Spotify case study PDF

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The case study of Spotify's strategic management....

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Strategic Management Report Date of submission 24.11.2017

Terms of Reference A management report has been requested by a lecturer of Strategic Management module at University of the West of Scotland. It will offer a strategic audit and analysis of Spotify. The report is to be submitted by 17.11.2017.

Executive Summary This report is conducted because of the lack of profit from Spotify. The purpose of this report is to analyze Spotify’s current situation and identify actions that can be made in order to make Spotify profitable. Spotify is the world leader music streaming service. According to Reuters, Spotify valued at 16 billion dollars, and could be valued at 20 billion dollars when it goes public on early 2018. Its biggest strength are market share and its growth that has been sustainable since the service was launched on 2008. The music streaming overall has been riding high for the past few years and it should keep it that way even though its growth will not be as impressive as it used to. Spotify’s business model is quite the same as its competitors. The only main difference is the possibility to listen to music for free, with some limitations, offered by Spotify. This offer makes Spotify attractive for neophytes that would like to try a streaming service before paying for it. This slight difference is not enough to give Spotify a significant competitive advantage though. On the other hand, Spotify costs have always been bigger that its revenue. The resources that Spotify has access to are much lighter than what its other competitors do which might be a threat if it does not start making profit soon. Its free offer does not provide a lot of money while it costs exactly the to the company. Spotify biggest opportunities are the number of markets it still has to go in, providing a large base of potential customers. Its number of free users that might subscribe to the premium offer is also one of Spotify’s big opportunities. Innovation is also one great opportunity, all the competitors providing quite the same offer, if Spotify improve its platform to provide new services to the customer it might convince some persons using the competitors’ services to turn to Spotify. There are threats that cannot be left aside, piracy of music is still a major issue for the whole music industry and Spotify is no exception. The financial power of its main competitors is also a threat considering the lack of profit of Spotify. Finally, even though Spotify is still the world leader of the market, the growth of its competitors is concerning and might become a problem in the years to come. The report finds that, at this point, the market is quite saturated and immature. Consequently, an emergent strategy is recommended in order to increase the innovation level which is the key in this new market where all the offers are all alike. There are also more precise recommendations such as :    

Renegotiate royalties with the labels so it costs less to Spotify. Keep innovating and provide some more features for premium customers only in order to encourage free users to subscribe Launch its platform on new markets before its competitors have a monopole there. Make the IPO as soon as possible to make money and fund the innovation process.

Introduction Spotify AB is a Swedish private organization founded in 2006 by Sophie Champagnon, Martin Lorentzon and Daniel Ek who is, as of now, still the company’s CEO. Spotify AB’s main activity is the development of the multi-platform music streaming service that was officially launched on 7 October 2008. The company employs more than 1,600 persons worldwide and its headquarters are located in Stockholm. Spotify allows users to search music by parameters such as artist, album, genre, playlist, or record label. They can create, edit, and share playlists, share tracks on social media, and make playlists with other users. Spotify provides access to more than 30 million songs. Recent figures show that there were 140 Million active users on Spotify in June 2017, which is 40 million more than June 2016, a 40% growth in just one year. What the founder of Spotify wanted to achieve when they first created the company was to reduce music illegal downloads and listening. That is why Spotify is a freemium service even though there are limitations. There is also a paying subscription system for more demanding customers that procure some advantages such as listening music without any ads, downloading music to be listened offline, playing any song on mobile instead of a shuffle system, unlimited tunes skip instead of 5 per hour… Spotify was not the first music streaming service that was launched, but thanks to its quality it was the first to generalize that new way to listen to music.

Purpose of the report The main reason for this report to be conducted is the lack of profit that has been made by the company since the service was launched on 2008. This report provides an analysis of Spotify’s current, internal and external, situation and indicate some key recommendations in order to improve its financial results on a short-term to a mid-term period.

Internal Analysis 3.1 SWOT Analysis Strengths and Weaknesses Spotify is the world leader in the music streaming industry currently valued at 16 billion dollars way ahead its competitors such as Soundcloud, Deezer or Tidal. This valuation is expected to be about 20 billion dollars when Spotify is supposed to go public in early 2018, and is one of Spotify’s biggest strengths. The interfaces in the desktop, mobile or tablet applications that are very user friendly compared to some other competitors and the huge number of songs available are both appealing features to attract new consumers. Innovative leadership in Daniel Ek that allowed Spotify to take the most out of social medias (particularly Facebook). Thanks to this strategy Spotify attracts new customers but provide to existing ones a new way to interact with their friends through music.

According to this chart (Statista, 2017) the revenue of Spotify never stopped increasing since the service was launched in 2008. The streaming industry’s revenue should keep increasing in the years to come even though the growth is going to be less and less sustainable. Thanks to the hundreds of millions of persons listening to music daily the potential market is huge.

Spotify is providing a free offer for people that do not wish to pay to listen to music. This offer allows them to test the service and provide a unique chance for Spotify to convince them to go premium thanks to advertisement and premium only features.

Though there are some weaknesses that need to be considered. Spotify has never made any profit since the service was launched according to this chart (Statista 2017). Even more worrying, the loss goes deeper and deeper every year. The free offer is delivered with a lot of ads to convince the listener to go premium. These ads are quite repetitive and might annoy the consumer that will potentially look for another option to listen to music.

As of now the ways for Spotify to make money are advertisement and its subscription system. Out of the 140 million active users, 60 million are premium subscribers, meaning than less than a half of the users make about 90% of the company revenues according to this chart above (Statista, 2017). The free users cost exactly the same amount of money to Spotify though which is approximately 0,00437$ per stream. Spotify has to also deal with artists’ hostility. Even though it is transparent with its royalty pay-outs, which is extremely generous 70% of its revue gave to Music Labels. Music Streaming is a fairly new industry and it is, at the moment, depriving income from the artists. Until a few years ago, if someone wanted to listen a song, he should have paid to download it or do it in an illegal way. The paid download was the income that the artist would receive, and he knew how many persons bought his song. With Spotify and other streaming services tunes are listened to considerably more, but the individual pay-out per stream is much smaller, and many artists are against this new trend. Spotify’s efforts at transparency, while much better than its competitors, still struggles to thrill most artists. Spotify is only available in 59 countries while main competitors such as Deezer or Apple Music are implemented in respectively 182 and 113 countries. The inhabitants of those countries where Spotify is not being accustomed to use another service than Spotify and it might be hard to turn them if Spotify decides in the future to go on these markets.

Sustainable Advantage Analysis Spotify’s business is very similar to its competitor as shown in the following table Google Play Music

Amazon

SoundCloud Go +

Standard: £9.99 Students: £4.99 Family*: £14.99

Standard: £9.99

Prime members: £7.99 Non-Prime: £9.99 Students: £4.99

Standard £9.99

Yes, with ads 30 Days free trial for premium

No 3 Months free trial for premium

No 30 Days free trial for premium

No 30 Days free trial for premium

30 Million

30 Million

30 Million

40 million

Spotify

Apple Music

Price/Months

Standard: £9.99 Students: £4.99 Family*: £14.99

Possibility to listen music freely? Number of songs (Approximately )

Possibility to listen emergent artists with ads. 30 Days free trial for premium 150 Million (120 Million coming from emergent artists)

According to this table, all the competitors have quite the same offers. Pricing policy is very similar and so is the number of songs, except for SoundCloud. Indeed, SoundCloud allow anyone to upload its own song and share it with the rest of the users, that is why they have so many songs. Spotify’s real change compared most of its competitors is the freemium service they provide. Most of

the competitors allow users to try their premium service for a month, but very few of them actually give the possibility to listen music freely for an undefined period. There are plenty of competitors in the music streaming market, though the ten biggest actors represent 99% of the market’s revenue. Being a very innovative company, in an innovative sector Spotify has filed 187 patents as of now, the latest dated from October 27th.

External Analysis Porter’s Five Forces Industry Rivalry In the music streaming industry, Spotify has to face many big company that decided to launch their own service such as Apple with Apple Music, Google with Google Music, Amazon… Considering all the powerful companies that decided to go on this market, it is safe to say that the music streaming industry is a high risk to Spotify. Apple, especially, has a huge loyal customer base and has been in the music industry for a long time now and have a brand known all over the globe so Spotify might suffer from this competition Powers of Suppliers Music labels are the main supplier of Spotify. They provide their music in exchange of royalties and have a lot of power over music streaming companies. There are also some artists such as Taylor Swift or Adele that are in war against the music streaming services because they think it does not financially reward an artist work fairly for their work. What could become a potential threat in the future is that some services such as Apple might negotiate some exclusive contents from Music Labels and deprive Spotify of some new tracks. If that happened listeners would most likely change their Music Streaming provider. It is safe to say that the suppliers are strong in this industry.

Threat of Substitutes This threat is quite low at the moment since Spotify is already a substitute in the Music Industry. Some exists though such as Radio Stations or Web Radios, but it does not allow the user to listen a particular song or to create and customize its own playlists. The biggest substitute risk for Spotify is users that decide to keep using the free version of Spotify and do not upgrade to the premium version. But even in that case, Spotify still make money through advertisement even though its endgame is to reach more paying subscribers.

Power of Buyers The power of buyers is medium for Spotify. Even though there are a lot of competitors, Spotify’s offer is adapted to all kind of listeners. If a free listener wishes to listen to his music offline and stop dealing

with advertisement he can switch to the premium offer. All the competitors having quite the same offers a Spotify user might not change to another one.

Threat of New Entrants The risk of potential new entrants is really low. At this point, this market is quite saturated and the big companies behind the music streaming services might discourage new companies to launch their own product. Furthermore, the entry costs are huge, and Labels would take about 70% of its overall revenue making it really hard “to be profitable and actually earn money. SWOT Analysis – Opportunities and Threats On one hand Spotify as a lot of opportunities it can look into. Spotify is available in 59 countries which is very little compared to some competitors, meaning that it could expand in many new markets and obviously earn new members. Another opportunity for Spotify is to turn its current free users into premium ones. To do so, Spotify must provide some new innovations to its premium offer in order to convince free users to take a monthly subscribing. Some of this innovation might be improving its recommendation algorithm to make listeners discover music they might like which is a very popular feature in the USA and Spotify is not quit as good as its competitors in this area. It might also make deals with artists to broadcast their live shows directly on the application for premium subscribers… There are lot of functionalities that might be interesting to the public that has not been developed yet. Spotify can also work directly with the artists, try to discover new talents in order to reduce the royalties part they would give them back. Thanks to the service BandPage Spotify started to sell merchandise to the listeners through its platform but this needs to be expanded since there is a very low integration at the moment. This particular opportunity can benefit to both the listener and the artist, the listener will feel closer to his favorite singers while the artists will earn more thanks to this. On the other hand, Spotify has to face some major threats. Even though piracy of music is on the decline, it is still a major threat to the music industry in general. Another threat is that all its big competitors have other activities aside the music platform providing them other sources of revenue and profit while Spotify give back 70% of its revenue and never made any profit. If Spotify keeps losing money they might not be able to keep its high quality of service resulting in customers disappointment and leading to an obvious shut down of the platform. And last but not least, the growth of its competitors, especially Apple Music, might become a problem for Spotify.

Critical Reflection

As a third year student at the University of West of Scotland I had to write this report about a company that has not performed really well for the past three years. I had to analyze the company both internal and external environment, and recommend actions for it to improve its performance. I have chosen to write about Spotify My choice was pretty easy to make since I am a really active user of this platform and had already heard about their difficulties to make profit. I do not regret this choice at all, it was a really interesting subject, there was a lot of information to be found and I really had fun looking for it. What made it even funnier was the fact that one of the other students decided to write about Deezer, one of Spotify’s competitors. We were in a sort of a war to know which service was actually the best and it made the research a little less fastidious to do. The hardest part was not to find the information, since I was quite passionate by the subject it did not took very long, redacting the report though was much longer than I thought. English not being my mother tongue I felt like I was writing the same words over and over again making my whole work very repetitive. Finding trusted sources was also a tough part of the process. A lot of speculations are around Spotify but only few trustworthy media are actually talking about Spotify’s most recent actuality Looking back, I think I could have anticipate a bit more the writing part of that report, it would have allowed me to work more on the quality of my English. I will keep that in mind for the upcoming reports I will have to do this year and in the years to come.

References:

Author Breteau

Cakebread Elodie

Fresh Patents Gil Inrater Lu

Reynaud

Sassard, Soderpalm & Swahnberg

Shanley

Statista Trichordist Editor

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