How a Swedish start-up transformed the music industry and how we consume music
Strategic Case analysis on Spotify
Overview of Spotify
Since 1877 [1] people have been able to not only listen to music from the comfort of their homes but more importantly buy and sell music. The shape of the medium to do so has changed many times from the phonograph, vinyl or cassettes to the present where 43% of people in the UK [2] and 48% people in the US [3] pay for audio streaming services.
With over 180 million monthly active users [4], 80 million premium subscribers (June 2018) [5] and a catalogue of 40 million songs [6], Spotify is the biggest music streaming service in the world as of today.
This case study will have a look at what made Spotify what it is today, evaluate their goals and strategies to get there, plus the new ones that are currently being implemented.
What is Spotify
As defined in their own website Spotify is “a digital music, podcast, and video streaming service that gives you access to millions of songs and other content from artists all over the world” [7]. It was founded in 2006 by Daniel Ek in Stockholm, Sweden and launched in 2008. Unlike physical sales of CD’s or download songs, where the artist gets a fixed percentage for each of the sales, Spotify has dealt with record labels meaning that it pays royalties according to the number of streams for the artists in the discography which then distributes the revenues to their artists.
What makes this case study interesting is that after its success, a new wave of streaming services arose with companies like Apple or Amazon trying to imitate Spotify’s strategy. However, they are yet to be as successful.
This could be particularly fascinating for other European tech startups that want to leave their home market and become world leaders in their industry like Spotify (which has a global market share of 36% [9]) as among tech companies (2000 — present), “European companies lag far behind in cumulative valuation” with $240 billion — 17% [10] (compared to $1,370 billion in the USA- 48% [11]).
It might also be useful for other companies operating in a dying or endangered industry (as the music industry was in the 90s).
Current situation
One of the main problems Spotify is currently facing includes that to this day, it is yet to create a profit despite their 4 € billion revenue in 2017 [12](an increase form 3.3€ billion in 2016 [13]). As of April 2018 and after pursuing a rather unusual direct listing, Spotify is a publicly listed company. The starting price was $165.90 [14], and 5.6 million shares were traded initially [15]. This is an attempt to turn their profitability around but that will not be enough to make up for their 300 million euros operating profit loss [16](compared to 557€ million in 2016 [17]).
The music streaming services market has been steadily growing since its birth in 2008, it is expected to grow 16 per cent to $28bn by 2030 in terms of annual revenue, according to Goldman Sachs [19]. As global market leaders, they have an advantage over their competitors.
However, in a key market such as the US, Apple Music has taken over since its launch in late 2015 and currently has 49.5 monthly million users (compared to Spotify’s 47.7) [20].
Other competitors like Deezer are currently operating in over 180 countries [21] (compared to Spotify’s 65 markets [22]) but it only has “12 million active users — about 9 million paying” [23]. Deezer strategy focuses more on gaining niche markets in the music industry such as Guatemala, Bolivia, Paraguay, Colombia, Nigeria, Senegal and South Africa [24] and tries to differentiate themselves from other streaming services by the localisation of their content.
Therefore Spotify’s current situation as market leaders could be threatened.
Goals
Spotify’s main goal is “to unlock the potential of human creativity”[25] as mentioned on their webpage. In order to achieve this, they have broken the main goal into two subordinate goals: 1) “by giving a million creative artists the opportunity to live off their art” [26] and 2) “giving billions of fans the opportunity to enjoy and be inspired by it” [27].
This is interesting because during the 90’s most companies that wanted to disrupt the music industry, focused on “giving billions of fans the opportunity to enjoy and be inspired by it” [28].
The appearance of the internet was the opportunity companies like Napster needed to make music available to everyone and for free (but in a rather illegal way, as it violated copyright laws and gave 0 profit to the artists). This was not a sustainable business model but it planted the seed in the head, Daniel Ek. Spotify took the opportunity but tried to embrace the internet instead of fighting it.
Offering an online extensive library of music that could all be accessed with one account was not something innovative but totally revolutionary after a very dark decade for the music industry where annual revenues fell from $14.6bn in 1999 to $6.3bn in 2009 (US music market) [29]. Spotify changed the whole market by taking into consideration the second part of the statement, “giving a million creative artists the opportunity to live off their art” [30]. Spotify brought exactly what music labels needed to keep afloat, and for the first time in 2017 streaming accounted for the majority of globally recorded music revenues [31].
However, it could be argued that Daniel Ek, launched Spotify merely as a way to profit from the failed business plan Napster had. It can be argued that he does not care about the artists but the opportunity to make money by making the business plan legal. Spotify has faced in the past is allegations of unfair compensation for the number of streams. In 2016 Taylor Swift even took her music off the platform “I’m not willing to contribute my life’s work to an experiment that I don’t feel fairly compensates the writers, producers, artists, and creators of this music” [32]. As of 2017 her music is back in Spotify as she reached a new agreement but this caused bad PR for the compensations Spotify gives its artists.
Nonetheless, if profits were the only drive behind Spotify, the company has not really succeeded in doing so, as it has yet to produce a profit, so we can discard this alternative as its main goal.
Strategy
Spotify has put a few strategies in place in order to achieve or at least get close to reaching their main goal.
The first strategy in order to get closer to their subordinate goal of “by giving a million creative artists the opportunity to live off their art” [33] was launching a new model where artists can sign direct license deals without the need of a label or an aggregator (like TuneCore and CD Baby which is what smaller artists currently use).
This is interesting because it would totally change the dynamics of the music industry, as it will provide the opportunity to many more artists to make money from their music especially those unsigned and indie artists. It could also mean bigger artists could potentially get “a bigger financial cut for those artists and ownership of their recordings” [8] something unheard of at the moment.
However, this would not only benefit the artist but the profits of Spotify too. It would mean that little to no money has to go to the music labels which is where around 52% (2.1 billion €) of their revenue [9] currently is spent on. So an alternative interpretation of this strategy is that the reason Spotify has carried out this new model as a possible way to improve profitability (which is the main issue with their business model heading to the future). If they are able to decrease the money spent on music label licenses agreements by directly signing artist on their platform by only 15% [34]they could potentially become a profitable company (assuming this does not incur significant further costs).
The second strategy targets the second subordinate goal of “giving billions of fans the opportunity to enjoy and be inspired by it” [35]. Spotify was the first streaming service to provide two different types of accounts in their platform. Spotify operates under the freemium service meaning basic features are free but run with advertisements and limitations (such as not being able to access music offline or not being able to skip songs), while additional features, such as improved streaming quality and music downloads, are offered via paid subscriptions (of around 6€ to 10€ depending on which geographical market [36]). This is interesting because it gave the option to millions of users the opportunity to listen to music legally (and benefiting their favourite artists) for free. This really helps to offer all fans the opportunity of enjoying music as out of it’s 159 million users only 70 million paying users as of January 2018 [37].
The third strategy targets both subordinate goals. Spotify are currently implementing data analytics and heavy investment in AI to create the best product for its customers. By using all streaming information collected on their customers they are able to create personalised playlists that are described by users to “know their customers taste in music better than themselves” [38].
This is especially interesting because it is one of their USP’s since their acquisition of Echo Nest, a firm that analyses data to predict future listening habits [39]. Spotify’s acquisition of Echo Nest not only improved their service but ceased their competitors, as Echo was working with Amazon and Apple before the acquisition.
One example is the Discover Weekly personalised playlist, which provides a weekly playlist with 30 songs that you’ve never heard of (both new and old) updated every Monday. The Discover Weekly feature on Spotify reached 40 million people in 2016 alone [40] and over half of Discover Weekly users listen to 10 tracks a week (plus they save at least one of those songs to their favourites [42]).
The combination of “Collaborative Filtering, Natural Language Processing, and Audio Analysis powers Spotify’s Discover Weekly”. According to Spotify “8,000 artists on the platform get half their weekly streams from Discover Weekly users [44]” which means that thanks to the investment in these technologies it is accomplishing their goal of bringing their users to new artists and by doing so users not only enjoy it but are more likely to be inspired if exposed to a bigger range of music inside their taste.
Apple Music and Deezer also have a similar highly personalised playlist. Apple Music has New Music Mix which is a personalized playlist of 25 songs [46]. The main difference with Discover weekly is the fact that New Music Mix is made up new songs from artists you already follow or know of. This means that it never brings exposure to smaller and new artists. On the other hand, Deezer has FLOW daily playlist combining some of your current songs and recommended songs feature that Spotify has too (“Daily Mix”) but instead of just one playlist, it provides you with 4 playlists updated daily.
Therefore it could be argued that Spotify only launched playlists such as “Release Radar” and “Discover Weekly” as a counter-attack to not be left behind when Apple launched personalised playlists back in 2015 [47], not because they want to help the artists live off their art or the users be inspired but merely to survive the music streaming industry and not be left behind.
Although this is unlikely to be their main motivation because by connecting users with new artists and songs (especially those that they’ve never heard before) with quality “Discover Weekly” playlists will keep them more engaged coming every Monday. This is potentially one of the reasons that have impacted customer churn which decreased from 7.7% to 5.5% over 2014–2017, despite strong subscriber growth [48].
Evaluation
In order to evaluate the strategy I will use SWOT analysis:
Strengths
In my opinion, Spotify’s main strength is the fact that it is the current worldwide market leader which has global market share of 36% [49]. That is the main advantage it currently has against its competitors and what gives them an edge.
For example, by being the industry leader, they have more users, which allows them to collect more data and create more accurate personalized playlists.
Weaknesses
Their main weakness is their lack of profits as mentioned above. It really damages the future possibilities of the company to keep operating if this does not change.
This is interesting because one of it’s main competitors, Apple music belongs to Apple Inc. Which is important because as highlighted by Tim Cook CEO of Apple Inc. “We’re not in it for the money” talking about the music streaming. For them “Apple Music to get more people into the Apple ecosystem, and provide extra incentive for them to stay” [50].
In order to turn this around, Spotify has been trying to reduce costs by renegotiating with the music labels. As a result, in 2018, Spotify a gross margin of 25.8% in the second quarter (2.8 percentage points from the year before)[51] due to new deals with the major record labels. However, this is not enough, so in order to improve profitability, Spotify has to look at other opportunities.
Opportunity
Their main opportunity lies on their strategy: by being able to sign artists directly to Spotify, it will allow saving money on Royalties and therefore improve profitability but also allow small-to-medium artists to make a living from their art as they would be able to publish their music without the use of aggregators or middleman.
However, we are yet to see results from the strategy as it is still being introduced at a slow pace with a few indie artists.
Threats
The increasing popularity of Apple Music in the USA (biggest market) or Deezer in multiple niche geographical markets (with the corresponding country-specific music genres — eg. Gospel in Brazil, Puerto Rican reggaeton or Dutch hip-hop [52]. This could be a threat in their current market leader position and an obstacle in future geographical growth in the future.
In my opinion, their goals and strategy are directly linked to reinforce each other. All of the strategies stated before had a direct link to help get closer to one of the two subordinate goals and therefore “to unlock the potential of human creativity”. They are also appropriate for their current environment signing artists directly not only help Spotify get to their main goal but solve the main weakness (lack of profits).
On top of that, the investment in AI and data analytics to create more personalized playlists also helps towards differentiating themselves against the other competitors and therefore being less threatened as they provide an overall better service.
Therefore, I believe the strategies are appropriate for the goal they are trying to reach.
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