
  • Gimlet Media (2019) for $230 million (Citation 18) — a digital media company and podcast network focused on producing narrative podcasts
  • Anchor Media (2019) for approximately $110 million (Citation 19) — an app to allow independent podcast creators to make their own content
  • Bill Simmons’ The Ringer (2020) for $196 million (Citation 20) — a sports podcast content creator
  • Megaphone (2020) for $235 million (Citation 21) — a podcast hosting and publishing company for independent content creators

I have picked Spotify’s latest acquisition, Megaphone, and carried out an acquisition analysis (Exhibit 7) to follow the decision making rationale behind the integration. The success of an integration can be defined by the following formula:

Strategic Benefits — Purchase Price > Opportunity Cost

Exhibit 7: Acquisition Analysis of Megaphone

Growth: Real Options Analysis

The appetite for podcasts is quite big, seeing an increase of:

  • 333% in shows, from approximately 525k in June 2018 to 1.75 million in January 2021 (Citation 22)
  • 230% in episodes, from approximately 18.5 million in April 2018 to 43 million in January 2021 (Citation 22)

Spotify’s acquisition of Megaphone (alongside other incumbents in the podcast industry) is a long-term move that takes advantage of the increasing demand for podcasts. The acquisition speeds up entry into the market and also acquires podcasting capabilities that will help Spotify sustain its competitive advantage.

In the long term, however, it is unclear whether Spotify will be able to capture the economic rents from the Megaphone acquisition as the value-added from synergy is yet unclear.

If Spotify decides to continue down its path of growth into podcasts, it has a number of options available as seen in Exhibit 8 below. Spotify can:

  • Scale up the recently acquired subsidiaries by attracting new customers
  • Acquire other podcast companies to strengthen its positioning in the market
  • Or abandon the idea and pursue alternative opportunities
Exhibit 8: Spotify Options Analysis — Growing The Podcast Market

Synthesis Of Findings

Through this analysis, I would expect Spotify to continue down the path of backward vertical integration to become a supplier, particularly in the podcast streaming industry, and possibly in the music streaming industry. Spotify’s recent acquisitions of Parcast, Gimlet Media, Anchor Media, Bill Simmons’ The Ringer and Megaphone, alongside other future expansion in the podcast market is an excellent move, and will strengthen its competitive positioning for a number of reasons:

  • Spotify will not have to pay for 2-year licenses to acquire the podcast content owned by its recent acquisitions. This will reduce the cost of revenue which in turn will lead to both a better cost structure and increased profitability
  • Increased profits could be invested in either strengthening Spotify’s capabilities or exploring additional growth possibilities
  • Total user reach will be expanded beyond just the Spotify platform, leading to a higher top-line
  • The ability to convert users from newly integrated businesses into Spotify users thereby increasing ARPU — Gimlet Media, for example, is free to use
  • Increased bargaining power because Spotify will be able to rely less on other content creators due to its in-house capabilities
  • Stronger competitive advantage through the exclusivity of content as it reduces the total base size of podcast shows that competitors can add to their library



Jiten Chablani

Strategy @ BT Group. I explore economics, innovation and growth strategy in the tech industry. Views are my own.