Entrepreneurship and Innovation Strategy - Mini-Project Spotify s Ecosystem

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1 Entrepreneurship and Innovation Strategy - Mini-Project Spotify s Ecosystem Diego Diaz, Luis Gonzalez, Henrique Thielen Description Origin Spotify is a Swedish music streaming platform that offers digitally restricted music streaming of selected music from a wide variety of big and independent record labels, such as Sony, Emi, Warner Music Group, and Universal. Spotify was launched in 2008, and as of 2012 it has 15 million active users, among which a quarter are paying members. Presence It currently provides service in a large range of countries, including Australia, Austria, Belgium, Denmark, Faroe Islands, Finland, France, Germany, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the United States. Operating System Its operating system is currently accessible using Microsoft Windows, Mac OS X, Linux, Telia Digital-TV, ios, Android, BlackBerry, Windows Mobile, Windows Phone, S60 (Symbian), webos, Squeezebox, Boxee, Sonos, WD TV, and MeeGo. Through this platform, users who must have access to the Internet can browse music by artist, album, record label, genre or playlist as well as by direct searches. Whereas on nondesktop applications the user can only listen to music, the desktop clients have a link that allows them to purchase selected material via partner retailers such as Amazon. Streaming Once a user registers either directly through Spotify or through Facebook - a six month free trial period is activated, period in which the user can listen to an unlimited amount of music supported by visual and radio-style advertising. After this trial period, Spotify has a listening limit of 10 hours per month, divided into a 2.5 hour streaming allocation each week (with any unused hours carrying over to the next week). Aside from the basic version, the "Unlimited" subscription removes advertisements as well as the time limits, and on the other hand the "Premium" account introduces extra features such as higher bitrate streaming, offline access to music and mobile applications access. Catalog Currently it provides access to ~15 million songs via searching for artists, albums, titles, labels and genres, and gives users access to tracks from many major and independent labels. On the other hand, some artists have opted not to be added to Spotify. Additionally, due to licensing restrictions imposed by the record labels, some artists are not found in certain regions. For instance, The Beatles are not available due to the fact that they have an exclusive

2 digital distribution with ITunes. An important component of the desktop version is that the user can import songs from itunes and sync with a mobile device. As mentioned earlier, users can also buy most tracks, if available, from Spotify's download partners such as Amazon. Playlists When it comes to sharing, playlists have an important role. Users use collaborative software to share playlists. It allows the user to directly drag the playlist into an or an instant message window. Even though Spotify does not automatically create preference-based playlists, it does integrate with Last.fm. What this integration allows is for users to send songs from Spotify to their Last.fm account and mix them. In the end, this allows Spotify to learn which songs or artists the users listen to the most. Radio Available in all types of accounts, Spotify also includes a Radio feature. This feature creates a random playlist of songs chosen based on specified genres and songs. Compared to the competitor Pandora, the Spotify radio function demonstrates distinct differences in that users are allowed to skip as many tracks as they which, while Pandora places limits on the number of tracks that can be skipped. On the flipside, Spotify does not have the ability to rate tracks (thumbs up or down). Social Media Facebook, Twitter and Tumblr are integrated with Spotify. This integration allows users to access their friends' favorite music and playlists. In addition, Facebook allows users to share music with friends through the inbox Applications In addition to the integration with other platforms, Spotify desktop users can access applications written in HTML5, offering features related to music listening such as live sharing of playlists, music reviews, lyrics, and concerts.

3 Ecosystem Map Artists Record Labels Social Platforms Music Operating Systems 3 rd Party Plugins Partner Retailers Spotify Advertisers Online Payment Systems Free Version Paid Version Users

4 Strategy Assessment Just like itunes revolutionized a decade ago the way that music is distributed and listened to, Spotify is doing it again. Back then apple had people no longer go to the record store and buy a whole cd but it will let you buy just the song that you wanted to listen to for a fraction of the cost. The actors in the ecosystem that were most difficult to convince to get on board this new model were the artists and the record labels; it is more profitable to sell a whole album than to sell just one or two songs. But they had no other choice since piracy was taking away all their revenue; with the new business model that apple was proposing it was more probable that people would pay for the music. Spotify is now bringing into the table a new model. This model involves the same actors plus the social media platforms. The new model is a mix between Pandora Radio and the Netflix model. Spotify s business model is to offer music either free but with advertisements or without advertisements but paying a monthly fee (like Netflix). With Spotify you can select whatever song you want from the catalog and add it to your playlist (unlike Pandora) and then you can listen to your playlist from any device that has Spotify in it. What changed? People now buy the right to listen to music instead of buying the song and listen to it like they used to. Revenue model Spotify model has three main sources of revenue: subscriptions, advertising for nonsubscribers and partner retail purchases. They have two types of subscriptions: unlimited music and unlimited music plus premium services. The monthly fee for each of these is $4.99 and $9.99 respectively. As for the advertising, in 2009, the advertisements for non-paying users were reported as lasting 15 seconds. Though later that year, those advertisements were reported to have increased to 30 seconds. In terms of the partner retail purchases, Spotify has partnered with some online music stores and just like advertisers, Spotify gets paid for every song purchase that was initiated from them. Ecosystem Analysis We are going to analyze the role that every actor of Spotify s ecosystem has in order to understand how Spotify aligned these different players: a. Record Labels: As mentioned earlier, Spotify needs record labels in order to gain access to their music catalogues. These are the most important actors in the ecosystem that Spotify needs on board. For Record Labels, the most important thing is that they will continue to make money the same way as they were doing before. This means that the royalties they get for every time one of their songs is played will be equal or greater than the money they were making from song purchases. In October 2010, Wired reported that Spotify was making more money for labels in Sweden than any other retailer online or off. During 2010, Spotify paid 45M to their licensors.

5 b. Artists: Although they are responsible for producing the music that Spotify streams, there has been much criticism from them to Spotify s business model as they argue that they do not receive the economic benefits of online streaming. According to an info graphic by David McCandless, an artist on Spotify would need over four million streams per month to earn US$1,160. However, much of this conflict is also generated by the contracts that each artist has with his or her record label. However, we also believe that artists are conscious of the need for them to use an online streaming business model in order to survive all the changes the music industry is having right now. c. Operating Systems: Spotify has taken advantage of these different platforms and has launched different versions for each of them. In this sense, Spotify needs to reach as much customers as possible. By having a platform approach they can also reach different types of users (PC, mobile devices, tablets, etc.) and offer different types of services (limited services, unlimited music, premium services, etc.). Spotify s main focus is to be able to access your account from almost any device connected to the internet. d. Social Platforms: Spotify knew that in order to launch their business in the US and grow it faster, they should leverage the social aspect of sharing music. In this sense, in 2011, Facebook and Spotify held discussions about integrating the music service into Facebook in a significant way once Spotify launched in the United States. Spotify was launched in the USA on 14 July 2011 and has been a success as they increased the number of free users and subscribers very fast. They have also used this social aspect to boost the streaming of their songs as now users rely on their friend s preferences to listen to new songs and artists. By allowing users to build their own music playlists, Spotify also builds a customized solution for every user. e. Online payment systems (credit cards/paypal): Much of Spotify s revenues come from subscriptions. One of the key elements of this business model is the access that customers can have in every market where Spotify operates to online payment systems. By having implemented this collection system, Spotify relies entirely on these systems to collect their cash in a regular, constant and predictable way. Allowing them to build and project some future investments and cash flows. f. Advertisers: This is an important actor for Spotify s ecosystem as it supports their free online streaming business. However, what it is really interesting for us is the way Spotify uses this topic to promote their subscriptions (advertisement free). They are basically encouraging customers to subscribe in order to experience a different Spotify. However under this scenario, free customers are also conscious of advertisements and will not complain about them. It is important to note that for any company that wants to advertise its products, their main concern is that the message gets to their target audience. Spotify can segment their users with the information that they collect when

6 you sign up for the service plus the type of music that you search for. This gives them a big advantage from other traditional advertising channels. g. Users: Spotify has clearly recognized their main target of users, young people that really like to share their music and enjoy the music everywhere. For users to adopt Spotify their monthly music purchases need to be greater than 5 songs. This way it makes sense to pay a subscription and not pay for each song. h. Regulators: Their main concern is music piracy and tax collection. For Spotify, regulation will have an important role as it will determine which markets they could potentially enter. So far Spotify has operations in most countries of Europe and the US. However, we believe this will be an important barrier in order for them to expand to new markets with an important potential customer base but with a lower piracy control for example. i. 3rd party plugins: These actors help retain Spotify s users. By allowing third party developers to create applications for Spotify, the firm is also engaging users by increasing the services they could find in Spotify such as lyrics, music reviews, etc. These applications add value to Spotify and to its users but are not critical in in the ecosystem. j. Partner retailers: Amazon, ITunes and other online music stores will rely on Spotify as source of new revenue by offering users a totally new, more personalized approach to their online music experience. In this sense, they would be very interested in partner with Spotify. However, we also consider this might be a potential threat to their business model as potentially more itunes and Amazon users would find more attractive to pay a monthly fee and get unlimited access to a huge catalogue of songs. The way Spotify aligned all these actors was critical for its success. By reaching customers through social media and letting them share their music preferences online they were able to leverage the number of users of Spotify s network quickly. In order to do that, they needed an open software that could be used in any type of platform (Windows, ios, Android, etc.). By offering a customized music solution for each user and letting them build their own playlists, Spotify was able to offer a new value proposition that was aligned with the idea of social network: I could share my own music. Finally, leveraging the relationship with Record labels and advertisers in a way that would let Spotify create a subscription user base would allow them to build a solid business model where they could collect monthly fees through an online payment system.