Executive summary
The digital music industry has over the last decade developed significantly. From LP’s, CD’s, illegal downloading until now; Digital music streaming underlines this theory. In that case we have analyzed Spotify as one of the fastest growing online music programs in the business. From their start in 2008 Spotify has contributed to renew the music and revolutionize the music industry with continuous launch of new services, markets and networks.
Their merge with Facebook in the fall 2011 had significant impact on their services and is also something this paper touches upon. Throughout the paper we gathered valuable information from Ms Catherine Solheim, Country manager at Spotify Norway, and the Norwegian Electronic artist, Ugress, who has Spotify as his most important distribution channel. In order to get an adequate and accurate view of Spotify’s external environment we have emphasized on PESTEL – framework and Porters 5 Forces throughout the paper.
We found this to be attractive where Spotify has managed to gather market share in their representative countries. On Spotify’s internal analysis we practiced the Vrin – framework, additionally as we have used a stakeholder analysis. Furthermore, this paper shows that Spotify is a value networking company since it links customers together through sharing of music. This is closer described in our analysis of their innovation process, since Spotify as an innovation itself derives from good understanding of the theories related to distributing music rather than experimentation.
As Spotify is uild in an EPI system, Spotify gathers significant input from external factors and to that extend, this paper shows that they have been practicing open innovation. Throughout the paper we have showed Spotify’s efficient and cheap marketing strategy by creating positive word of mouth and involvement with Facebook. This involvement, additionally to US launch, facilitated for 250,000 new users the first weeks, and thus increased their brand awareness. We also found that Spotify invests in high technology to a large extent in order to continuo their development on these operations.
Lastly, we have made some recommendations with basis from findings and analysis throughout the paper. What is Spotify? Spotify is a music streaming service offering unlimited streaming of selected music from a range of major and independent record labels, with virtually no buffering delay. Spotify was founded in 2006 by Daniel Ek and Martin Lorentzon. In 2008 Spotify it was launched to the masses, and today they have about 15 million users in 9 countries, 8 in Europe, additionally to the US. Spotify currently offers three main music packages – Spotify free and in the new launch May 2010 called Spotify-open.
They also have Spotify unlimited, and Spotify premium. The Spotify free is mainly financed through advertisements of different kinds, audio and pictures, text and short films. Spotify unlimited was launched in May 2010 with Spotify-open which gave you access to all music, ad-free only on your computer for half the price of the premium version. Spotify-open is a future development, now the difference is that you do not need invites from your friends to access the free version and is still ad-supported, while the Spotify premium is financed through the monthly subscription fees and cost 100 NOK/month.
One of the key selling point of Spotify lies with its extensive music catalogue of more than 15,000,000 million tracks by both international and local artists, adding over 10,000 everyday, where users can instantly access to any song, any artist, any album, and any genre (iTunes, Spotify preview, 2011). Some of the basic features include easy to use music interface, sharing of music through Spotify social (an integrated social media function), and also the ability to add and organize CD’s and mP3’s.
In addition, Spotify does retail songs where users can buy them per download. The basic difference between the four users is as followed: Spotify’s free version makes sure users can listen to the advertisement-funded music on their personal computers for free. For the Spotify premium version, users pay a monthly subscription fee for ad-free music. They also get to enjoy additional features such as listening to uninterrupted music on their mobile phones with Spotify mobile, and syncing their playlists with the computer under the “offline” mode.
Today, Spotify is experiencing massive growth in markets they represented, and their expansion and collaboration with Facebook has facilitated to share music more easily, hence building stronger and more efficient music platforms.
External Environment Analysis PESTEL framework
In order to get best overview over Spotify’s external environment it’s vital for the paper to show how the digital music industry influences the society. The PESTEL framework will be preferred with debt on Political and Legal aspects as two central points for this paper.
Spotify is represented in countries which is characterized by democracy, good Internet access adequately 3G, low cultural barriers and basically the same judicial system. In the aftermath of Napster, which globalized the music business, the access to music has become unchallenging. For Spotify’s sake, expanding to new markets is not possible before the licensing is sufficient. Closing the deal with record labels settled in the specific countries is the most demanding part, which is also time-consuming, as Ms Solheim stated.
Spotify contributes to increase the major record labels revenue simultaneously as information of their music expands, thus the legal aspect for their business is sufficient for its industry. Spotify’s strategy of which countries to chose relies on these mentioned aspects.
Porters 5 forces
The industry Spotify operates in is the music industry, and more specifically; the online streaming industry. This industry is only a part of the music business, but in the last ten years there has been a shift with further focus towards digital music.
Michael Porters Metrics with his five forces will be used as a tool to analyze the industry and thus attempt to find answers to Spotify’s advantages/disadvantages. The threat of new entrants can be viewed as moderate to low. It does not require a lot of capital to set up an online streaming service, but capital is required to implement the music files, get the licensing rights and pay the royalties. The music business is built on trust and network, thus it demand a lot of hard work to close the deals with the record labels, as this can be intense and a long driven process.
WIMP, the Norwegian music streaming service established in 2010, has by Nov 2011 gathered a foothold in the industry (Jorn Gjersoe 2011). It has also been other activities in other countries, but they have not come so far as Wimp. Additionally, iTunes with its astonishing developments and achievements during the recent years has managed to provide satisfying service for its customers and pose the greatest threat internationally for Spotify as of today.
The Bargaining power of suppliers can be viewed as low. 0 years ago, the bargaining power of the suppliers in the music industry was extremely high. Since then, there has been a revolution in the music industry. This revolution has led to a decreasing power of the suppliers, and today the major record labels are forced to deal with this shift in the industry and find new sources of income. Because of this, more and more record labels are going online to sell their music. However, it is important to remember that the record labels still own the licensing rights, and following have a lot of power over the different players in the market.
Nevertheless, with the increasing and rapid building of networks through music and social media actors enforce an increased switching cost, hence this will differentiate Spotify to a higher extend. With the declining sales of CD’s and LP’s, and the rising use of mobile phones to access digital music, Spotify presents an attractive alternative to music labels as a distribution channel and source of revenue. Additionally, it is shown that Spotify has helped the music industry, since piracy in Sweden has been reduced by 25%. Therefore, music labels will be willing to work with Spotify in a bid to combat piracy (Andrew Couts 2011).
The threat of substitutes can be viewed as moderate. The music industry is a huge industry with a lot of different operators. There are many substitutes to the streaming industry. Alternatively, music can be accessed from radio broadcast, games, movies, advertisements and television shows at close to zero cost. Even if the sales of CD’s and DVD’s have decreased, the positions of the record labels still possess strong value. The market contains of other online media channels like YouTube, legal mp3 downloading industry and illegal piracy downloading of Mp3’s and torrents.
The use of social media as an information platform has increased dramatically the last years, and it’s assumed to develop with further integration in the years to come. However, the threats these substitutes pose can eventually be diffused in the future as Spotify develops, improves and increases its network size, hence it will be moderate. The bargaining power of buyers can be viewed as moderate. As mentioned earlier, there are a lot of different players in the digital music industry, which enforce more opportunities for the customers.
Hence it’s easy for customers to try out different services and identify which are their favorites. Illegal downloading, iTunes, Wimp, Grooveshark, Pandoora, MOG etc are some of the players, markets consist of, and thereby the switching costs are considered to be low. In this regard Spotify has managed to evolve and improve its core product in accordance with customer’s demands and requirements. With more integration towards social media, and especially the agreement with Facebook, launched in Sep 2011, the future looks brighter than ever.
However, it is important to remember that when the buyers first start to use a service, they are likely to build a music library, create their own playlists and synchronize the service with social media services and also their portable music players. These features increases the switching costs for the buyer, and the services that manage to attract a huge customer base at an early stage, is likely to have a competitive advantage over new entrants. The intensity of rivalry can be viewed as moderate to moderate plus. New services are entering the market every day, and they increase the amount of opportunities for customers.
It is hard for different streaming services to differentiate themselves from others, but by focusing on continuous innovation, updating with new features, functions and design, it is possible. The competition shifts alongside and with accordance to different countries and regions that Spotify operates in. For instance, in the Scandinavian market Wimp has managed to establish themselves as a trustworthy actor with a huge database, and in the US there are bigger actors and competitors such as Pandoora, MOG, Grooveshark, Brick, Rhapsody etc. Randy Glusto 2011).
To summarize, the digital music industry in today’s market seems to be fairly attractive. The score in the different forces usually seems to be moderate with a margin to low, but the fact that this industry is growing so rapidly and more consumers are willing to try this new way of listening to music, makes it appealing. Globalization gives better access to internet on worldwide basis and music industry will thus increase in the years to come considering the digital music industries rapid growth.
As there is already tighten competition and rivalry, there is room for new services that can outstand from other products and services that already exist thus make a huge difference in customer’s decisions and preferences. This industry has not reached its full potential yet and features and services could be offered to customers whom are interested in a better, more efficient, reliable and accessible manner. Examples of this are demonstrated in growing networks collaborated with social media platform as Facebook/Spotify.
Internal Environment Analysis
Vrin framework Spotify’s sustainable competitive advantage lies in their continuously development of product and integration of network. In order to assess whether Spotify’s competitive advantage is sustainable, the paper will apply the four criteria’s: Value, Rarity, Inimitability and non-substitutable (Ireland, Hoskisson and Hitt, 2009). Their capabilities of innovation are their premier advantage, and this keeps the company ahead against its competitors. Just looking at the timeline enlightens Spotify as a company that stresses on continuous development.
For the last few years there has been an expansion in online streaming services, and the bigger role ITunes possess. Still, no other service has accomplished to offer the same value as Spotify at the present time. Their advantage is valuable because it gives Spotify the ability to exploit opportunities and neutralize threats in the external environment. This has been showed in their launch with Facebook, where they integrating the biggest social platform in order to make it easier for customer to access and share new music.
Since it launched in Sep. 2011 two months after the US launch, they increased number of members by 250,000 each day during the first weeks. This specifies that Spotify is a solid and trustworthy company (Ravi Mandalia, 2011). Another point is the pricing strategy Spotify operates with. Referring to Information Rules by Shapiro and Varian (1998), Spotify uses Versioning pricing. This is explained since Spotify gives customers 3 options to chose from; Free, unlimited with 50 NOK e/month and premium with 100 NOK e/month.
This helps them capture customers who share different sensitivity on price with a tailored product. Looking at the user interface, convenience, features, flexibility, quality and comprehensiveness, Spotify’s price strategy demonstrates all of these various factors. Information obtained from Ms Solheim stressed Daniel Ek’s eager to offer accurate and the same services in all countries represented, which underlines their versioning pricing strategy, hence is their price strategy significant linked up to their competitive advantage in the market.
Thus Spotify’s competitive advantage will be considered as rare and unique, and as long as Spotify continues to be one step in front of its competitors in expanding its business to other countries and other informational channels, they will be hard to imitate. Even a competitor’s successful imitation of Spotify’s product would not be a success, since the switching costs to similar online streaming services will be costly as users establish a network of themselves and get used to the easy features Spotify has to offer.
These features include sharing of playlists, its accessibility and linking music up to Facebook, which are highly appreciated by the listeners. Finally, the last criterion is non-substitutability. The innovative and continually evolving nature of the business model enables Spotify to always be a step ahead of its rivals in responding to changes in consumer demand, e. g. Facebook. The complex integration of multiple services raises the switching costs of customers making alternative services unattractive.
In conclusion, Spotify’s resources and capabilities meet all four criteria, which qualify as having a source of sustainable competitive advantage. Stakeholder analysis Stakeholder management is very important for the success of every company. By engaging and satisfying the right people in the right way, they can make a big impact to the success rate of a project. Knowing which stakeholders to please can prove a difficult task, as different stakeholders wants different things.
Where business partners wants to see positive numbers on the balance sheet, customers demand better service, which sometimes comes at the cost of the numbers on the balance sheet. In order to have a healthy stakeholder relationship this paper will conduct a stakeholder analysis. Spotify’s stakeholders are any persons or organizations that have a vested interest in, or is affected by Spotify’s work in some way or another. This paper has further identified and classified Spotify’s stakeholders into 5 different categories: users, rights holder, business partners, employees and competition.
Users This category of stakeholders includes all users of Spotify, ranging from the people that use the free version to ‘pay as you play’ and premium users. Spotify’s decision to use an open EPI also means that the tech community around Spotify needs to be included in this category.
Right Holders
It is the music that Spotify offer to its customers that ads value to the company. This music comes directly from right holders. Right holders include artists and the major record labels.
Collecting societies such as STIM are also an important stakeholder within this group, as they are the ones that makes sure the artists and record labels receives monetary payment in form of royalties whenever their songs are played. Business Partners It is Spotify’s business partners that enable them to offer a good service. Spotify has several business partners that adds value to the company. Investors add funds to finance expansion and development while other business partners add more value through marketing efforts or extra services.
The integration with Facebook has resulted in a dramatic increase in users while investors have made Spotify’s early years deficit acceptable. Spotify’s business partners include Telia, Facebook and Scott Parker. Employees Employees are closely integrated with the firm and this gives them a special role amongst stakeholders. Employees contribute to the firm in many ways, they interact with customers and acts as the company’s face to the outside world. Employees are also greatly affected by the success or failure of the firm because it will directly influence their living standard.
Competition
Spotify’s actions are of extreme importance to its competitor. Because of the company’s magnitude and reach, their decisions will have a huge impact on the music Industry. ITunes, WIMP, Rhapsody, Brick and Mortar stores are some of Spotify’s competitors in the international market. Some of the stakeholders the paper has identified may have great power over the work of Spotify, others may be interested in what they are doing, while others might not even care. To illustrate the relationship between power and interest for different stakeholders, we have placed them in a power/interest matrix, which can be seen below.
Internet and what road’s it could create. Piracy was just an understatement of how easy it had been to trick the business and benefit your own interests. Internet was the future, he expressed, and is glad it Spotify took over and at least gave money back to the artists, because this is the future. As a minor artist in Norway with music gender that is not so commercial, Spotify through social media, has helped him getting his name published, especially outside Norwegian borders. With their network in the countries they have made it easier to brand myself, thus have rapidly stepped up on the advertising scale.
Especially the launch with Facebook must have been a strategic genuine answer to WIMP and other competitors for Spotify. He enthusiastically embraced the functions Spotify delivers as a random user. Still, as an artist he looked upon the use of a profile of the user so artists can get an overview and picture of whom the listeners are, and how music they prefer. And thus would it be easier to see statistic over which songs is preferred to different groups and when the listeners are “tired or bored” and switch to other songs.
Lastly, we asked him what his believing of the future will turn out to be, he happily answered that the use of mobile devices and music through this platform will be more handled as this becomes more handy, especially in today’s smart-phone market.
