Subscription music services have been dominating the news recently with the U.S. launch of Spotify and the new IHeartRadio, plus free offerings from MOG and RDIO, and the recent purchase of Napster by Rhapsody. There is a sea change occurring in all content industries moving towards streaming and subscription rather than ownership and amongst them- Spotify has been both the most visible and the most vilified of the new companies.

While some believe that Spotify has a diruptive business model and will kill i-tune. (http://blogs.hbr.org/cs/2011/07/why_spotify_will_kill_itunes.html).  Other’s are sighting it’s great mobilization success – signing up more than a million subscribers within couple of weeks as the service coized up to facebook; a great reason for celebration. Perhaps not! Specially in light of the fact that not only has the service never been profitable, but it’s loss is increasing. In 2009, spotify has lost $26 million and losses ballooned to $41 million in 2010.

Though many say – so what? A digital company posting big losses in its initial years is nothing new and spotify launched in Oct 2008, after all. And even though these numbers don’t paint the best picture, they show revenues climbing almost twice as fast as expenses. I believe making Spotify profitable sooner than later would & should be company’s greatest priority. History has shown time & gain that start-ups that succeed to generate growth faster despite losses face significant struggle to make it’s business model work later. Opportunity to tweek your profit model when you are small is crucial to make a venture true success. More users listening to more songs means more expense to spotify which will make this experimentation difficult.

So, the question is how can Spotify quickly grow it’s two main revenue streams: paid subscriptions and advertising. Verdict on paid subscription will be out in 6 months. Currently, new users are offered unlimited listening for six months. Post that, free usage would allow only 10 hours of free listening. Hence though 2011 won’t see any change in subscription revenue, some predict that once the six-month period comes to an end, a chuch of ‘power listener’ US user may sign up. Converting users from free service to $10/month for a service which is often available for free appears to me a daunting task and spotify cannot rely only on subscriptions for revenue.

The more importance (and even more problematic) factor is advertising. Spotify is stymied once again here since the biggest opportunity for it to reach more people is through mobile devices. However, problem is that advertising on mobile is practically nonexistent. Pandora despite being the most-downloadable app in the Apple & Andriod market is not able to make profits! Spotify isn’t Pandora. Pandora is 24th most popular app on App store and Spotify is 106th. Even if they can become more popular with the recent trends, they will have to crack the code on mobile ads without listeners tuning out.

No matter how great a platform & serivce spotify provides, making it profitable looks like a really challening task to me. Today’s crouded internet music space requires not only ‘somthing little different’ but a change in business model to alter the game. Rdio’s recent move probably will change the game. (http://www.pcmag.com/article2/0,2817,2394292,00.asp#fbid=EhB8ZcgPfVQ)

So, do you think Spotify is rising to rise further? I doubt!

 


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This past summer I launched a pop-up e-commerce business called Indie Cases, which produced and sold iPhone cases with exclusive designs from graphic artists. Soon after launch, Fab.com reached out to feature our products on their site. Though we passed on the offer for timing reasons, I was intrigued by their model and impressed by their customer acquisition stats. What follows is a brief description and analysis of their business… 

About Fab.com

Fab.com is a flash sales site for design, cutting across art (the highest-grossing product category), jewelry/wearables, tech, etc. In January 2010, founder Jason Goldberg started working on Fabulis, a social network for gay men. After growing to 150k users in the first year, the team scrapped Fabulis and launched Fab.com in June 2011 (for the rationale behind the restart, read Jason’s Tumblr post). Less than six months after launch, Fab now has over 750k members, 10k orders per week and 500 featured designers.

The Model: Sustainable and Scalable

One might wonder why Fab entered the flash sales space when earlier entrants such as Gilt and Rue La La were already struggling to achieve profitability and continue to grow. The answer is that Fab’s model is quite different. Luxury fashion flash sales businesses are in a bind due to shrinking supply of inventory and growth in users and competitors. In response, they are going down-market to lesser known brands, offering smaller discounts, and even expanding to full-price offerings.

Fab differs from the traditional flash sale businesses in several ways, not just in its focus on design.

  • Perhaps the most significant difference is that Fab is not reliant on excess inventory. Less than 5% of sales are liquidation, and brands can make to order.
  • Fab holds minimal inventory as 90% of brands drop-ship. This results in low working capital requirements and enables simplified scaling.
  • 90% of suppliers are small independent producers. These brands view Fab as a new retail outlet and marketing vehicle.
  • Fab compensates brands such that each sale is profitable. How? For one, Fab’s average margin of 30% is partially offset by Fab’s volume discounts on shipping and the brands’ larger-than-usual production runs. Two, Fab offers a lower average discount to end consumers. While the discount ranges from 0-70%, the average is only 20%. Consumers are willing to accept the lower discount because the products are neither out-of-season nor the least popular. Consumers value Fab for product discovery as much if not more than for discounts.
  • Fab has minimal sizing issues. Most sales are final, leading to very low return rates.

Fab is even differentiated from its closest competitors, One Kings Lane and Etsy. In comparison to OKL, Fab is focused on design in more than just the home context, and is more modern and eclectic. And whereas Etsy is a “pull” model, Fab utilizes a “push” model that keeps members coming back to the site regularly and creates a sense of urgency.

Customer Acquisition: Fast and Cheap

How did Fab sign up 170k people before launch and rapidly grow to 750k? Surprisingly, not by porting over the Fabulis user base. Only 6k of the 150k Fabulis users signed up for Fab. Of today’s 750k members, over half have come through member-to-member viral share links, with email being the strongest channel. How did Fab achieve such success? Three months before launch, Fab implemented a viral loop with varying levels of incentives (see screenshot below for current version).


Today Fab’s social strategy is augmented by sharing features and an inspiration wall similar to Pinterest and Svpply. It also helps that design is a social product category, Ashton Kutcher is an investor and Fab is a catchy domain name. The net effect of Fab’s investments in social is a lower cost of customer acquisition, which in turn directly results in increased profitability and/or allows Fab to pass on savings to brands and consumers. It’s worth noting that social/viral referrals aren’t free due to referrer and referee credits, but of the 750k members, fewer than 4k have received referrer credits through the primary viral campaign.

What’s Next

Fab as is seems poised for continued growth and profitability, but it is already experimenting with new concepts such as pop-up shops, i.e. shops curated around a specific theme that last for a month or more. Will Fab make even larger changes to its model such as holding inventory to ensure a more consistent customer experience?


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