Face the Music

Group 12
Karan Kohli (PGP/23/210)
Raunak Kochar (PGP/23/211)
Mudit Yagnik (PGP/23/216)
Shubham Manuja (PGP/23/233)
Swati Sachdeva (PGP/23/239)
Taher Lokhandwala (PGP/23/240)
Agenda

 Case Introduction
 Power of different players in the industry
 Change in the structure of the music industry 1990-2017
 Changes in Value Creation & Value Capturing
 How should Spotify proceed ?
 What more could Spotify do to increase revenues ?
Case Introduction

 US Music Industry Overview: Size – $7.7 billion in 2016 THREE MAJOR

1  Composition: Streaming (51.4%), Download (24.1%), Physical (21.8%), Sync (2.7%)
MUSIC LABELS

2  Spotify: World’s leading on-demand music-streaming service, founded in 2006

 Spotify (Free): $0 – Full Catalog, Playlists, On-demand (only laptops and tablets)
3  Spotify Premium: $9.99 - No advertisements, better sound quality, offline

 Revenue: $4.09 billion in 2017 (~90% of revenue from subscriptions)

4  Cost of Sales: $3.24 billion in 2017 (majority arising from royalties)

5  Royalty: Fixed percentage of monthly revenue allocated

 Discrepancy in revenue and cost of sales: Revenue arises from a $9.99 monthly
6 payment made by users while it must pay publishers every time a song is streamed
Power of different players in the music industry
An Analysis

Streaming Relationships among these

Criteria Artists Music Labels
platforms players
High Moderate Moderate
(Artist owned (heavy (Spotify 140 million
streaming concentration, only users, Pandora 80
Bargaining power
service Tidal 3 major labels, had million users, 51%
The music industry comprised of three
launched) the power to sue file from streaming in major players- artists, music labels
sharing services) 2016) and streaming platforms. Artists are
Low the original content creators who tie-
up with exclusive platforms/music
High Moderate (Low Influence due to
Power over the labels. The three major music labels-
(Original content (Influence artists higher reach and Universal Music Group, Sony Music,
content
creators) through contracts) direct contact with Warner Music, accounted for nearly
customer) 70% of the global market of recorded
Moderate music. These music labels have
Low Moderate licensing agreements with streaming
(Royalties jointly
Power over (Royalties are (Royalties jointly platforms like Spotify, Apple music
decided by and get royalties in return. The
revenue paid by the decided by streaming
streaming devices streaming platforms- Spotify, Pandora
labels) devices and labels)
and labels) allow on-demand unlimited listening
and distributed the content directly to
Moderate High
the consumers. These three players
(Choice between High (Face of the music, were interdependent and leveraged
Power over
exclusive (Control the entire deliver on demand high bargaining power on each other.
distribution
platforms/music distribution network) content directly to the
labels) consumer)
Change in the structure of the Music Industry – 1990-2017
P R E D I G I T A L E R A F I R S T S T E P S I N D I G I T A L D I G I T A L D I S R U P T I O N

KEY
RETAILERS/DISTRIBU
ARTISTS PIRACY SERVICES CONSUMERS
TORS
DOWNLOAD STREAMING
MUSIC LABELS
STREAMS SERVICES
Changes in Value Creation and Value Capturing
P R E D I G I T A L E R A F I R S T S T E P S I N D I G I T A L D I G I T A L D I S R U P T I O N

B U S I N E S S A S C H A N G E I N M U S I C M U S I C C R E A T I O N
U S U A L D E L I V E R & D E L I V E R Y

ARTIST MUSIC LABELS RETAILERS • Aggregation – Music • Access to larger catalog

• Creation of content • Support creation of content • Distibution support Catalogs • Access using flat subscription fees
• Partnership with Music • Publishing • Consumer Convenience • No need for ownership
Labels • Promotion and Marketing • Adaptable to new • Better exploration options
• Established distribution technologies
channel • Ability to buy and own music • Support production function of Artists, by
in digital format Digital Players
How should Spotify proceed ?
Yr 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 13.3 73.9 188.1 430.3 746.9 1084 1928 2933 4090 5317 6646.25 7975.5
Growth rate 1.2876 0.7358 0.4513 0.7786 0.5213 0.3945 0.3 0.25 0.2
---Subscriptions 52 157 375 679 985.6 1730 2640 3674.1 4776.33 5970.413 7164.495
---Ads 21.8 27.5 55.3 67.9 98.4 192.9 293 415.9 540.67 675.8375 811.005
---Others 0.1 3.6 0 0 0 5.1 0 NA 0 0 0
Cost of Sales N/A 76.8 183 396 614 910 1664 2483 3241 4040.92 4984.688 5901.87
--- % of Revenue 104 97 92 82 84 86 85 79 76 75 74
Gross Profit -2.9 5.1 34.3 132.9 174 264 450 849 1276.08 1661.563 2073.63

Op Expenses 19 51 120 223 365 500 799 1227 1569 1800 2000
--- R&D 38 72.7 114.2 136.1 206.9 396
--- S&M 54 110.8 184 258.7 417.8 567
--- Gen & Admin 28 40 67.2 105.9 174.3 264
Op Income -21.9 -45.9 -85.7 -90.1 -191 -236 -349 -378 -292.92 -138.438 73.63

Finance loss NA NA NA NA NA NA NA 855

Loss Before tax -21.9 -45.9 -85.7 -90.1 -191 -236 -349 -1233

 Spotify should pursue growth over the next few years to generate revenues which could offset the increasing
royalty payments.
 It should also continue negotiations to reduce the royalty rates which is a critical component to achieve
profitability.
 If it could negotiate a consistent decline in the royalty rates from 79% to 74% over 3 years. If this means giving
some concessions to the music labels, Spotify could acquiesce to that.
 Spotify should not take any more debt because that presents a very large hurdle on its path to profitability.
What more could Spotify do to increase revenues ?
CONTENT CREATION INDEPENDENT ARTISTS

 Spotify could augment  Independent artists

the music revenues by could help Spotify
newer avenues such remove the music
as karaoke, podcasts, labels and also reduce
etc. the power of these
lables

NEW AVENUES
FOR GROWTH
AND REVENUE

 Tweak the
 It can launch new
recommendation to
plans to cross sell and
promote some music
upsell it’s plans like
tracks which would
family plans, yearly
provide some
plans, etc.
additional revenues.

SPONSORED ADVERTISEMENT NEW PLANS

Thank You