As streaming platform, Spotify eventually surpassed Pandora’s

As technological advances continue to
revolutionize the music industry, there has been a noticeable trend towards
users streaming music rather than purchasing albums and songs. According to the
Global Music Report of 2017, there has been a 60.4% growth in streaming revenue
versus a 7.6% decrease in physical revenue and a 20.5% decrease in download
revenue.1
Congruent with this recent trend, there has been an evident increase in the number
of companies offering music streaming platforms, such as Spotify, Pandora,
Apple Music, and Amazon Music, to name a few. Founded in 2000, Pandora was one
of the first streaming companies to experience success. After going public in
2011 with a $100 million dollar IPO,2
Pandora became the leading music streaming company, and its stock eventually
peaked at $37.42 cents per share in February 2014 (Figure 1). During Pandora’s
rise, a small Swedish company, named Spotify, was founded in 20063
and became available in the US in 2011.4
By offering a more resourceful music streaming platform, Spotify eventually
surpassed Pandora’s total monthly active worldwide users by 2015 despite having
to overcome the significant hurdle of joining the music streaming industry much
later. Spotify has continued to separate themselves even further from the
competition by offering a product that exhibits a stimulating visual appeal, superior
algorithms on a platform that provides its users with an autonomous experience,
a versatile pricing structure, and ultimately exploits the value of network
effects to maximize their success.

In order to accurately analyze the two
platforms, most of the juxtaposition presented will focus on the premium versions
that both companies offer, because they have the most options available to the
user. Also, it is important to note that while both Spotify and Pandora are
music streaming companies, they are noticeably different in terms of what they
offer their users. Thus, a direct comparison between the two does not
necessarily demonstrate a perfect correlation; however, beginning in 2015, there
has been an indisputable increase in worldwide Spotify users coinciding with a
plateau in worldwide Pandora users (Figure 2). This paper attempts to explain
how Spotify capitalized on their implementation and exploitation of network
effects to influence this trend and stay ahead of the competition.

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Pandora was founded in 2000 by Tim
Westergren, a “traveling musician” and “music identifier for films.”5
The original idea for Pandora’s personalized radio stations was born using the
experience that he accumulated through these unique occupations. Westergren
believed that he could generate a taxonomy of musical characteristics that could
be codified and sorted into a platform that bridged together musicological
profiles and undiscovered music by addressing the similarities between the
music.6
Using such characteristics as form, rhythm, voice, and melody to harmony, an
intricate macro formula was developed to pair songs in an order-ranking system
based on the number of similarities that they had with all of the songs in the
original database.7 This
platform was seen as the perfect formula for providing consumers with stations
that played the music they loved as well as an opportunity for them to discover
new artists and songs.  Now that his
dream had a tangible product, Westergren and his business partner, Jon Kraft, sought
funding. Unfortunately, due to the Napster shut down in the midst of the
dot.com bubble burst, the capital raise for Pandora ultimately took 3 years,
348 pitches, 11 maxed out credit cards, and $500,000 in personal debt before
finally achieving success.8
Finally, in November of 2005, the full free service launch of Pandora
experienced substantial public success due to its ability to match users with
music they did not know existed.9
In 2010, there were almost 300 million smartphones sold, which drastically benefited
the music streaming industry (Spotify Case). By taking advantage of the
smartphone revolution, Pandora instantly became the music streaming industry
leader as their growth seemingly doubled overnight (Spotify case).10

Because they allow users such easy access
to millions of songs on any computer or device, music streaming services are
being seen as the future of music.11
The Spotify platform reiterates this belief due to its extensive library and
user ability to select whatever music they desire. Eliot Van Buskirk of Wired
Magazine has characterized Spotify as, “a magical version of iTunes in which
you’ve already bought every song in the world.”12
This ability to play almost any song on command was an influential
differentiator between Pandora and Spotify once Spotify became a legitimate
competitor in the industry. Spotify was founded in 2006 by Martin Lorentzon and
Daniel Ek in Stockholm, Sweden right around the time of Pandora’s initial
success.13 Rather
than copying Pandora’s strategy of allowing users to uncover new music through
methodically chosen customized radio stations, Spotify decided to focus on the
user’s ability to access music.14
When discussing his thoughts on Spotify, Ek stated that, “What Spotify is
saying is, ownership (of music) is great, but access is the future. The main
reason people want to pay for Spotify is really portability. People are saying,
‘I want to have my music with me’.”15
By building a platform that allowed this autonomous access to seemingly all
existing music, Spotify was then able to use network effects to grow their user
base exponentially in their overall quest to transform and dominate the music
streaming industry.

1 “Global Music
Report 2017.” Ifpi, 2017.
http://www.ifpi.org/downloads/GMR2017.pdf.

2 Evelyn M. Rusli,
“Pandora Files to Go Public,” The New York Times, February 11, 2011,

3 Jordan Crook and
Fitz Tepper, “A Brief History Of Spotify,” TechCrunch, July 29,
2015, https://techcrunch.com/gallery/a-brief-history-of-spotify/.

4 Daniel Ek,
“Hello America. Spotify here.,” News, July 14, 2011, https://news.spotify.com/us/2011/07/14/hello-america-spotify-here/.

5 “Origin Story:
The Founding of Pandora Radio,” Startup Grind, https://www.startupgrind.com/blog/origin-story-the-founding-of-pandora-radio/.

6 Ibid.

7 Ibid.

8 Ibid.

9 Ibid.

10 Ibid.

11 Kate Swanson,
“A Case Study on Spotify: Exploring Perceptions of the Music Streaming
Service,” Journal of the Music and Entertainment Industry
Educators Association 13, no. 1 (2013):, doi:10.25101/13.10.

12 Ibid.

13 Jordan Crook and
Fitz Tepper, “A Brief History Of Spotify,” TechCrunch, July 29,
2015, https://techcrunch.com/gallery/a-brief-history-of-spotify/slide/3/.

14 Brandon Griggs, “Spotify founder:
Future of music is access, not ownership,” CNN, July 21, 2011, ,
http://www.cnn.com/2011/TECH/web/07/21/spotify.fortune.brainstorm/index.html.

15 Brandon Griggs, “Spotify founder: Future of music is access,
not ownership,” CNN, July 21, 2011, ,
http://www.cnn.com/2011/TECH/web/07/21/spotify.fortune.brainstorm/index.html.

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