Entrepreneurship and Innovation Strategy - Mini-Project Spotify's Ecosystem

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 non-
desktop 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

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 email 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.

Ecosystem Map

Artists
                                                         Social
          Record
                                                       Platforms
          Labels

                     Music
                                         Advertisers

               Operating
                                                 Free Version
                Systems
                               Spotify                             Users

                   3rd Party                     Paid Version
                    Plugins
                                 Online Payment
          Partner Retailers          Systems

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 non-
subscribers 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.

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

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.