Spotify case - essay PDF

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Spotify Case

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Thinking about the PEST framework (Political, Economic, Social, and Technological), which non-market shock is most responsible for the disruption of the incumbent music industry? Within your analysis, think about the value chain of produced music from the artist all the way to the end consumer. How has the value chain evolved over time, given the PEST shock, and where does music streaming service fit? Where does music piracy fit? Tech shock Music value chain: artists->record labels->distributors->users 10% 70% 20% % are the distribution of revenue shared ex: if i buy a song for 1.00 20 cents goes to distributors -

Tech shock really disrupted distributors Record labels has a lot of power because mid point between artists and distributors. Also has power is because they have copyright power They added distributors - Used to be: - Brick and mortar - Online retail - Retail - Now: - Piracy: - Napster, Torrent sites, - Leakage to system because it takes away from the pool of revenue by allowing users to download free music - File sharing is illegal and let's assume we can enforce against it - Who benefits? - Artists, record labels, distributors could all get more money - Who would be against it? These are the costs - Users but they are not gonna take action so ignore it - The file sharing place (loses 1 billion dollar valuation, could have been the first Facebook) - Digital downloads - Streaming

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Thinking about the PEST framework (Political, Economic, Social, and Technological), which non-market shock is most responsible for the disruption of the music industry? Within your analysis, think about the value chain of produced music from the artist all the way to the end consumer. How has the value chain evolved over time, given the PEST shock, and where does music streaming service, like Spotify, fit? Where does music piracy fit? Has negotiating power shifted at any point in the

value chain, or does power still reside within the same place along the value chain. Make sure to think about the source of the negotiating power within the value chain, and if it is still a strong source of power. Is there a possible source of power in the value chain for Spotify? Technology has been the largest non-market shock responsible for the disruption of the music industry. These advances have driven the past to the present and history has proven that the value chain of music because of this has increased exponentially. From the 19th century, when Thomas Edison created the first record player, through the journey of radio, MP3 players, downloads, and now streaming services has made music more accessible. Technology also has increased the ability to create value and earn revenue which is negotiation power. The power to influence others has a lot to do with the most valuable source in the chain, which involves content creation such as marketing ads or consumption. With more than 20 million songs in Spotify’s catalog, it attracts over 24 million users and six million premium users who pay $9.99 a month (in 2014). Even though Spotify isn’t profiting too well, in Exhibit 2 it shows the increase of revenues of streaming services as a part of the US music industry revenues. In 2007, revenues from streaming was only 3% of the industry’s revenues which grew to being 21% in 2013. That is only six years whereas the largest percentage holder in 2013 was revenue from downloads, which really started in 2001. Meaning that for the past 12 years of this time, downloads was increasing and can be assumed has reached its climax and is on the decline as the new technology of streaming replaces it.One can make the reasonable conclusion that Spotify has shifted towards more power and influence on deals and partnerships as it replaces the last hit.

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Assess what type of political issue music piracy can be classified as….Define the political action as making online file sharing without copyright royalties paid as an illegal activity. Interest group politics

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Who has relative strengths? Record labels bc copyright Special active interest group versus special active interest group

Why is there a clear movement in consumer tastes and preference for digital music? What are the pros and cons of digital music from the consumer’s point of view? Did the music labels first embrace digital? How have the music labels changed their business approach towards embracing digital and other online platforms?

Pros -

Cons Easy port Cheap Easy pay Increase music library What you want when you want= customize

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No physical product Compatibility / malfunction You have got to have a device No re sell

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Easy to find new music Easy to share personalize

Think about how the popularity of iPods (and other iDevices) is related to the success of Apple capturing the value of the shift in music preferences. Apple was the first to drive business profits off of the digital music platform, but did those profits come from iTunes sales? They do not make any money because at first they were losing money bc of all the costs and now they make a few cents but not a ton of money So they decided to really hone in on the idea that you need to buy a device So every year they come out with new phone that is bigger and better Apple doesn't care what the price of an itune song is because they don't care because they don't really make money off it so they will do whatever the record label will say bc they know if they have more songs and stuff people will buy their devices -

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What is Spotify’s value proposition to consumers and how does it capture the market trend in consumer tastes and preferences? Why has Spotify been earning losses since its inception despite its rapid growth in users and revenue? Apple's value proposition: - They were Not: - 1st mover - Innovative business model - Special backing by labels - But they are: - Good branding/ marketing - Closed ecosystem (one button away from itune store) Hb spotify - Not: - 1st mover - Innovative business model (ripped off pandora) - Unique -

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Very cookie cutter model, all these services are a commodity people just want nice easy music so how does one become dominant in this model? Look at next question Does Spotify have a competitive advantage that can be defended within the music streaming business? Think about how Spotify has differentiated itself within the industry, and if those differences can be sustained. How does network valuation fit into Spotify’s business proposition?

Winner take all markets -

High switching costs- no because u can have multiple services Barriers to entry - spotify stole from pandora so they do not have any Network effects ? - They try to sell it as if they are the only way to get streaming - As soon as one person starts to use spotify, all ur friends get on as well - That is why myspace is stupid bc no one has it and everyone has

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facebook so that is what you use Partnership with Tinder. They are hooking up Everytime you turn on a corner social wise, spotify wants to be there Student discount with Hulu and Showtime

Case update -

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Most of legal revenue is still generated in the music industry is captured by the record labels, while they relied heavily on distributors to innovate and adapt - So logically the next step is to disrupt to the stronghold that the labels have on the artists relation to the distributors Examples of artist led disruptions - Radiohead “pay what you want” for in rainbows album - They decided to just put out free album and ask for donation - But if they went to itunes: - From 9.99 spent on a radiohead album bought in Itunes, they would 1.40 - What really happened - They earned 2.26 and earned 1 million more in earning - Wu Tang Clan's auctioning for one copy of their once upon a time in shaolin album - Sold album for 2 million - Frank ocean's direct relation with apple( bypassing def jam and universal which are record labels) - Artist share went from 14% to 70% Can distributors such as spotify lead their own disruption? - Lowered product costs would make it easier to replicate what the labels offer - However is it hard to crack contracts between labels and artists, as well as hard to legally crack copyright laws - Ex: taylor swift stuck w her label and removed her music from spotify to devalue the streaming services - The record labels have already shown their willingness to play aggressively when challenged - Lobbying as well as suing/ taking legal action

Notes from case: Spotify in 2014 -

200 million dollar credit facility Was company gonna go public? 24 million users, six mil paid In 56 markets More than 20 million songs Huge net loss

History of digital music - 1999- 38 billion in global revenues, 2013 16.5 billion - Piracy biggg issue - Recording industry association of america versus Napster - Napster: MP3,rise of the internet, new devices for music - Napster was shut down but it is impossible to do it to all of them - The industry: - First started without the backing of record labels - Then had some JVs - Rhapsody - Success of itunes model: - Backing from labels - Big restriction: digital rights management technologies limited the number and types of devices the tracks could be used on. Allowed stores to control how tracks could be used - Amazon music 2007 and had tracks without DRM - Streaming and smartphone - Pandora - Radio station - Music genome project - Smartphones Spotify -

2006 Free and premium Music on mobile app Playlists Social aspect Spotify promoted autonomy within its structure, with the aim of fostering innovation and quick decision-making and implementation of improvements, design changes or features.

Music industry in us 2013 -

The major labels acted as both producers and publishers, coordinating and handling recording, manufacturing, promotion, marketing and distribution of music. Universal music group Very physical Digital operations

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Download 40% of total revenue in recording industry streaming

Spotify performance -

Cost of goods sold was very expensive - Royalties - Artists hated low payments - Taylor swift Competition -

Beats music Google radio Youtube Thus, as Daniel Ek left Spotify’s U.S. headquarters in New York, several questions might have crossed his mind. Could Spotify become a sustainable business? Could it really live up to its own hype and help the music industry grow again after more than a decade of continuous decline?...