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Spotify Case Study Essay

Critical Analysis: What is the Strategy of Spotify and how improve business Spotify model:

Executive Summary:
This case study about the Spotify business model allows a broader vision of what the digital music industry is. In a short time, many companies have developed and managed marked their territory in a highly competitive industry. The start-up Spotify has undergone a remarkable evolution in a financial point of view but also in terms of its popularity. Its various competitive benefits regarding the market leader and its respect for music labels have enabled the company to be renowned and to have a reputation in the real business. Today, five years after its creation, Spotify is certainly criticized in some aspects of its evolution, but it is a company that has gained market share, popularity and income, despite sometimes significant losses.

History of Spotify
I.The digital music Industry:
1.Presentation of the Industry
2.Place of Spotify in the Industry
3.Actual competitors in the business

II.Spotify Business Strategy:
1.Freemium model
2.Porter’s model

III.Spotify in the future: a sustainable competitive company 1.How can Spotify reach a competitive advantage?

“When people hear good music, it makes them homesick for something they never
had, and never will have”. (Edgar Watson, [1853-1937]). Music is an integral part of our lives, which is why artists and CEOs improve tools to stream music over the long term. Spotify is an online music streaming website, created in Sweden in 2008 by Daniel Ek and Martin Lorentzon. In Five years, Spotify had a critically rise in a really competitive industry which is the digital music industry. With a leader in the market as Pandora, Spotify really has to prove itself in a long term, in order to have a name in the field of streaming music.

The following case study will begin to give an overview of the digital music industry, Spotify’s place and its direct competitors. Then, we will analyze the success of Spotify and its actual business model. Finally, we will discuss how Spotify can reach a future sustainable competitive advantage in this risky industry.

I.The digital music Industry:
1.Presentation of the Industry
Since 2012, the digital music Industry has a dramatic increase in subscribers to the music in streaming sites such as Spotify, Deezer or Itunes. Indeed, according to the IFPI report (International Federation of the Phonographic Industry, 2012) focus on the evolution of the Digital music Industry in 2012, there is a real increase of database clients, with a number of paying subscribers from 8 to 13 million in twelve months. In a global worldwide point of view, in 2011, there were more than 5 billion dowloads of streaming music. 2.Place of Spotify in the Industry

In this environment where everything is changing so fast and in few years, Spotify has had to make a name and change as fast as its competitors and stand to gain the most market share. According to the IFPI report, in five years, Spotify was launched in four European markets and in the U.S., the world’s largest music market. According to the Financial Times, in 2012 Spotify was already available in 17 other countries. “Simply beautiful. Beautifully simple.” According to the Spotify website, the company is one of the best online music streaming service which had more than 15 million music tracks and around 10 million of users registered. Moreover, Spotify reports to have 3 million paying subscribers in the world, which is a really huge amount regarding the number of subscribers of the competitors.

Indeed, Itunes for example, is one of the direct competitors of Spotify; with an establishment in 50 countries worldwide, Itunes is one of the leaders in the market with Pandora. This is the first company which created in 2011 “the streaming from the cloud” (IFPI, 2012). 3.Actual competitors in the business

Competition is really hard because all the companies in the Industry have the same business model and the leader in the market is implemented since the beginning of the creation of the streaming music Industry. Indeed, according to Kathy Finn, (Reuter’s website, 2012), Pandora which has been created in 2000 in California, is the leader in the market with more than 125 million of users and no less than $274 million of revenue in 2012. With that kind of figures and new revenue estimation for 2013, (around $410 million), the question is how a strong competitor as Spotify can stand out from others companies, in such industry? What are their competitive advantages? II.Spotify Business Model:

1.The Freemium model
“Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently ”[…] “ then offer premium priced value added services or an enhanced version of your service to your customer base.” Fred Wilson, (2006). Freemium is a word which appeared for the first time on the Fred Wilson’s Blog (www.AVC.com, 2006). The word is a contraction of “Free” and “Premium”, which means offering premium subscription and enables at the same time another kind of users to listen to streaming music for free. According to the Co-Founder of the Hub Copenhagen Peter Froberg (2012), the Freemium business model is based on the wide expansion of a free offer to reach a large customers database and subsequently generate incomes by selling a Premium offer to a number of specific users. Contrary to the original meaning of its name may suggest, the primary goal of Freemium is to generate profit and not distribute a product or service for free.

The Freemium business model is based on a famous concept of micro-economics: the theory of the economy of scale; the lower the price is, the higher the production and the cost advantages will be. In other words, With the Freemium model, we increase the offer of the service by lowering its price to make it free. Thus, we maximize the demand for the good that will be an additional service feature (the Premium subscription). According to the author David E. O’Connor (2004),” A decrease in the price of a complementary good will cause an increase in demand for the related good and vice versa”. Therefore, the user can test the offer and assess if the asking price for the Premium service for example, is in agreement with the utility that will take back. 2.The Porter’s Model:

“Competitive Advantage introduces the concept of the value chain, a general Framework for thinking strategically about the activities involved in any business and assessing their relative cost and role in differentiation”. Michael Porter, (1985). Negotiation power of clients:

As a company in the streaming music Industry, it is essential to have a competitive advantage in order to stay in the run. Indeed, a big competition is established between all the companies which are using more or less the same business model. In the streaming music Industry, it is easier for clients to make implicit bargaining. Indeed, the more subscribers a company has, the more music labels will be in service for users and the company will be more competitive.

Spotify understood very well that is really important to have an advantage compare to the competitive companies: indeed, the company has a partnership with Facebook which push customers, when they subscribe to use Spotify (even for a free use), to create a Facebook account or to log in on the website. With this business strategy, Spotify expands its notoriety on the Facebook website, because users can share their playlist with Facebook friends. Finally, Spotify offers three different products categories, (Free, Unlimited and Premium), which drives customers to be less able to bargain as many options open to them with a real choice of music and services. Negotiation power of suppliers:

In the streaming music Industry, suppliers are represented by music/records labels, advertising agencies and sponsors. It is the same as for customers but from the other side: the more subscribers you have, the more renowned your company will be and you will have a lot of suppliers interested in your business. The advertising that Facebook make for Spotify is one of the best ways to have more subscribers in a long-term. If the company has more users, it will definitely be more music labels to offer on the website. Over the business of musical choices, Spotify will have more subscribers: this is called a virtuous circle. Threat of substitute products:

“Go faster than the music.”
This is exactly what happens in each Industry where everything is moving so fast. Clients, companies, music, technology and innovation are changing every day; it could be possible to see in few months substitute ideas of the streaming music, like streaming music replaced CD sales few years ago. With this kind of market, Spotify has managed to make a name in the streaming music industry, distinguishing itself from others and getting closer every year more and more from the Leader. The music library of the company is growing each year and attracts more and more subscribers. Threat of new competitors:

To avoid the entry of new competitors, the actual companies on the market have to put barriers to strengthen their image, investments, notoriety and to fight against “new entrances”. Nowadays, a new entrant in the industry can hardly hamper the reputation of Spotify; indeed, with three different categories of products (Freemium, Unlimited, and Premium), a partnership with Facebook, a growing music library, and the possibility to share playlist with friends, the company tries to find competitive advantages to differentiate itself from competitors. Competitively, Rivalry:

In this market, the rivalry is defined by the desire to have always more than other firms: more advertising, more music labels, more music library, and more options for customers. The problem is that in always wanting more, it happens so-called diseconomies of scale. Therefore, the more a company tries to develop and grow against its competitors, at a specific time this will lead to an increase in cost of production. By definition, if production costs increase, the company must increase its prices and therefore increase sales offers to customers.

In the case of Spotify, the company has a real interesting strategy, because it combines cost savings, competitive offers, economies of scale, increase in users, increase in number of available music tracks and interesting partnership with giant. According to Michael Porter, if a company gets to go against all these threats that exist on the market and finally find true competitive advantage, the company can only be successful.

III.Spotify in the future: a sustainable competitive company 1.How can Spotify reach a competitive advantage?

Spotify can achieve real competitive advantages because it is a company which had the idea to use social networks, one of the most used tools in the world. Indeed, as written before, in contrast of the others streaming music websites, new Spotify subscribers have to be on Facebook to sign-up on Spotify website. Otherwise, this strategy helps to rejuvenate the brand image of the website, to make it more competitive, because each user can share their playlists on Facebook in order to share music with friends.

This competitive advantage enables Spotify to differentiate itself from others who only offer to like their Facebook pages. Moreover, this tool allows introduce new artists and therefore to advertise these artists still unknown to the general public. This is one of the most interesting ways to do advertising. Spotify evolved with the society and as we all know the music industry is one of the markets where everything evolves very quickly and a company created a year ago may have disappeared after six months. 2.Recommendations:

According to the Wall Street Journal (2011), Spotify had big loss in 2011, with more than $59 million of losses on about $245 million in revenues. Even for a start-up, these kinds of losses are really important and it is so different regarding the notoriety of Spotify since its launch in 2008. The company is aware of its losses, but not discouraged, however, and continues to grow. One of the key recommendations that could be made is that Spotify rethink its strategy in a profit point of view.

In fact, the company has net revenue very important each year but lost money in things like royalties. Indeed, according to Sam Hamadeh, founder and CEO of the company PrivCo’s, “the biggest problem of the start-up is that every dollar she earns as revenue, 98 cents are paid in royalties”. Seen in this light, we recommend Spotify to increase the price of subscriptions for the Premium option, because the company cannot stop paying royalties, or cannot increase the number of advertisements between each song (this option would undermine the influence on the website because too much commercials would make it impossible to read music).

As a conclusion, Spotify is a company who reached its target in five years and succeeded to establish its strategy and its business model in a really competitive market. As a start-up, the company had to manage competitive advantage to optimise its growth and build its notoriety. The streaming music Industry is one of the most competitive markets, with more than a hundred of streaming music services around the world. Be renowned in such competitive market is to be different from competitors in order to achieve more profits, more subscriptions and better music labels. The Information and Communication of Technologies (ICT) of Spotify could be improved in the future. The treatment of the music on the Spotify website provided to users could be improved to expand the number of subscribers. It could be a real competitive advantage. In addition, the dissemination of music on his website can also be improved by offering even more music labels and reducing such parasites which inhibit listening subscribers.

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