Analysis of Spotifys Business Strategy - Case Study Example

Analysis of Spotify’s Business Strategy (2,168 words) Table of Contents I. Executive Summary 3 II. Introduction 3 III. Analysis 3 A. Conceptual Framework 3 B. Piecing Together Spotify’s Current and Evolving Strategy 3 B. Porter’s Five Forces Model 5 C. Porter’s Generic Strategies 6 D. SWOT Analysis 6 IV. Conclusions and Recommendations 6 References 7 I. Executive Summary This paper undertakes a study on the business strategies of Spotify, as well as an analysis of the soundness of those strategies, taking off from a chosen conceptual framework that relies on key analytical models, including Porter’s generic strategies and five forces models. The findings of the analysis are used to determine just how sound Spotify’s current and emerging business models are, and how it can leverage its technological assets moving forward. II. Introduction This paper is a report on the business strategy of Spotify, and includes a critical analysis of the company’s leveraging of information systems in support of the business strategy of the company. This paper undertakes the evaluation of the business strategies that were developed and pursued by the company using chosen theoretical models. With an eye towards considering how ICT fits into the overall strategy of the company moving forward, this paper also makes several recommendations relating to further developing Spotify’s business strategy. In particular, recommendations will include the future role of ICT in the operations of Spotify moving forward. The discussion covers an analysis of the business strategies of Spotify as can be gleaned from its cost structure, its dealings with record labels, and its recent moves and announced plans. It includes a discussion of its current business strategies as well as its evolving business strategies. The discussion also proceeds from this to present the results of an analysis centering on selected theoretical analytical models, including Porter’s Five Forces and SWOT. The paper draws conclusions and makes recommendations that follow through from the results of the analysis (CrunchBase 2013; Facebook 2013). III. Analysis A. Conceptual Framework This paper takes off from an examination of the historical and current business moves of Spotify, alongside its traditional cost structure and other relevant data, to piece together its current and emerging business strategies. From there, the paper uses theoretical analytical models, among them SWOT and Porter’s Five Forces models, to assess and analyze the soundness of Spotify’s business strategies, and to recommend ways forward for the firm based on the findings of that analysis (Halliday 2013; Carlson 2013; Elliott 2013; Fiegerman 2013). B. Piecing Together Spotify’s Current and Evolving Strategy Newer data reveals that the total user base of Spotify has grown to 24 million users who are active by 2013, with the number of paying subscribers roughly equal to one quarter of that number, or six million (Elliott 2013). Moreover, the company has pushed to widen the range of free music it is able to offer to mobile users, aiming to break free from a model where users have to pay 10 British pounds in the UK, to be able to access music from mobile devices as well as tablets. This is in line with the pricing of rivals such as Deezer, Napster and Rdio, which all charge the same monthly fee. A glimpse of its business model can be gleaned from the way it has allocated revenues to differing costs, key among them the payouts to the holders of the copyrights to the songs, which reached 188 million Euros in 2011. This payout to the holders of the song copyrights translates to 70 percent of all revenues. Since 2006 when it was launched, total payout estimate to the holders of the copyrights has reached half a billion dollars. The company has not turned a profit from its operations as of 2012 (Halliday 2013; CrunchBase 2013; Facebook 2013). Other recent developments that give a hint as to the evolving business strategy of Spotify include its first forays into advertising in the US market (Elliott 2013; Fiegerman 2013). The other important development is its announcement of plans to enter the video streaming market in competition with the likes of HBO and Netflix. This will transform Spotify into a company that is able to offer both on-demand video as well as on-demand music to its subscribers. Moreover, the long-term intention it seems is to go into content production and marketing, which would put Spotify in the same league as HBO in that respect. It is important to note that current valuations emanating from the investment by Coca-Cola in the company, which totaled 100 million dollars, together with Goldman Sachs, puts the value of the firm at US 3 billion dollars (Halliday 2013; Carlson 2013). What makes the business model challenging is the large payments to copyright holders of the songs, at 70 percent as stated above. The margins of the firm are very small, and at present it is unable to generate profits from its operations. Moreover, its arrangements with the major labels are such that the more music they are able to stream to users, the larger the cut that major record companies demand out of the revenues generated from them. This is because it is the record labels that have the upper hand. The intent in the beginning was to generate scale in the subscriber base, so that Spotify would be able to renegotiate the terms of its agreements with the record labels achieve larger margins for the streaming. The power would come from the user scale. The problem with this is that while the user base has grown, the power of the record labels and the copyright owners has not diminished. This has led to Spotify actually generating even smaller per track margins as its volume of streaming has gone up. On the other hand, the diversification into video streaming and the creation of original video content would place Spotify in the same ranks as Netflix as well as HBO. This can enable Spotify to generate larger margins from original content streaming (Halliday 2013; Carlson 2013). The preceding discussion reveals many aspects of the business strategy of Spotify, both the original strategy when it first launched, and its emerging strategy as can be gleaned from its most recent moves in the market and announced plans. There is the aspect of the business strategy, for one, tied to its current streaming music service. As can be gleaned from the initial discussion above, this business strategy centers on scaling up the customer base in order to shore up profits from thin margins. This is owing to the nature of its cost structure, which is heavily tilted towards music producers, record labels, and generally owners of the copyrights for the music that they stream, which eats up at least 70 percent of all revenues. This leaves roughly 30 percent to cover everything else, from operational costs to advertising to development costs and on-going market development work. That the company has not achieved profitability even as its subscriber base has ballooned, and even as it has managed to convert a quarter of all active subscribers into paying customers, attests to the importance of scale economies to achieve profitability at some point in the future. In this regard the company is going all out to achieve that scale. It has expanded into all kinds of devices, from smart phones to tablets, whereas it was traditionally concentrated on PCs and Macs. It is planning to expand the free music streaming service to mobiles too. These and its other related moves and plans attest to the continued need for Spotify to build a sizable customer base to achieve scale, as the centerpiece of that business strategy. With scale, it is able to ramp up revenues from ads for its free music streaming service, as well as ramp up sales and profits for its paid service. Scale allows the firm to achieve profits even with thin margins. Its serious ad push in the US is further testament of the importance of this business strategy (Halliday 2013; Carlson 2013; Elliott 2013; Fiegerman 2013). The second aspect of its business strategy is its emerging strategy of going into video streaming and original content programming, to compete head on with the likes of HBO as well as Netflix, which are pioneers in this space. This push is transformative, because it morphs Spotify into an on-demand multimedia streaming service, able to provide both video and music to its subscribers. The implied business strategy here is to up sell higher-margin video and original content to its music subscriber base. Part of this business strategy too is to diversify into higher margin video and original programming, to increase the overall margins from its service offerings (Halliday 2013; Carlson 2013; Elliott 2013; Fiegerman 2013). B. Porter’s Five Forces Model 1. Threat of New Entrants In the current business that Spotify is in, which is streaming music services, there are a number of competitors, as already discussed. Apple with its iTunes service is an indirect competitor in the sense that it is a popular provider of music services. On the other hand, there is the threat of new entrants looming in the horizon too, with the likes of Amazon, Google, and even Nokia getting into the act and aiming to introduce their own streaming music services. These considered, one can say that the threat of new entrants is high (Porter 2008; Halliday 2013; Carlson 2013; Elliott 2013; Fiegerman 2013; Pocket-lint 2012). 2. Supplier Bargaining Power Given that the record labels have tremendous leverage and is able to largely influence decisions on how much they get from Spotify’s revenues, one can say that supplier bargaining power is high for its music streaming service. The same can be said for its planned video streaming service, which is nullified somewhat by their intention to produce original content ((Porter 2008; Halliday 2013; Carlson 2013; Elliott 2013; Fiegerman 2013). 3. Buyer Bargaining Power The existence of alternatives to Spotify means that buyer bargaining power is medium to high (Halliday 2013; Carlson 2013; Elliott 2013; Fiegerman 2013). 4. Threat of Substitutes There are existing powerful substitutes, such as Xbox Music and iTunes, that make the threat of substitutes high (Porter 2008; Halliday 2013; Carlson 2013; Elliott 2013; Fiegerman 2013; Pocket-lint 2012). 5. Rivalry With all of the biggest players in mobile and on the Internet getting in on streaming music, it can be said that rivalry is high (Porter 2008; Halliday 2013; Carlson 2013; Elliott 2013; Fiegerman 2013; Pocket-lint 2012). From the preceding analysis, one can say that the competitive forces for the industry where Spotify competes in, streaming music, are on a very high level. This partly explains why Spotify is not profitable even with its achieved customer base scale. This points to the wisdom of Spotify’s recent announcements at diversification away from just music and into original video content production and distribution (Porter 2008; Halliday 2013; Carlson 2013; Elliott 2013; Fiegerman 2013; Pocket-lint 2012). C. Porter’s Generic Strategies It is not easy to situate Spotify’s current strategy for its music streaming services as either purely cost leadership or purely differentiation. On the one hand, it tries to achieve cost leadership via optimizing distribution while keeping the cost of music acquisition low. This is not working as much as Spotify wants to, given the large leverage of the music labels and copyright holders. On the other hand, it has been able to differentiate itself on the strength of its brand and its loyal customer base. Moreover, its evolving strategy to enter video streaming and original content creation can be deemed as steps towards further differentiation as opposed to cost leadership. This evolving strategy can leverage existing assets in ICT that Spotify has already built, and which includes its formidable platform for delivering content on mobile devices (Mind Tools 2013; Halliday 2013; Carlson 2013; Elliott 2013; Fiegerman 2013; Pocket-lint 2012). D. SWOT Analysis It cannot be argued that its brand cache as well as its large customer base, together with its deeply integrated platform for streaming across different devices, are very formidable strengths for Spotify. On the other hand, its poor leverage with record labels means high music acquisition costs and negative profits, which are some of its biggest weaknesses. There are opportunities to diversify into video streaming and original content creation, which can leverage existing strengths. Current and emerging competitors can undercut Spotify’s business model, and this constitutes the most fundamental threat to the viability of Spotify’s emerging business model (Halliday 2013; Carlson 2013; Elliott 2013; Fiegerman 2013; Pocket-lint 2012) IV. Conclusions and Recommendations It is clear that Spotify’s current business strategy may not bring in the profits, and the preceding analysis shows just why this is so. The rivalry is intense and the Porter models validate that profits are hard to come by in this industry. There is wisdom therefore in pursuing a differentiation strategy, by diversifying into video and original content streaming. This move plays into the strengths of Spotify, and allows them in particular to leverage its deep technological and ICT strengths, from its existing platforms for delivering music. The move also leverages its large customer base and great brand equity. The recommendation is to further leverage those strengths, and in particular make the technology infrastructure more robust, to allow for the successful offering of video content moving forward (Halliday 2013; Carlson 2013; Elliott 2013; Fiegerman 2013; Pocket-lint 2012). References Carlson, Nicholas 2013. Spotify Plans To Take On Netflix and HBO With Streaming Video Service. Business Insider. [Online] Available at: http://www.businessinsider.com/spotify-plans-to-take-on-netflix-and-hbo-with-streaming-video-service-2013-3 [Accessed 27 March 2013] CrunchBase 2013. Spotify. CrunchBase.com. [Online] Available at: http://www.crunchbase.com/company/spotify [Accessed 27 March 2013] Elliott, Stuart 2013. Spotify, New to Advertising, Says I’ve Got the Music in Me. The New York Times. [Online] Available at: http://mediadecoder.blogs.nytimes.com/2013/03/25/spotify-new-to-advertising-says-ive-got-the-music-in-me/ [Accessed 27 March 2013] Facebook 2013. Spotify. Facebook App Center. [Online] Available at: http://www.facebook.com/appcenter/get-spotify [Accessed 27 March 2013] Fiegerman, Seth 2013. Spotify Unveils First Ad Campaign. Mashable. [Online] Available at: http://mashable.com/2013/03/25/spotify-ad-campaign/> [Accessed 27 March 2013] Halliday, Josh 2013. Spotify seeks to expand free streaming to mobile devices. The Guardian. [Online] Available at: http://www.guardian.co.uk/media/2013/feb/20/spotify-free-streaming-mobile-devices [Accessed 27 March 2013] Mind Tools 2013. Porter’s Generic Strategies. MindTools.com. 2013. . [Online] Available at: http://www.mindtools.com/pages/article/newSTR_82.htm [Accessed 27 March 2013] Pocket-lint 2012. Google Music vs iTunes vs Spotify vs Amazon vs Xbox Music vs Music Unlimited. Pocket-lint.com. [Online] Available at: http://www.pocket-lint.com/news/48422/best-music-service-streaming-downloads [Accessed 27 March 2013] Porter, Michael 2008. The Five Forces That Shape Strategy. Harvard Business Review. [Online] Available at: http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ [Accessed 27 March 2013] Read More