BUSINESS INNOVATION AT SPOTIFY

(The Company launched in 2008 provides Audio Streaming Services for Music)

  

Spotify, the audio streaming company is serving to more than 2.5 million paying subscribers and a much bigger nonpaying subscribers. The company is believed to be one of the most promising prospects amongst other big players in DIGITAL music business like iTunes Match, Pandora, Rdio, Grooveshark and MOG. This post is an attempt to understand the business of the company.

What does SPOTIFY offer to Customer?

Spotify customers get free of cost access to music library available with the company on internet. Music can be accessed anytime anywhere through PC, Mac, Home Audio System and Mobile Phones. Also, customers can use Facebook to share (post/directly send to a specific friends) music of their choice within their social networks. Music can also be shared over Flickr, Twitter and YouTube. The Spotify library has millions of tracks.

Music can be browsed by artist, album, record label, genre or playlist as well as by direct searches. On desktop clients, a link allows the listener to purchase selected material via partner retailers.

Initial subscription for Free Services gives unlimited access during trial period. After the trial period is over, Spotify will have a listening limit (of say ten hours per month) under Free Services category. Advertisements played in Free Services become source of income for the company. Upgrading to an "Unlimited" paid subscription removes advertisements and time limits. Premium subscription (costlier than Unlimited subscription) gives access to privileged services like Offline Mode for personal play lists, enhanced quality of music, access to mobile applications and option to take music abroad.

Presently the services of Spotify are available only in a few countries of Europe and the USA. To go truly global with its services, the company is trying to work out licensing arrangements with record labels and local publishing rights societies. An active Facebook account is required to use Spotify, unless the user has registered for a Spotify-only account before 22 September 2011. Subscriptions are restricted to people with credit/debit cards or PayPal accounts registered in certain countries.

What Value Proposition does SPOTIFY proposes? 

1. The key value proposition for customers of Spotify lies in doing away with efforts of downloading, storing and arranging the music.  
2. Access to authentic music from legitimate source may also make a good value proposition for some of the customers.
3. Customers need to pay only for access to tracks and do not buy tracks (either in digital or physical form). This may enable customers with unlimited access to variety of tracks for a given period of time. Time, Internet Accessibility and Devices to Play Digital Music are the key enabling resources for the services.  
4. Net savvy customers may see value in use of social network for sharing music and may like being a part of music related events on internet.

Where is SPOTIFY placed in Evolutionary Industrial Dynamics of Music Industry?

Spotify has introduced a new way of doing digital music business. Leveraging on the internet technology, it facilitates online streaming of music. This may be considered as natural move from the paradigm shift in music business brought about by changes in technique of storage and accessibility.

(PLEASE CLICK ON THE SOURCE URL FOR CLEARER PICTURE)

(Source: http://visually.visually.netdna-cdn.com/EvolutionofMusicTheimpactofDigitalontheMusicIndustry_4e65e14a30aa1.jpg

data - Recording Industry Association of America, Shipment database 2011, International Federation of the Phonographic Industry – Recording in Numbers 2011)

It is evident from the details shown in the figure that the phenomenon of Digital Music (‘Music Streaming Services’, ‘Music Download’ and ‘Music Locker’) is beginning to disrupt industrial dynamics of music industry (please refer to the graphs , ‘TYPES OF DIGITAL MUSIC SERVICES’ and ‘GLOBAL UNIT SELL OF LP / CASSETTES / CD / DIGITAL’). There has been a surge in sale of digital music and decline in sale of physical music (please refer to the graph, ‘SALE OF PHYSICAL AND DIGITAL MUSIC’). Experts suggest that CDs would continue dropping a steep 40 percent from $3.8 billion in revenue for 2010 to just $2.7 billion in 2012. It can also be observed that previous disruptions brought about by Cassette and by CD have made the transition in growing market, while DIGITAL disruption is taking place in reducing market.

Worldwide decline in sales of music industry is attributed to piracy of music. It is widely believed that online piracy through the medium of internet is more prominent than roadside piracy of physical music. It is widely believed that two-way approach is necessary to solve the problem, first to enforce stringent piracy laws and second is to promote new innovative business models for subscription services through internet portals.

  

However, it has been reported very recently (in Business Insider) that “Total U.S. music sales actually grew for the first time since 2004. They were up 0.2%, just topping $7 billion. The reason: digital sales were up 9.2% during the year, and physical sales (mostly CDs) dropped only 7.7%, which is smaller than in recent years. There were some other interesting notes as well:  

• Subscription service revenue is growing
• Album downloads are growing like crazy
• CDs are still the biggest seller by far  
• People spent more than $100 million on vinyl records last year” 

Clearly there are evidences of upward surge in music industry with prospective future for subscription services.

In short period of time, Spotify has established itself well in the niche market of audio streaming of music. It is in a position to consolidate its position by adopting innovative approaches for streaming music suitable to diverse cultural, socio-economic and legal situations in different countries across the globe. Bringing well established artists and music houses to collaborate with it would be another area which may need attention.   

Last year, it was published in ‘mediadecoder.blogs.nytimes.com’ that “Spotify’s performance has been closely monitored by the music industry, which sees it as a kind of litmus test for the viability of digital music by subscription, which pays labels each time a listener streams a particular song. That system brings in lower royalties per song than downloads, but with a large enough listener-base could in theory bring in substantial amounts.”

Which market SPOTIFY is targeting at?

Those people who:

1. Listen to music frequently
2. Value variety in music
3. Like to explore new music
4. Share music with friends
5. Easily access internet through electronic medium
6. Have internet access available when they like to listen to music
7. Prefer integrated facilities on one electronic device
8. Do not like to download and manage music on personal storage devices
9. May pay for better quality of music
10. May pay for additional facilities for the sake of improved music experience (like say for music without advertisement)
11. Like internet-surfing and may feel more comfortable with music available on internet

   

What are the key Differentiators for SPOTIFY? 

1. Music on Demand through internet
2. Huge database of music, which is consistently introducing new music
3. A new way to catch attention of customers for commercial advertisements
4. Source of revenue is Customer base (not the sale of tracks)
5. Enhanced facility to share music on internet through Social Networking sites
6. Institutional support to musicians having untapped potential
7. Enhanced ease of experimenting new type of music
8. Data for a better understanding of personal music preferences of customers

  

What is the Business Model of Spotify?

Spotify assumes that there is a huge market for free music available online. On capturing a significant proportion of the market share Spotify would be well placed to use its customer base for inviting advertising community for commercial advertisements to be played with music delivered online (say in between the tracks). Advertisers will have the privilege of using enhanced precision for selection of target audience (based on accumulated data for music preferences by customer groups). Advertisers would make advertisements keeping in mind the taste of music lovers. It is assumed that such type of advertising may be a new way of invoking customer attention towards advertised products and advertisers would be willing to pay to Spotify for advertising. It is also assumed that customers (availing free services) would not dislike interruptions by advertisements on the way to listening to their favorite numbers. Revenue generated through this mode would mainly depend on a) volume of Free Services subscribers and b) price advertising community would be willing to pay for advertisements.   

Spotify may have lower price for subscription for customers, who choose to opt for ‘Unlimited’ version of subscription. For those customers, who may like to enjoy a full set of additional services (Premium Services) for increased accessibility or for better quality of music, Spotify has a provision for Premium subscription. Revenue generated through these modes would mainly depend on volume of customers of Spotify, who prefer to subscribe to paid services.

Following location specific factors may be key to success of the business model:-

a) Music loving population with culture of listening to music

b) Existence of suitable piracy laws and their implementation

c) Sense of appreciation for new and different music among music lovers

d) Internet penetration and availability continuous power supply

What Paradigm Shift Spotify brings through audio streaming?

Efforts of Spotify may significantly impact in the community of musicians. It may help new musicians to reach larger audience with greater ease.

This business may contribute towards reducing long and complex value chain in the process of introducing new music to audience. In the existing scenario, the new and struggling musicians face great difficulty in taking their music to audience. One of the main reasons for this is the risk-averse approach of business community involved in taking music to audience. Looking into the amount invested in rollout of a new music album, the risk involved in getting non-established musicians publicly accepted is high. Spotify may challenge the existing paradigm (of releasing music albums) by significantly reducing the cost of releasing new numbers to public. Cost would only be incurred in recording, hosting and promotion but not in manufacturing or distribution of CDs. This may contribute towards making world of music a level playing field for new comers with respect to established musicians. This will usher fair competition and encourage innovation. This may help in bringing new dimension to creativity among musician and help in promoting excellence in world of music.

  

References:

http://www.spotify.com/int/
http://en.wikipedia.org/wiki/Spotify
http://visually.visually.netdna-cdn.com/EvolutionofMusicTheimpactofDigitalontheMusicIndustry_4e65e14a30aa1.jpg
http://kaleazy.com/digital-music-will-finally-surpass-physical-cd-sales-by-2012/
http://arstechnica.com/tech-policy/news/2010/04/piracy-problems-music-industry-grew-in-13-markets-in-2009.ars
http://mediadecoder.blogs.nytimes.com/2011/10/10/spotify-loss-widens-despite-higher-revenue/?nl=technology&emc=techupdateema3
http://www.booz.com/uk/home/what_we_think/40807640/40807984/46413352
http://articles.businessinsider.com/2012-03-27/tech/31243825_1_music-sales-spotify-album-downloads
http://www.ifpi.org/content/section_news/20100428.html
http://www.thefreelibrary.com/Booz-Allen+Report+Anticipates+Major+Changes+And+Opportunities+for+the...-a075655989
http://www.lockergnome.com/media/2011/11/30/is-spotify-keeping-up-with-its-competitors/

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