Morgan Brown has done a fantastic job of reconstructing the story of Spotify's growth in this long post.
Written in late 2014, it only tells the first six years of a story that begins with the official launch of the service in 2008. But its content is exciting and a great source of insight into the drivers of online growth.
Brown recounts the initial traction and innovation of the product that gave the user complete control over the music they listened to for a $10 subscription at the time. He develops the deployment in Europe, the mechanisms of the freemium model and the operation of royalty payouts. Then the installation in the US and the relationship that the service built with social networks, starting with Facebook.
A very detailed and well-documented case study.
In many markets, disrupting the pricing model allows new entrants to shrink the existing market made up of legacy players who charge a premium for a similar service. For example, Encarta (and then Google and Wikipedia) shrunk the encyclopedia market from a $1 billion market to essentially zero. Encarta, $99 on CD compared to $1,000 for Encyclopedia Britannica, grew to $100 million in its first five years as it shrunk the market. It’s a powerful growth opportunity for companies that can pull it off. iTunes similarly shrunk the music market while taking a massive chunk of cash from existing players like Tower Records. What’s interesting about freemium in music however, is that is not just a market shrinking mechanism, but also a potential growth mechanism, as it can act as a bridge between piracy and legacy buying options.