Questions for the Spotify case study

1. What factors contributed to the success of Spotify? And yet, what were the complex set of
issues faced by Spotify in the case study? The case ended with one decision making point. Was
there one decision making point or several? Illuminate please.

· Success Factors:

o Digital medium enabled the users to share songs over internet

o Free invites by existing users.; Pay or join anytime – Free premium use for 6
months

o Simple functionality of app, Follow friends and artists, Radio, Integration with
other Social media platforms

o Value offering promotions to sign up more customers. Eg, Hulu free

subscription, subscription sharing among 6 family members etc.

o Spotify for Artists where they can real time track their songs among users.

· Issues:

o Piracy

o Royalty Issue – Spotify has to ensure it secured all the royalties to offer music
to their users. It tackled the issue by various negotiations and fixing ratios instead
of fixed amounts being paid per stream.

o Low royalty rates paid artists quite low compared to other platforms. Some
withdrew their albums to move to other platforms but were forced to return due to
less users on other platforms. Spotify also tried to cut the middlemen to pay
directly to artists as well.

● Issues with app stores where they take huge cut from revenue.

· Podcasting can be a viable option for Spotify, as the because of the growing market trends
given in the case.

· There are many questions like can Spotify help the company to compete other giants?
Should Spotify actually go with podcast or look for other options of producing original content?
What kind of podcasts should it start with?
2. What type of pricing model/s is/are being followed by Spotify? What are the pluses and
downsides of this/ these models (only the model/s)? (this may be from different places in the
case). In an extension to the above question, explain the revenue split for Spotify in the context
of its premium and free users. And what should Spotify do to convert the free users into
premium users?

· Freemium strategy

o Advantages: large user base, opportunity to upsell, advertising as revenue,

Coping with the churn rate

o Disadvantages: Cash burn out if not adequate subscriptions, less value to

customers,cost of revenue is higher

o Premium users growth in 4 yrs ~380%

o Ad revenue growth in 4 yrs ~431%

· Spotify can:

o Give repeated offers to the loyal free customers to upgrade

o Tie up and bundle other platforms in the paid subscriptions

o Introduce short duration plans for customers to try and upgrade

o Personalize the messages and offers for the customers

3. Are the free users undermining the value of the platform, for instance, should Spotify
eliminate free users after a certain time period? In a broader context, even if prospects prefer
their services and continue using only their free services, is it at all useful for Spotify? Explain.

Free users are undermining the value of spotify because of the following reasons:

● The revenue from ads is very minimal, it only accounts for 10% of the total revenue.
● The paid subscriptions generate 90% of the revenue.
● Cost of revenue is also higher for free model as royalties are greater.
● Spotify spends more money (620 M) on traditional marketing than it receives through
(542M)advertisements.
● Major labels view free streaming as unsustainable and removing free streaming would
improve Spotify’s relationships with major stakeholders in the market.
● Spotify already spends nearly half a billion dollars a year on sales and marketing, so it’s
not as if the free tier provides all the promotion the company needs — indeed, it spends
more on traditional marketing than it earns in revenue through free streaming.

The free users are of use to the company because they will provide them with the data that they
can further publish to the Artists in their spotify for artists and that can help the artist in
understanding their audience and also benefit the artists for merchandising and other details.

4. What is Spotify’s overall pricing objective that you can gauge from the pricing models
(strategies)? How do you read this? Why is that important in the context of the Spotify case? Do
you think the overall objective is working out for Spotify? How about the future?

Spotify operates on a freemium model with pure acquisition and retention strategy.

- Spotify makes money from two sources:

1. A free tier supported by advertising

2. A premium tier with paid subscription ($9.99/month)

3. Spotify Family Plan allows five users to access a single account for $14.99.

- Spotify has not changed its pricing since its US launch in 2011. (Not in the case)

- Yes, the objective is currently working out.

- Spotify has gone strong on acquisition. With rivals entering the market, the company also has
to think about retention constantly. Both of these factors are keeping price low. But eventually,
acquisition will become more costly, and that is when they would need to bring a strong
monetization strategy. They should open up to the idea of trying new pricing tiers, such as with
lossless quality, or raising prices to match willingness to pay, such as with the Family Plan.
5. Explain Spotify as a digital service platform? Who are the participants in the digital music
streaming value chain, and how do they contribute to the generation of value? What is Spotify’s
gain from the platform – what is the biggest source of competitive advantage for the platform?

Answer:

Spotify as a digital service platform:

Spotify provides an app that could be installed on many devices, from Android and iOS
smartphones and tablets to smart TV receivers and even Internet of Things devices such as the
Amazon Echo. On these platforms, Spotify offers two service tiers in most of its markets: free
and premium. Both tiers allowed on-demand unlimited listening of every song in the Spotify
catalog (40 million tracks, and 1.5 billion listening hours) for an unlimited number of times from
any personal computer or tablet. Whereas, Users of the free service had their playback
interrupted every few songs by short audio adverts. However, premium users could listen to
music without being interrupted by adverts, had access to higher-quality audio, and enjoyed
other features.

Participants in the digital music streaming value chain and contribution to the
generation of value:

Content Creator:

Artist/ Record Labels/producers – They share their content like songs to the customers.

Digital music retailers– artists and producers via digital music retailers link to their customers
nowadays by offering them their products and services in a much easier and more comfortable
way. Also, Digital music retailers add value for both by applying new marketing, promotion,
copyright, and licensing opportunities.

Customers – User-generated playlist, Podcast all these activities add value to the value chain
of digital music streaming.

Spotify’s gain from the platform and biggest source of competitive advantage for
the platform:

Spotify users are growing at a good pace, up 25% respectively, year over year. As users
continue to use the platform and more users join, Spotify's competitive advantage stemming
from their data, analytics and AI will continue to grow. Spotify will be able to use their data to
create an even more personalized experience and lock users into the service.

Advantage for content creators:

Artists could use it to harness the data generated by Spotify streams of their music, manage
their profiles, and engage with fans. Artists were able to check what kind of playlists they were
getting added to. Artists were able to track in real time which songs were being played the most,
segmented across many variables such as gender, age, and location.

Advantage for customers:

Users could “follow” their friends to see what music they were listening to. Users could also
follow artists, bands, and other personalities to get news about them and be alerted if they
released new songs on Spotify. Spotify would use it to tell users when their favorite artists were
playing near them.

Also, Spotify's user-generated playlists may also be another biggest competitive advantage.
Playlists created and shared by users accounted for 36% of listening hours. Much of this is likely
personal playlists created by the user of favorite tracks, but a lot also comes from popular third
parties that share playlists publicly.

6. Who are the customers of Spotify? What is Spotify’s value proposition for its
customers? From the case, do you discern any differentiation that the Spotify brand can
offer through its value proposition? If yes, can it last? If not, what must the brand do to
fall in the customer’s consideration set? What do they gain from participating in the
value chain?

Ans 6 : The customers of Spotify are both the people who subscribe by paying a monthly
subscription fee and the people who don’t. From the financial analysis, it is evident that both of
these segments bring in significant revenue.

The customer for Spotify is someone who wants to have any song that he wants to listen on his
fingertip without any additional payment as such.

Value prop-The core product that is part of the value proposition is that it allows you to listen to
music anytime, anywhere and any music you want in high quality audio. Spotify keeps finding
new supplementary services for a better value proposition.

Differentiation- In the case, it is mentioned that to differentiate,spotify gives a feature where the
customers can follow their friends and see what they are listening to right now. Apple music also
has started providing this supplementary service.

Another feature that was mentioned in the case is that it can give a platform to artists to get a
better idea about how much or when the users listen to their songs. Apple music has caught up
with this feature as well.

Outside the case, Spotify now gives a feature that allows users to listen to music with their
friends simultaneously. This is a feature that is not yet available on Amazon music or Apple
music but it won’t be long till they catch up with this as well.

So, it would be hard for spotify to give a differentiation that will be sustainable for a long term.
The game is currently about giving innovative and new supplementary services and moving fast
to give a certain feature first(like listening to songs with friends).

Consideration set- To fall in the consideration set of the customers, spotify has to make sure
that the core product is superior and make sure that they have innovative supplementary
services.
Also availability of songs is a big factor. Since, Spotify has started inviting artists to directly enlist
their songs on spotify, Spotify can get an exclusive deal signed with big artists directly( at the
same time cutting out the middleman and giving the artist more money).

In supplementary services, Spotify’s philosophy is to launch quickly and that can be a

differentiator. This can differentiate Spotify from other players if they are more agile and brave in
innovations in supplementary services.

Part of value chain-By being part of the value chain, it is helping itself in the long term. By
directly collaborating with the artists, Spotify is cutting out the middleman which is allowing the
artist to earn more and therefore have a better relationship with the artists. This is a big gain for
Spotify as it is one of the platforms where artists were paid really low leading to some artists
even leaving the platform. Having as many artists( and therefore tracks) on the platform is very
important for Spotify.

Questions 5 and 6 are distinct. Try not to overlap the answers.

7. Who is/ are the strongest player/s in the value chain? Why? Comment on the shifts in
the power across the value chain over time. Comment on the relationship between artists
and Spotify. Do you agree with Spotify’s approach to tackling the relationship with
artists? Explain.

Music labels & streaming service providers are the strongest players in the music industry value
chain.

Music labels as they acted as both producers and publishers, coordinating and handling the
recording, manufacturing, promotion, marketing, and distribution of music. They also hold the
performance rights for recorded music which means they hold the decision-making power over
who can listen to the music created by the artist. And then there's streaming services like
Spotify, which allows users to listen music over the internet on their platform. They are the final
touch point in music streaming services with a massive user base. They hold the decision over
revenue distribution to different participants in this value chain.

Previously, when CDs & cassettes of music accounted for the majority of total revenue, Music
Labels had the majority of the authority. Production, marketing, and distribution of music were
controlled by the record companies, giving them complete control. Eventually the market was
concentrated among the big-five major labels who started acting as the publishers even for
smaller independent companies.

Later in the 2000 era the power shifted from music Labels to digital platforms that offer music
streaming and downloads with the advent of digital music. Regarding the power shift, compared
with the situation in 1999, the global music market had witnessed concentration. The “big five”
major labels had been reduced to three only.
Artists were criticizing Spotify for very low royalties far lower than its competitors, and now the
rates were even lower because of the new deals signed with the major music publishers in
2017. While those low rates were helping Spotify’s quest for profitability, they risked alienating
artists. This criticism increased when Spotify embroiled in a legal battle to prevent the Copyright
Royalty Board from progressively raising the mechanical royalties from 11.4% to 15.1% of total
revenue.

Artists, on the other hand, were limited in their options, some of them tried to stream their music
on other platforms but returned as Spotify enjoys a massive consumer base that they can not
find anywhere else.

No, Spotify's treatment of musicians was exploitative. Both parties are extremely reliant on one
another, and a massive backlash from artists might endanger their business model.

Spotify was also beta testing a feature that would allow unsigned artists to publish music directly
without a publisher. Artists in the program can directly receive royalties from Spotify but so far,
they have just invited a few hundred US-based independent artists.

8. Discuss the role of competition in the music streaming industry – how has it altered
the rules of competing in the industry? How can Spotify tackle its competitors, especially
that they are giants who are often endowed with better resources and capabilities to
attract and retain customers mainly by cross selling music services, for instance,
Amazon as a giant marketplace cross selling to its users or Apple cross selling its
services to device owners with the added advantage of its app centre?

Answer 8

As the viability and feasibility of providing the music streaming services successfully has been
proved by Spotify the Industry became attractive for the largest tech companies in the world:
Apple, Amazon and Google.

How this competition has altered the rules of competing in the Industry :

● Cross selling: These big tech giants wanted to leverage a considerable number of
people already using their products or provide this streaming service as additional
products along with their other products. For ex: Apple wanted to bundle its new video
and News service with apple music offering a one stop solution for culture products and
information
 ● Providing more at same cost: Apple music allowed its customers to interact with fans,
exclusive deals with artists, and integration with the Siri voice-controlled personal-
assistant feature that most Apple products had. All of this was available at the same cost
as spotify premium. Similarly for Amazon music you can use it through Alexa making it
more fun
● Already have a customer base: Youtube is already the Internet's largest music
streamed all over the world, and through youtube music this base can be easily reached
● Discount: As these big giants are cross selling they can offer discounts such as
Amazon prime customer got Amazon prime music for free and Amazon prime
customers get discount on the full service
● Financial Backup: These big tech giants have a much more financial backup and can
even synergize horizontally with companies other activities and even they can afford
streaming business as a loss making to drive customers to its core offerings.

Spotify plans to tackle these competitors with their New Audio strategy. They believe they can
exploit the opportunity for audio to evolve into a more personalised, more immersive experience
such as the video industry has involved. This opportunity starts with podcasts and spotify had
purchased 3 different podcast companies stepping into that direction. Spotify aims to produce
original non music content as a way to drive up engagement and differentiation.

9. Was podcast the best way forward for Spotify (it is making money and there is growth,
but is it the future)? Is ‘audio’ really the future for Spotify? Yes/ No and explain –
especially the issues it faces in terms of the differences between its podcast business
and the music streaming business. How will the future of the music industry evolve – for
instance, do you think the powerful music labels would own customer relationships in
the future?

A9. Spotify’s main motto was to increase the engagement with its current users and attract more
users through the use of audio content like Podcasts. The Interactive Advertising Bureau and
PwC firm had put podcasting revenue at $314 million for 2017 forecasted that the number will
hit $659 million next year, marking a 110 percent increase. Currently, audio constitutes only
one-tenth of the size of the video market, so there is a massive opportunity here for audio to
evolve into a more personalized, more immersive experience, much like how the video industry
has evolved. Podcasts are episodic in nature where that can improve customer retention and
engagement a lot comparatively to music streaming.

Thus, introducing podcasts as a feature could be the best way forward for Spotify.

Over time, more than 20% of all listening on Spotify will be no music content, and Spotify
strongly believe that this opportunity in audio starts with podcasts. Audio could be the future of
the Spotify given its core competency is in audio streaming only. Basically the main issue that
could arise is of the taste of the music and podcast. But also mentioned that it is primarily about
driving that virtuous cycle. What Spotify see very clearly as they are investing in more podcast
content is engagement goes up. As engagement goes up, Spotify both broadens the appeal to
new users but also increases the engagement of the existing ones on the platform—which
drives down churn, which in turn makes the business overall much stronger.

The powerful labels could not handle the customer relationships in the future as it will create an
issue. The major labels thus still controls most of the distribution of music, which is now being
delivered to customers through two main types of digital retailer which are Download operations
and Streaming that allowed customers to listen to music without downloading it to their device.

Vertically integrating towards the customer side could prove to be costly for the power labels as
there are very resourceful companies such as Amazon, Google and Apple who are competing
for the space in the customer segment. Moreover, again there will be a conflict of interests
among the power labels and thus limiting the number of options to the consumers as that was
the case earlier in the music industry but what a streaming platform will provide is that they
create a portfolio of albums from even different labels also thus giving consumers a wide range
of options which is what the consumer exactly needs.