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Spotify Company Essay

Introduction

The goal of Group 4 is to analyse and explore the operations of Spotify.com. Our objective is to get an better understanding of Spotify’s information systems, and how they use this information to better understand the wants and needs of their customers. Our group is then going to assess the company’s production. Using the tools we have gained from MIS, we are going to attempt to find ways in which to improve customer relations, advertisement, and overall productivity that will lead to an increase in revenues.

Spotify is a Swedish founded company that is currently headquartered in England. Its core competency includes streaming DRM protected music to subscribers over the internet. Spotify retains licenses from almost all major music labels including but not limited to Universal, Sony, and Warner Music. Spotify is a relatively new company and just launched in the United States this past summer in July 2011. It is a new entrant into a heavily saturated market that includes the likes of Napster, Pandora and Apple’s iTunes however Spotify aims to distinguish itself from the competition by changing how customers access the music and how they are billed for it. For example, all though both Pandora and Spotify can be used to stream music, Spotify allows their customers to choose which song they are listening to, Pandora just plays through a random selection of songs that can be selected by genre, but no specific song can be selected and played.

Spotify further separates itself from its competitors by allowing access to the service via all mobile device platforms (IOS, Android, WebOs, Windows Phone, and Symbian). While the services can be accessed from a Windows, MacOS, or Linux computer for free, access from a mobile device requires a separate premium subscription for which there is a charge to customers. One unique method of generating revenue that Spotify employs is utilizing a computer algorithm to monitor a users music preferences and then generate an ad targeted to the same demographics and interests as listeners of those songs. This allows spotify to better target customers and increase its ad revenue by providing its advertising partners with better access to customers who fit their demographic rather than just random advertising.

Spotify was founded in 2006 by Daniel Ek and Martil Lorentzon. Due to the increased interest in the company, they have started to expand. They are now located in numerous locations around the globe. The main Headquarters is in The United Kingdom, London. They also have locations in Stockholm, Paris, Oslo, Madrid, and Amsterdam and in New York. Currently Spotify has registered 10,000,000 users and is showing no signs of slowing down. They also have 1,600,000 paying users. They recently have a total of only 300 employees, but due to the company’s drastic expansions they are offering many different job opportunities. Spotifys critical processes consist of obtaining music licenses, and also compiling a profile for each of their customers taste in music, in order to set up a advertisment that best matches the demographic of each person. Spotify offers three types of product lines. First it offers its completely free and legal music version. It also offers an unlimited package for $4.99 a month and it also offers a premium package for $9.99 a month.

Business Strategy

1. Do a five forces analysis for the industry in which your company operates. What are the entry barriers? Are there switching costs?

Porter stated that there are five competitive forces that determine an industry’s profitability. These forces are bargaining power of customers, threat of substitutions, bargaining power of suppliers, threat of new entrants, and rivalry. Spotify is highly affected by the threat of substitution force, because there are many online music companies and they are all fighting for the same customers. The bargaining power of suppliers force effects Spotify extremely high, without the suppliers then Spotify will have nothing. It is also hard for Spotify to compete because it is a legal company going against many illegal music companies. The threat of new entrants force will affect Spotify in a very weak way.

Due to Spotifys advanced technology and set up the newer music companies would have a troubled time competing. The one entry barrier that spotify has set up is its elite technology. There technology would make it extremely hard for the newer companies to survive. Spotify currently does not have any type of major switching cost. Spotify offers two versions that can be paid monthly. This allows customers to pay for Spotify as long as they want without getting into any contracts. Any time a customer wants to change to a different company it can without any cost to them.

2. What competitive strategy is your company using? Explain.

Spotify offers a highly renowned and quality product across the online music industry. Spotify’s main competitive strategy would be considered an industry-wide differentiation strategy. Even though Spotify does offer a free version, which would be technically considered a cost strategy. A business with a differentiation strategy will add cost to an activity as long as the activity has a positive margin. Spotify views their free version as an advertisement so in actuality it isn’t a loss for their company at all, but a huge gain. Spotify’s main goal is for their customers to purchase the two upper level versions that are a much higher quality than the free version.

3. Identify some key business processes in your company. Can they be streamlined or linked? Can margins be improved?

The two key business processes are music acquisition and distribution. Spotify must first negotiate the rights to the music they wish to make available as part of their service. In the past, the music industry has struggled with negotiating rights for their music to be available for use online. Spotify has to overcome these obstacles and put together a package that content holders will agree to. By educating rights holders as to how their service functions and they can make them more comfortable with allowing Spotify to use their content. The second key process is distribution. The way the end user listens to the music is very important to both Spotify and those who supply them with the music.

The process must be set up in a way so that the music is secure and restrictions are in place to prevent unauthorized use. Both of these processes are clearly linked due to the fact that content owners are very interested in exactly how their content will be made available to customers. In regards to margins, Spotify has 3 different types of accounts for uses to choose from, 1.Free (ad supported)

2. Non-Mobile Unlimited ($4.99/month)

3. Premium Unlimited ($9.99/month, included access to music from mobile devices) Given the structured nature of Spotify’s business, the only viable method of increasing its sales margins are to increase users.

4. What information systems provide a competitive advantage for your company? Is it a product or process implementation?

Spotify employees an information system to keep track of the music that its subscribers listen to. The genre/styles of the songs allow Spotify to gain insight into that particular users likes and interests. This process implementation allows Spotify to push out targeted ads to its users that depict products/services that individual is most like to be interested in based on the type of music the prefer. This targeted advertisment gives Spotify a competitive advantage because it allows them to offer access to their service for free and gain customers that it otherwise would not have been able to. This is very important given the nature of online music. A good number of online music listeners refuse to pay for said services because they are available in other forms (mostly illegal) online for free. By allowing Spotify to have a free entry level service that still produces revenue, it give the company access to a user base that is otherwise inaccessible to its competitors who do not have such an information system in place.

Recommendations

Illegal downloading in the online music industry has been going on for years. Even though recently many of the illegal companies are getting shutdown, there will always be new ones. Spotify takes pride in being a fully legal online music company, with all of the proper licenses to prove it. Spotify offers a top quality music product. One recommendation for Spotify regarding its product is to help aid in the prevention in illegal music downloading. Illegal downloading is taking away enormous amounts of potential clients from Spotify. With less people being able to download illegally, they will soon turn to the next best thing in the online music industry with a quality product and that will be Spotify. Spotify currently offers three different types of product packages. They offer a premium, unlimited and a free package. Spotify reals many of its customers in with the free version. Yet like most companies they don’t really mean the word free.

Spotifys free version is completely free of charge, but they do put a limit on your account. You are only allowed twenty hours for one month. With the other two versions the premium and unlimited you make a cash payment of either ten to five dollars a month, depending on which one you choose. Spotify can do two main things in the area of their product packages that will make a drastic difference. The first thing that Spotify should do is remove the hour restrictions to the Free version. Spotify should do this because it wouldn’t necessarily hurt their company. It will actually aid in the advertisement aspect of the company. The other adjustment that Spotify should pursue is a lowering in the prices of their other two packages. Even though they are only ten and five dollars a lower price should reel in many more potential customers.

Spotify today currently has deals with each of the “Big Four” record labels. They have deals with Sony music, Universal music, Warner music, EMI, Merlin, and The Orchid. Spotify is doing extremely well when is comes to there suppliers. There music suppliers make up for almost 80% of the entire market. A recommendation to Spotify would be to tap into the other 20% of the market and made deals with some other independent groups in order to surpass there rival Pandora. Posted by Mina Khalil at 5:05 PM No comments:

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Processes

Spotify has many diverse processes throughout their corporation, for the purposes of this blog we are focusing on the media acquisition and distribution of Spotify.com. The core of Spotify’s mission is to entertain its users while adequately compensating the record labels and or artists. The Label Relations department is responsible for new content acquisitions. Label Relations works closely with account managers to develop and maintain business relationships with the different content providers. Label Relations enables content providers to utilize Spotify as a sales and promotional platform by providing market research and consumer insight. Song publication, or the actual process of getting the content to the servers, is the role of the Operations department. Their goal is to make sure the music never stops streaming. Spotify’s service is run on hundreds of servers in multiple locations around the world. Their platform is built with special focus on server virtualization to reduce costs. They also reduce cost by utilization of free/libre open source software, e.g., Puppet, CHEF, cfengine, and FAI, for the maintaining and automated configuration of large scale computer systems. Spotify is constantly collecting extensive quantities of data which provides extremely valuable insight into their users .

It is the responsibility of the Analytics department to translate the raw data into input for financial calculations and marketing activities. The Analytics department also provide this processed data to the departments of Finance, Legal, Business Development, Label Relations, as well as business partners to achieve maximum gain from the data. Being that Spotify is providing a free service to the majority of its users they rely heavily on their business partners for their success, be it from positive relationships with their content providers or financial support from advertisers.

Therefore, it is in Spotify’s best interest to provide the highest quality of market data services to the business that support and sustain Spotify.com. Spotify is a young company and is growing very fast. They fully understand the need for integration of all departments for the benefit of the company. To avoid the “silo effect” Spotify’s hierarchy is very flat, and they consider themselves an open company. Much like open source software, an open company allows for collaboration and contribution from anywhere in the organization, even to the extent of employees bouncing ideas off the CEO is not that uncommon. Posted by Mina Khalil at 5:02 PM 1 comment:

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Analysis

Spotify’s process differs depending on the type of user accessing the system. Should the user be a paying customer they are permitted unrestricted access to Spotify’s online library. If the user is a “free” customer than they will have their music playback interrupted on occasion and an advertisement specifically selected for that user is played. Spotify utilizes a proprietary algorithm to match the user listening to a song to a specific ad that they believe the user would be interested in. The way the system calculates the likelihood of whether or not the user would be interested in a particular ad is by analyzing the music they have listened to in the past and inserting an advertisement designed to target a similar demographic as that of the songs that the user enjoys.

This process is highlighted by the flow chart attached to this post.

Think of Spotify as your new music collection to your library. Only this time your collection is vast: millions of tracks and counting. Spotify comes in all shapes and sizes, available for your PC, Mac, home audio system and mobile phone. Wherever you go, your music follows you. Spotify also allows you share music with a flick of the wrist. Send it straight to your friends, or post tracks on social networks. The system is currently accessible using Microsoft Windows, Mac OS X, Linux, Telia Digital-tv, and mobile devices running iOS (iPod/iPhone), Android, BlackBerry (limited beta release), Windows Mobile, Windows Phone, S60 (Symbian), webOS, Squeezebox, Boxee, Sonos, WD TV, and MeeGo. All these software systems make it easy for Spotify users to use because it has such a diverse data base. Spotify also uses a lot of social networks to listen and share music. Spotify and Facebook have come together to help you discover more free music than ever before. Now you can see what your friends are listening to, and hit play to hear their tracks instantly.

Spotify is also connected with Youtube and Twitter, those two plus Facebook are the powerhouse of today’s social networking. Spotify targets a lot of people all over. All people from different age groups use Spotify for their own excitement. Spotify also has its own essential skills that makes it different from any other music sharing site. A Radio feature available to Spotify Free, Unlimited and Premium accounts, which creates a random playlist of songs chosen based on specified genres and decades. An Artist Radio feature creates a random playlist of songs by artists related to (and including) the selected artist. Artist Radio channels on Spotify provide background information on the selected artist, ranging from its history to a list of the artist’s most famous singles. The Spotify radio function demonstrates distinct differences from its competitor, Pandora. With the Spotify radio function, users are allowed to skip as many tracks as desired, while Pandora places limits on the number of tracks that can be skipped. Additionally, Spotify does not allow users to lend “star ratings” to tracks, thus, limiting the ability to organize the radio function based on user preference.


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