E-Commerce in Spotify - Essay Example

? E-Commerce in Spotify Executive Summary Digital music industry is one of the fastest growing industries of the world. In this report, the market position and staregy of Spotify, a Swedish online music streaming service providing company has been analysed. The study revealed that the company has been witnessing consistent growth since its foundation. The reason behind this occurnace is shift in foucus of consumers towards digital music. Although the company has been growing at a rapid pace, but still there are some areas where the company needs to implement new strategies. For example, it was found that website of the company is notb that much attractive and hence accordingly the company was recommended to make modification in the website design and make it bright. Table of Contents Table of Contents 3 Introduction 4 Discussion 5 Overview of the Online Music Industry 5 Porter’s 5 Forces Analysis 6 VRIN Analysis 7 Analyzing Spotify’s Strategies 8 Information Technology in Spotify 9 Conclusion 10 References 12 Introduction Spotify is a Swedish company involved in providing music streaming services. The streaming content provided by the company is availed from a number of independent and major record labels (Gilmour, 2011). Some of the major content providers of the company include Warner Music Group, Universal, EMI and Sony. Spotify was founded in the year 2006 and is currently headquartered in London, United Kingdom. The company however started to provide music streaming services from the year 2008. Within two years of its operation, the total membership of the company reached 10 million and between them around 2.5 million were paid members. According to latest reports, as of 2012 the total paid membership of the company reached more than 5 million (Barker, 2012). Keeping in mind about the rapid technological developments, the platform of the company has been designed is such a manner that it supports Mac OS X, Microsoft Windows, Telia Digital-TV, Windows Mobile, iOS, S60 (Symbian), Samsung Smart TV, Roku, Sonos, Linux, Android, BlackBerry, Windows Phone, webOS, Squeezebox, MeeGo, Boxee, WD TVand TiVo (Heimer, 2011). During its inception, the offerings of the company were limited only within the UK market. However, the company witnessed strong growth in the last couple of years and that has allowed them to make their presence in different parts of the world. Recently, the company expanded its wings to countries such as Australia, Sweden, Faroe Islands, Belgium, Liechtenstein, Portugal, Denmark, Austria, Finland, France, New Zealand, Germany, Poland, Ireland, Italy, Luxembourg, Andorra, the Netherlands, Monaco, Norway, Spain, Switzerland, and the United States. This report will evaluate the strategies of the company with the help of several strategic frameworks. In addition, the report will also shed light on the strategic role played by information technology towards the progress of the company. However, the report will mainly emphasize on how the company is using information systems to support their business strategy. The report will begin by providing a brief overview of the digital music industry. Discussion Overview of the Online Music Industry The digital music industry can be broadly classified into two segments: the digital download market and streaming market. The digital music industry is one of the new business segments and is growing at a rapid pace. According to reports, in 2012 the revenue of this industry witnessed a growth of 8 % from 2011 and is presently valued at $5.2 billion (Thomes, 2011). However most of the revenue is generated by digital download business and the streaming market contributes only 10 % of the total revenue. Interestingly, the growth rate of the streaming market is more. Companies belonging to this industry, principally differentiate themselves on the basis of regions of operation, licensed music libraries, features, and also the packaging. Apart from that, companies are also offering several value added services which allow the users to know what their friends are listening and create a collaborative playlist. This social networking strategy has helped to attract more customers and played crucial roles in the growth of the industry. Figure 1 – Market Share of the companies acting as online music suppliers (Source: Lule, 2012) Figure 2 – Ranking of the Countries in terms of Digital Music Sales (Source: IFPI, 2008) In order to get a better understanding of the industry, it is important to analyze the attractiveness of the digital music industry. The analysis is presented below: - Porter’s 5 Forces Analysis The online music industry will be analyzed with the help of porter’s 5 forces analysis. Porter’s five forces model is simply an analysis tool by which a particular industry is analyzed. In doing so, it considers 5 different forces (Porter, 1979, 1985). The forces are detailed below in the context of the digital music industry. Bargaining Power of Buyers: - The bargaining power of buyers within the online music industry is relatively high. The reason behind the high bargaining power of buyers is that there are large numbers of established players in the industry. In addition, the switching cost is low, which further increases the bargaining power of the buyers. Bargaining Power of Suppliers: - The bargaining power of the suppliers refers to the ability of suppliers to increase the cost of production, by increasing the price of raw materials (Hill and Jones, 2012). In this context, the suppliers of the raw materials are the companies providing musical contents. The suppliers of the online music industry are therefore Warner Music Group, Universal, EMI and Sony among others. The numbers of suppliers are relatively low and the company has to depend heavily on them. Hence, the bargaining power of the suppliers in this industry is moderate. Threat of New Entrants: - The threat of a new entrant is characterized by the possibility of a new player entering the industry and increasing the intensity of rivalry. The initial investment required to set a business in the field of online industry is comparatively low as there is hardly any requirement of developing physical infrastructure. Apart from that, the legal and political interference is also minimal. Another encouraging factor is that the industry is growing at a rapid pace. Hence considering all the aforementioned factors, it can be stated that the threat of a new entrant in this industry is high. Threat of Substitutes: - Substitutes are the products which offer similar benefits to that of the core product. The substitutes for the online music industry include CD, DVD and Vinyl. In addition, portable media players which are fitted with memory sticks also act as the substitutes for the online music industry. Although the online music industry is witnessing strong growths, but many still prefers traditional method to listen music . Hence, the above findings give a clear indication that the threats of substitute are high. Competition within the industry: - The competition within the industry refers to the intensity of competition that presently exists within the industry. Competition within the online music streaming market is very strong principally due to the presence of large numbers of companies in the industry. Moreover, the business model of many companies is similar. However, availability of content between the existing players acts as major differentiating factors, but interestingly most of the players have a wide collection of contents, Hence, on the basis of the findings, it can be clearly stated that the level of competition within the industry is high. The industry analysis revealed that most of the factors are negative for the companies belonging to this industry and thus is less attractive. VRIN Analysis VRIN analysis is one of the essential strategic management tools to identify a company’s key sources of competitive advantage and core competencies (Barney, 1991). It stands for valuable, rare, imitable and non-substitutable. The VRIN analysis of Spotify is presented below: - Capability Valuable Rare Imitable Non substitutable Conclusion Brand name Y N N N Competitive advantage E-Commerce Y Y N N Sustainable Competitive advantage Customized service N Y Y N No advantage. (Authors creation) Analyzing Spotify’s Strategies Spotify mainly deals with two types of client, one of them is the music or content providers and the other ones are the end consumers. Thus a large portion of their business strategy remains concerned with for creating coordination between the two business clients. The company also understood that a music streaming platform without quality music would hardly appeal to any customer. Thus, to address this issue, the company subsidizes artiss and music levels and providing them lucrative deals for allowing Spotify to stream their music. The company aims to earn revenue from the customers by offering them monthly and yearly subscriptions for listening to music. Apart from earning revenue from subscription fees the company also generates revenue from advertisements. The core strategy of the company is to offer quality and a wide range and variety of products to the customers so as to increase the profitability. Reports have suggested that the company has active 18 million users and among them more than 6 million users have paid subscription. Hence, the results clearly show that the conversion ratio between users and paid subscribers has been 1:3, reflecting one paid subscriber for every 3 users. In order to attract new customers and eventually convert them into paying subscribers, the strategy of the company has been to offer them free music streaming for 10 hours. In addition, the company also launched two different versions of the streaming application namely premium version and unlimited version (Migliore, 2012). Another key strategy of the company is reducing the switching cost. The company offers applications which imitate the features of the competitor’s products at a low cost. This feature can act as one of the competitive advantages for the company. In order to cite an example, Spotify launched a Radio application, which imitates one of the key features of its closest competitor, Pandora. This approach of the company has made it easier for the customers to switch brands. Information Technology in Spotify Nowadays information technology has become the most important element of a business. The importance further increases when it comes to music streaming business (Chen, Mocker and Preston, 2010; Wexelblat and Srinivasan, 1999). Similarly, technology plays the all important role in Spotify’s business. The use of technology in the company can be found in every department. From service delivery to acquiring content, all the factors are dependent on technology. The company is also concerned with maintaining the privacy of the users and security of the website. In order to ensure security, the company has installed strong firewalls and security systems. This strategy of the company has helped them, to minimize the attempt of hackers to spread viruses and steal information. The company makes use of intelligent streaming technologies so as to deliver music instantly. In addition, it has been also observed that Spotify is the only company, providing music streaming services which are not web-based. Instead, the company makes use of a peer-to-peer (P2P) network. This rationale behind using P2P network is that, it has the ability serve millions of users at a time. According to reports, the centrally hosted server of the company only streams around 8.8% of the music, the rest is done by peer-to-peer network and local cache that accounts for 35.8 % and 55.4 % respectively. However, if a user is streaming music from a smartphone, only then it comes directly from the servers of Spotify. Figure 3 (Source: Pansentient, 2012) The aforementioned strategies not only help the company to increase the base of customers but also strengthening its network. Conclusion Online music streaming is one of the rapidly growing industries of the world. However, the competition within the industry is fierce due to the presence of a large numbers of players. This study was related with the analysis of the business strategies of the Spotify with the help of several strategic frameworks. In addition, the report also emphasized on the strategic role played by information technology in the developing the company. However, the report has mainly stressed on how the company is using information systems to support their business strategy. The study revealed that information technology is playing the most important role in managing the operations of the company. The company makes use of technology in almost every department. Moreover, with the intelligent use of technology such as P2P network and cache memory, the company has been able to gain competitive advantage. In spite of that, there are certain areas where the company needs to make further development and information and communication technology (ICT) can play a crucial role. The recommendations for the company are presented below: - The company should try to enhance its network reliability by the deployment of more effective software and hardware. In addition, proactive network monitoring can also be an option to increase redundancies and improve network stability (Wilson, 1991). The platform of the company should be made more users friendly and lighter in weight. This will help the company drive more customers and allow them to serve more customers at a time (Wang et al., 2007). Finally, the company is recommended to the company that apart from providing music streaming services, the company should also offer video streaming services. References Barker, A., 2012. Streaming site accrues five million paying subscribers. [online] Available at: [Accessed 21 March 2013]. Barney, J. B., 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management, 17 (1), pp.99-120. Chen, D. Q., Mocker, M. and Preston, D. S., 2010. Information systems strategy: Reconceptualization, measurement, and implications. MIS Quarterly, 34 (2), pp. 233-259. Gilmour, K., 2011. Spotify for dummies. 2nd ed. New Jersey: John Wiley & Sons. Heimer, M., 2011. The theory of access replacing ownership on the example of Spotify. Munich: GRIN Verlag. Hill, C. W. L., and Jones, G. R., 2012. Strategic Management Theory: An Integrated Approach. 10th ed. Connecticut: Cengage Learning. IFPI, 2008. IFPI digital music report 2008: Revolution innovation responsibility. 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Integration and Innovation Orient to E-Society Volume 1: Seventh IFIP International Conference on E-Business, E-Services, and E-Society. Berlin: Springer. Wexelblat, R. L. and Srinivasan, N., 1999. Planning for information technology in a federated organization. Information & Management, (35), pp. 265-282. Wilson, T. D., 1991. Overcoming the barriers to the implementation of information system strategies,” Journal of Information Technology, 6 (1), pp. 39-44. Read More