Spotify Solution PDF

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Soluzione del caso Spotify, lezione del prof. Chiaroni ...

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SPOTIFY CASE DISCUSSION Spotify created a Blue Ocean from a Red Ocean (the music industry) shifting from directly selling the songs to customers to selling the access to its libraries where more than 30 million songs were stored. Spotify was one of the first companies offering music streaming on demand (traditional music streaming (e.g. Pandora) was a radio stations streaming); for this reason, it could target, among the others, new generations enlarging a lot its available market and thus finding a new ocean where it could be possible to fish without any kind of competition. However, the industry Spotify is operating in had increasingly became a Red Ocean; from its launch on, Spotify have been suffering more and more due to the competition from big players copying their idea, adding features and using their already existing communities and in the last years Spotify sustainability have been put under discussion. Since a Blue Ocean strategy is successful only when the company implementing it gains profit from it, the key point we will stress in this analysis is: was the Blue Ocean Spotify was able to find profitable? From this point of view we can immediately understand from Table 2 that Spotify has not been profitable at all, since, even if its Revenues constantly increased over time, often doubling year by year, its Operating Income never registered a positive value, inexorably worsening. Why is Spotify not profitable? What are the problems in the Spotify model? 1) The FREEMIUM model was not so well designed; most of the people used the free version without paying anything to access the library 2) There have always been a lot of possible substitutes for this kind of services 3) Royalties are paid whenever a song is reproduced; this contract is not based on how much Spotify gets from customers 4) Spotify had probably been trapped by the growth rate, meaning that they struggle to increase the sales without developing a sustainable model 5) Since the beginning entry barriers were very low; the only entry barrier we can identify is represented by community, but, since its main competitors have even more structured and big communities this can’t effectively defend the company profit To better understand the reasons behind Spotify non-profitability we can also apply the traditional strategic model; we will have a look at Porter’s five forces to understand what the relative situation of Spotify was. The five forces that determine the competitive intensity and, therefore, the attractiveness (or lack of it) of an industry in terms of its profitability are: -

Bargaining power with customers Bargaining power with suppliers Threats of new entrants Threats of substitutes Internal rivalry

For our purpose the forces we will address in this analysis are only the first three since they perfectly explain why the business Spotify was starting was not attractive. Bargaining power with customers Since Spotify have always had two completely different types of customers (final and advertising customers) we will split this analysis in two parts:

1) Bargaining power with final customers 2) Bargaining power with advertising customers Bargaining power with final customers This force is perfectly represented by the freemium model; in this model the customers who are willing to pay the subscription fee are mostly the soon to be customers, or, more in general, customers that like to use the mobile app. However, since Spotify can extract only a limited amour of value from them we can say that the bargaining power with customer is very low. Bargaining power with advertising customers As we can see from the cost of sales, the bargaining power with advertising customers is low. Spotify tried to keep most of its adv space for its customers, but, realizing that it was not possible to find enough customers to cover all the space, the company decided to use its own space to deliver to customers its own advertising. Fact is that, even if Spotify could appear as a good platform for developing a targeted advertising campaign, its relative size respect with Facebook and other competitors made the difference. Spotify was not able to offer enough to potential customers which often preferred to use different platform for their commercials. Coming back to the problems of the Spotify model we can realize that maybe the Freemium model which was firstly presented as a bad choice could have been the only possible chance for them to start and run their business. Bargaining power with suppliers From this perspective we have to clarify that Spotify simply stream the songs without owning it, while suppliers develop and own the content. Most of the value for our customers stays with the music and not with the platform. Also, since suppliers already had their own channels through which they could gain very good margins and since Spotify is not able to offer something differential, we can say that the bargaining power with suppliers is very low. As the traditional strategy models suggest, when you don’t have bargaining power you have to pay a lot your suppliers (in this case royalties are about 70%) gaining lower and lower profits. Threats of new entrants As already discussed in previous classes, entry barriers that can prevent new entrants from became a threat could be: -

Regulations Economies of scale High fixed costs Special contracts with customers or suppliers Switching costs Distribution channel

Unfortunately, it’s quite clear that all these factors are not present in Spotify model and then to protect its own market Spotify had to address most of its marketing effort and costs toward its brand positioning to create a perception barrier. However, without profits Spotify had not been able to create a very strong brand. This can also explain the decision to advertise the company itself through the platform and how Spotify had been trapped by the growth rate.

We can conclude this analysis saying that, applying the traditional strategic model to Spotify, it’s clear that this company has not a sustainable plan. Another possibility is given by the analysis of the foundations of the long-term (defendable) competitive advantage of the company and then its “core” competencies and resources. The important features for a resource to be strategically important are as below (VRIN model): -

Valuable Rare Inimitable Non-substitutable

Unfortunately, from this perspective, Spotify has not inimitable and non-substitutable resources, thus the only chance for Spotify could have been to use a Hit & Run approach. Spotify is not in a good position, but what could have it done better? The pricing strategy could have been different; for example, they could have set a fixed fee for everyone aligned with the “monthly” average price customers on iTunes or other platform making explicit what is implicit in Apple platform. In general, they could have reduced the differences with iTunes creating a certain level of entry barriers but this only a suggestion. KEY POINT Strategic models are not wrong or right; they are only like different glasses through which you can design strategic alternatives. In this case, the blue ocean strategy was very useful in identifying how to position the company on the market, but without a traditional analysis the profitability and the attractiveness of the market had not been checked. Often, the best way to generate strategic alternatives is through the combination of more models. SPOTIFY CASE ADDITIONAL NOTES (not important) Spotify created a BLUE OCEAN from a RED one (the industry of music in general, the fishes are all the people that listen to music) shifting from directly selling the songs to selling for a fixed price and free from adv its library with all its songs. In the beginning for Spotify it was a blue ocean, but now it is red, so Spotify changed its business model. In this case the only entry barrier was the “community” since from a technological point of view it has nothing special and for this reason it does not take long for the ocean to become red. ( related concept: blue ocean created from a red one and blue ocean as a temporary situation) -

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Spotify is not selling artists or songs, it’s selling an open broadcast for music, either for free with ads, or premium with no ads and additional features. Also, since broadcast music is becoming a mainstream we can talk about an ocean. Of course, Spotify is not inventing a brand-new technology or product for your customers. So, it’s about changing your business model, to create blue oceans. You don’t have to think of a very special customer, as they already exist. (Finding a blue ocean, is inventing a new business model in a new space, but sooner or later it will change to a red ocean, it just depends on the barriers, but at the meantime, you must go fishing in your ocean.) Spotify redesigned its business model based on two main ideas: Audio quality is very important A partnership with Facebook could increase a lot the possibilities of creating a community...