How Spotify's Pending IPO relates to the Payment Industry

February 20, 2014 by Camille Brenkwitz

Spotify Business ModelOne of our favorite companies over at PayStand is Spotify. For those of you that haven't used it, it's a music service that offers unlimited music for free or if you want added features, a small monthly subscription. If you walk into the PayStand office during the day, someone's Spotify playlist is usually playing ambiently in the background, and if you come in during the evening, it's pretty much always on, and it's volume level is, well, not-ambient. Since so many of us own Spotify subscriptions, we'll be the first to admit we are fanboys. And since we are fans of Spotify and good success stories in tech in general, it's been great to see all the recent news articles talking out about Spotifys pending IPO. Most of the conjecture is based on a recent job posting of theirs for a role that typically is only needed when companies are going or have gone public. Since Spotify has been growing at a phenomenal rate over the last few years, it's not really a surprise that they are likely going public in the next year or two. With revenue at $571 Million in 2012 (probably closer to a Billion now), and 24 million users, it's clear Spotify has been a run-away success. But as they say, hindsight is 20/20 and Spotify's success certainly wasn't always so likely.

The Peer to Peer Music Revolution

Nearly all of us remember 15 years ago when the music industry looked dramatically different. Those were the days of buying a $20 dollar CDs for one song you liked on the radio. And as things became digital it became extremely clear that the business model didn't feel particularly fair. This underlying feeling became rather apparent when infamous Sean Parker invented Napster, a peer-to-peer file sharing system that college kids started in droves using to pass around music. As Napster and then Bittorent became popular one of the things that was interesting was how many people were using it, not just delinquents and juveniles, but what we would consider normal upstanding citizens. Despite the fact that it was technically stealing, much of the general psych felt like it didn't cost anything more to transfer music digitally so why was the music industry charging digitally pretty much the same price as a stamped out CD that had to be shipped. In respect because the music industry industry didn't have a business model inline with what the customer demand was for, good honest people, ended up basically stealing.

The Music Industries Response

The music industry responded to the peer to peer revolution of napster, et all in two ways. First they tried to create competitive digital music products of their own. (Funny aside, one of PayStand's team members worked 10 years ago on Project Urge, a doomed "iTunes killer" by MTV, that never made it off the grown). Theses systems were clunky, hobbled with DRM, and generally were still based off a music business model built pre-internet. So naturally more and more people started using the peer-to-peer software because it was faster, cheaper, and easier to use then the industries attempt at digital music. Unable to contain p2p the music industry responded in a second way - they started suing people. Which lead us to the morbidly comical situation where dead grandmothers were getting sued for piracy. Clearly a low point.

Spotify's Radical Gamble on a New Model

So while Napster and Bittorrent were thriving, the music industry was clearly in need of a revamp. The genius of Spotify was to take the technology of a peer-to-peer music system that Napster and Bittorrent were using and apply it to a model that was music industry friendly. Of course not everyone in the music industry was onboard with Spotify at first, but the idea of a commercialized peer to peer music network that the music industry could be a part was truly one of great timing. And not only did Spotify use bit torrent like peer-to-peer technology, they added another major change to the music industries model: monthly fixed pricing. The music industry pre-2005 was basically variable pricing, in the majority of their business models. Whether it was buying a CD for $20 a piece or buying songs from iTunes for $.99 a piece, at the end of the day, the more music I wanted the more I had to pay. But because it was digital, Spotify realized they could essentially offer unlimited music for a set price. And if you are a music lover, the idea of getting all the music you wanted for $9.99 a month sounded like heaven. In fact, if you poll some of the folks at PayStand many will tell you that their Spotify bill is one they actually LOVE to pay. Why? Because you are getting an incredible value, that you otherwise would have been spending a lot of money for, and so you are happy to support a company that gives you something you love, in a way that feels economically fair.

So what does Spotify have to do with the Payments Industry

At this point it's probably obvious that at PayStand, we love Spotify for more than just the music. We love the music. But it's also a great case study in how an old business model can get disrupted because of the p2p distribution of the internet. And how a company can come in and build a fairer pricing model with new technology that works for all parties. If you replace out music industry with payment industry above, you'll find that we are in a pretty similar state. The variable "percent fee based" pricing model of payments no longer seems always fair in a digital age where money is moved over as 1's and 0's. And like the Napster and bittorents of the music world, now P2P currency has emerged (from Bitcoin, LightCoin, DogeCoin and so many others) as a money based system built for the Internet. But also like the Napsters situation, currently the financial industry and many consumers are not yet onboard with the sometimes seemingly strong agenda and lack of trust in the first waves of a p2p money. But like Spotify, we believe at PayStand that all that is really needed is a good company to leverage the emerging p2p technology, work with the industry in a cooperative way, and build a new fixed cost model with fairness in mind. It seems to us if Spotify has been able to revolutionize an industry we are all passionate about like music, there's no reason why we can't do the same kind of revolution in something as fundamental and important as commerce.

Tags:   Bitcoin, Payments, p2p, artists, music