Youtube vs Spotify: why markets matter
Youtube earned 20 billion from ads in 2020 compared to Spotify’s 8 billion.
2 billion people stream videos from Youtube every month compared to Spotify’s 365 million listeners.
Why have these two companies achieved such different magnitudes of success and adoption?
There is a mixture of reasons for this discrepancy. Some of the reasons that first popped into your mind might be relevant, like the founding context. But they may be mostly insignificant, like the founding year and market share.
Explanation #1: Youtube had a headstart.
Youtube was founded on Feb 14, 2005, about a year before Spotify’s April 23, 2006 founding. The Youtube story starts in San Mateo, California, founded by 3 ex-Paypal employees -- Jawed Karim, Steve Chen, and Chad Hurley. Two months later, the first Youtube video was uploaded: ‘Me at the Zoo’ by co-founder Jawed Karim. Fast forward 12 months into 2006, and Youtube had reached 100 million views per day.
Why didn’t Spotify experience similar growth?
A 2019 study of US adults found that over 68% of adults aged age 18 - 34 listen to music every day.
Spotify certainly appealed to customers, even having to limit user growth in its early years. So Youtube’s 1-year headstart was not the bottleneck.
Ask not when Spotify was founded, but where.
#1: Youtube had a headstart - False. Headstart was not significant
Explanation #2: Youtube had a founding location advantage.
Daniel Elk and Martin Lorentzon founded Spotify in April 2006. What will surprise you is where it was founded: Stockholm, Sweden. In fact, the company is still headquartered in Sweden, where it has over 30% of its workforce. From a new venture standpoint, Stockholm, Sweden (Spotify) is less preferable than San Matteo, California (Youtube). This founding location explanation carries some weight.
By October 2006, 20 months after its founding, Youtube was acquired by a neighbor, Google, for $1.65 billion dollars. That's a billion with a b! Where was Google’s headquarters you ask, as a diligent reader? Mountain View, California.
However, this location advantage does not explain it all. One of the main benefits of proximity to Tech Clusters like Silicon Valley is having access to top engineering talent. This talent will then help you build a great product that users love. However, Spotify hired some of the best engineering talents across Europe. You can tell talent was not a problem because Spotify was growing so fast that it had to deliberately limit its growth by restricting user invites and having invite-only beta roll-outs.
Even Mark Zuckerberg tweeted “Spotify is so good” in 2009, 2 years before the service would be available in the US.
#1: Youtube had a headstart - False. Headstart was not significant
#2: Youtube had a founding location advantage - True, but Spotify still had fantastic growth
Explanation #3: Spotify does not have a 100% market share like Youtube.
By comparison, Youtube nearly has a 100% market share. I don’t have a neat way of defining the markets so let’s use these questions. A friend asks “Have you watched the Way 2 Sexy music video?” Nearly 100% of the people I know, would think of finding this video on Youtube. “Have you listened to No Friends in the Industry?” Spotify, Apple Music, and Amazon Music are all common answers.
Market share is definitely a hurdle Spotify has to overcome whereas Youtube does not. But this explanation is insufficient. Given that Spotify has 365 million users, and 30% of the market, even if it were to ‘win’ the music streaming market, that comes out to 1.2 billion users. Youtube already has 2 billion monthly visitors watching 1 billion hours of video every day.
So Spotify is a beloved service but has strictly fewer users than Youtube does. Spotify grew very fast, but Youtube only seemed to grow faster, getting acquired by Google within 20 months. So why does Youtube appear to be in a larger market?
#1: Youtube had a headstart. - True but the headstart was not significant
#2: Youtube had a founding location advantage. - True, but Spotify still had fantastic growth
#3: Spotify does not have a 100% market share like Youtube. - True, but it won’t matter if it did
Explanation #4: Youtube is simply in a bigger market
Sight vs Sound
Youtube has performed ‘better’ because of a fundamental truth about human biology: We have evolved to better process visual stimuli than auditory stimuli.
“Vision may dominate our perception of space not because of any inherent physiological advantage of visual over other sensory connections in the brain, but because visual information tends to be more reliable than other sources of spatial information”
“The reason that visual information should dominate space perception can be appreciated intuitively: visual spatial information is exceptionally reliable and precise. Optical signals provide high-resolution information that is rarely distorted or corrupted by the environment and that projects directly onto the retina topographically.”
-Why Seeing Is Believing: Merging Auditory and Visual Worlds by Eric Knudsen
Let’s extend the Sight and Sound comparison beyond biology into our everyday lives with some examples. Firstly, 65% of people are visual learners. This leads to challenges replicating some video content. For instance, can you think of a Khan Academy-like podcast on Spotify? No. The superiority of vision enables many more forms of content on Youtube beyond music and podcasts which is all Spotify offers.
Also, Facebook changed its name to Meta. This signals a prioritization of the metaverse: a concept that includes Virtual Reality, Augmented Reality, Mixed Reality, and similar technologies. The underlying change is that we will experience the world very differently due to changes in how we SEE. The promise of the metaverse is not centered on smelling or hearing things differently. It’s about seeing things differently.
#1: Youtube had a headstart. - True but the headstart was not significant
#2: Youtube had a founding location advantage. - True, but Spotify still had fantastic growth
#3: Spotify does not have a 100% market share like Youtube. - True, but it won’t matter if it did
#4: Youtube is simply in a bigger market - Sight >> Sound
There were a variety of reasons for Youtube’s alpha performance. Compared to Spotify, Youtube was founded a year earlier, and in Silicon Valley, not Sweden. Two factors I didn’t get to discuss are the founding teams and the fact that Youtube has spent 90% of its life as a subsidiary of a bigger company, Google/Alphabet.
However, contrary to expectations, market share and business models turned out to be irrelevant compared to the very nature of the market. The lesson here is that some industries and businesses are simply bigger than others.
Whether bigger equals better is a question for another day.