62 Time the insight business first QUA RT E R 2015 iss to Face ue 24
Music? spotify iese insight
Pashalgnatov/iStock business insight Spotify
THE STREAMING MUSIC SERVICE has excited investors, musicians and the listening public. But with profits unseen, antagonistic artists and growing competition, how should Spotify change its tune?
n the face of it, Spotify seems a success story. drawing her entire back catalog from Spotify, citing unfair Launched in Sweden – home of the infamous compensation as the reason. Ironically, it is top-selling art- site for illegal downloads, The Pirate Bay – the ists like Swift who are precisely the ones who stand to make streaming music service has managed to con- the most off Spotify’s business model, while smaller, lesser Ovince a nation, as well as millions of other people around the known acts have much more to lose from fewer listens. world, to pay for music again. But after five years of rising Spotify may be wise to pursue a business model that re- popularity and a growing user base, a series of challenges is wards talent, so as not to bite the hand that feeds it. Yet if it casting doubt on hyperbolic claims that Spotify might hold can’t get around the middlemen (the labels) and it is alien- the key to saving the troubled music industry. ating even the top acts (to say nothing of the little guys) Despite having 50 million active monthly users world- then this could spell serious trouble longer term. wide, around 10 million of whom are paying subscribers, Spotify has yet to post a profit. Indeed, the last available Islands in the Stream figures from 2012 report a loss of 58.7 million euros, higher In considering tinkering with its business model, Spotify is than the 46.8 million of the year before. not operating in a vacuum. It is not the first to experiment Why such shortfalls? Operating expenses are high, with subscription-based digital music provision, and given but revenues pose the real challenge, generated from two its popularity, Spotify now has even more competition to sources: advertising, which offsets the costs of letting 40 contend with. million people listen to unlimited songs for free in ex- Apple’s purchase of Beats Music makes it poised to be- change for advertising interruptions; and premium sub- come Spotify’s biggest rival. Competition also comes in the scribers who pay $10 a month for an ad-free experience. form of iTunes Radio, Google Music Play, Rhapsody (which But as with similar “freemium” business models, it’s not acquired Napster), Deezer (a Paris-based service begin- clear how to convert the “free riders,” who represent four ning to make inroads in the United States) and YouTube, times the number of paying customers. among others. In the absence of other revenue streams, the bulk of How can Spotify work on its larger, structural issues Spotify’s funding continues to come in the form of venture with competition like this nipping at its heels? And with capital, with $538 million invested at the end of 2013 and Apple able to ensure the diffusion of its acquisition on ongoing top-ups. Spotify will have to show it is working on iPhones and iPads, should Spotify be focusing on building addressing these issues or risk losing investor confidence. bridges with rival device makers? When start-ups rely on regular capital injections for their There may be other options. Dominant global leaders survival, it is the money that increasingly calls the shots, like Apple and Google appear eager to cut themselves a big- and investors are likely putting pressure on Daniel Ek, the ger slice of the digital music pie. Spotify could conceivably chief executive, to turn up the volume. be a viable acquisition. After all, many players in the digital world have gone this route. Might Spotify’s Daniel Ek be Troubled Talent hedging his bets, waiting to sell the venture for a few bil- Another pressure on profitability is that Spotify pays out 70 lion the way Jan Koum and Brian Acton did when they sold percent of its revenues in royalties. While Spotify presents WhatsApp to Facebook? For some entrepreneurs, the exit this as evidence that its business model is pro-musician is the end goal, and they live instead for the next project. and a viable alternative to piracy, not all the artists are so Yet if Spotify wishes to remain independent, it’s going convinced. to have to find new streams – not of music but of cash. Spotify negotiates with and pays the labels, which then distribute revenues to the artists. Musicians complain that Spotify’s rates are too low: with payments of only a few cents per stream, a song has to be played more than 100 times for an artist to earn the equivalent of one MP3 download. The case study “Spotify: Face the Music” (SM-1613-E) by This has created vocal enemies among some musicians, IESE’s Govert Vroom and Isaac Sastre Boquet is available from with Taylor Swift making headlines in late 2014 for with- IESE Publishing at www.iesep.com.
ieseinsight issue 24 first QUARTER 2015 63 business insight spotify
Spotify has a tough fight on its hands, but I think it is well-positioned to come out a winner. Fight While There’s Still Time
popular despite Samsung being cheaper. Spotify by Adrian Zaugg needs to focus on being that strong product, and Head of Corporate Strategy people will pay for it. Swiss Broadcasting Even the bad press around Taylor Swift isn’t Corporation entirely detrimental: just because some musicians feel there isn’t enough payback, the public is at least reminded that Spotify does pay royalties. This Although the picture seems bleak, makes people feel good when they listen to a song I believe Spotify has many things going for it. It may on Spotify – it’s one of the good guys. not have been the first to offer digital music, but it I don’t see labels and artists choosing to was the first to offer it in a legitimate way that have pre-Spotify launches as a strike against really took off. It now has a great catalog, Spotify, but rather typical music in- and the image it projects is appealing: dustry marketing behavior. Spo- independent, Swedish, cool. tify might try to explore ways of The competition is growing and Leverage working with the music industry fierce; moreover, in the world of the feel-good factor: marketing effort, negotiating al- Internet, we in the business like to it’s legal, it pays bum launches as supplementary say that “the winner takes all.” When royalties, it’s one services to its paying users. This it comes to digital music, we haven’t of the good guys. could convert more people to paid seen a clear winner yet, and Spotify is accounts. going to have to invest heavily if it If Spotify really wants to raise wants to become that winner. its game, it needs to address the weak- Spotify has the potential nesses associated with fast growth. It needs to become the winner, but it to consolidate its network of users and its team. It faces some tough choices. Sell or has had to grow very fast to get where it is today, and As a strategist, I am adamant go public, fast growth burns a lot of cash. It takes a while to get that Spotify should stick but above a return on investment. Spotify’s problems are un- to its “freemium” business all, decide! derstandable, but they need to be addressed. If re- model. Free drives reach, and sources are limited, why not go public? as long as there’s no clear win- Tips for Turning Up No doubt, Spotify faces a big battle ner, reach is everything. ahead. It’s a volatile industry, and no Spotify does need to work the Volume one can honestly predict what’s go- on improving its offer to pay- ing to happen next. With competi- ing customers. This might mean tion as formidable as Apple and offering eternal downloads – Improve offer Google, Spotify has a tough fight on downloads of songs that can be to paying customers: its hands, but I think it is well-posi- kept even if the customer ceases eternal downloads, hi- tioned to come out a winner: it has to use Spotify. res audio, marketing the recognition, the feel-good factor One major trend I noted dur- pre-launches. and a strong existing client base. Al- ing a recent visit to the Consumer ternatively, it could sell. Electronics Show in Las Vegas was Either way, Spotify shouldn’t leave hi-res audio. After a decade of listening it too late: fight for the business or sell, to poor-quality MP3s, hi-res audio is be- but a decision has to be made. Often, in Eu- coming a key consideration for the music industry. rope, we have a follower mentality when it comes to Spotify should seek to capitalize on this trend. strategy – observing, adapting, incremental chang- After all, people are willing to pay for a really es – but these circumstances demand that Spotify, strong product. That’s why the iPhone is still so if it wants to stay in the game, be a pioneer.
64 first QUARTER 2015 issue 24 ieseinsight business insight spotify
Spotify has a clean user interface, but there is opportunity for doing even more. Room to Grow
User engagement and viral growth will come from people’s interaction with the service. Spotify by Alejandro Arnaiz has a clean user interface for searching, discover- Director of Business Development, ing, playing and sharing. There is opportunity for MNO Americas, Skype doing more: finding concerts, purchasing memora- bilia and tickets, gifting, sharing beyond the song or playlist and interacting with artists. Messaging apps Spotify didn’t change the music indus- that integrate in-app purchase options or brand ac- try but it has helped it by introducing a frictionless counts are seeing accelerated growth, user engage- access model that exposes consumers to more mu- ment and revenues. This combination of elements sic than ever before. To succeed, Spotify needs to must have the casual listener in mind, as the consolidate its market position through an music addict is on board already. increased user base and engagement, price From a monetization perspec- adjustment and deeper interaction with tive, the simplest thing would be to artists. Increase charge a symbolic fee to all free us- Coming from the communications paid user base ers. We have seen that if the prod- segment, I see apps that have reached by offering more uct is compelling, people will pay 100 million monthly active users in less compelling for it. However, considering Spo- than four years. For Spotify, there interfaces. tify’s fixed operating expenses, I is room to grow. Increasing would seek to increase its paid user its user base will help Spo- base and optimize the food chain. tify on the revenue side, The key argument is that music has as well as putting it in price elasticity. The average annual music a stronger position Collaborate spend in 2010 was $45 to $65, consistent with on- for an acquisition or more aggressively line or CD sales before. Spotify, at twice that cost, an IPO. The key is to with mobile opera- could renegotiate lower monthly fees with the la- become an important tors, OEMs bels, tapping into a larger market with a lower dis- part of people’s lives. and artists. posable income. Obviously further analysis is re- Build that, and moneti- quired to reach the ideal price point. zation opportunities will Optimizing the food chain also follow. As a result, Spotify will Tips for Turning Up means working closer with artists. be better positioned to control its the Volume By leveraging connected devices own destiny. and social channels, Spotify has a To increase the user base, I much broader and faster reach would look at removing friction Position it as a than traditional media. It can for the end user. As a preemp- channel for marketing and should be positioned as a tive but also proactive strategy, I and promotion: new marketing and promotion chan- would consider building a strong releases, concerts, nel: new releases, concerts, in- ecosystem of end points through in-app purchases app purchases for tickets and which users can experience the for tickets and merchandise. As the user base service at any moment during merchandise. and engagement grow, artists will the day. To have significant impact, see value in Spotify and want more these devices must target the mass exposure to its users. Labels certainly market. Given that online sales of digital have their own objectives, but the direc- music are tied to connected devices, I would seek tion the music industry is heading won’t change, to collaborate more aggressively with mobile opera- and it is in the best interest of everyone involved to tors, OEMs and similar distribution channels. make this work.
ieseinsight issue 24 first QUARTER 2015 65 business insight spotify
Use the social dimension to send signals about the importance of payment to others in the user’s network. Play to the “Ego Factor”
with complementary brands and services that by Reza Ghassemi bring added value to the Spotify community. For COO & CMO, Shot & Shop example, a subscriber to a movie-and-television Former Manager of Strate- streaming service like Wuaki would be a suitable gic Alliances, Google Spain target to try to attract additional subscribers to Spotify. Spotify could also sign agreements with Internet service providers to offer a bundle of While many regard Spotify as the online streaming services. music listening service par excellence, the race Meanwhile, the company is sitting on a gold- among contenders in the streaming music space mine of data collected from its 50 million users. has only just begun. Spotify may be in pole That wealth of information on user interests and position, but it would be reckless to de- trends needs to be leveraged, both to clare victory too soon, as the competi- further improve the experience as well tion is gaining fast. Explore as generate new sources of revenue. Apple’s forthcoming Beats-pow- joint marketing Third parties, such as major players ered music service is being touted opportunities in the music business and advertisers, as “the Spotify killer.” There’s no with third would be more than willing to pay for telling how many users will end up parties. better targeted market segments. switching over and paying for Apple’s Another area to exploit is the social apparently cheaper version, but dimension. Often, users don’t become it could certainly inflict seri- subscribers, not because of any major ous damage. In addition, price barrier, but out of sheer laziness or, worse, Google’s Play Music and a general belief that nobody else is paying so why YouTube’s Music Key Use data should they? are fiercely vying for to improve the To tackle this, Spotify might take inspiration listeners. Apart from experience from LinkedIn, whose premium account holders these heavyweights, and generate get a visible badge next to their name, which has a there are several note- new sources of signaling effect on others in their network. Spo- worthy upstarts, and giv- revenue. tify could play to this “ego factor,” experimenting en aggressive promotional with ways of turning the issue of pay- and expansion campaigns by Tips for Turning Up ment into a status symbol, and letting Deezer, Sonos, WiMP and the the natural forces of social networking like, these rival music stream- the Volume and peer pressure encourage others to ers will likely become house- join the club. hold names before long. Finally, Spotify must resolve its head- The good news for Spotify is Make line-grabbing disagreements with those in that, according to some recent premium the music industry who call the business subscriptions a reports, it appears to be turning a model into question. Enhanced relation- status symbol. corner and revenues are starting ships with artists, composers and relevant to exceed costs for the first time. influencers across the sector would certainly As 90 percent of those revenues help generate new ambassadors for the brand. come from premium users, the stra- This, in turn, would at the very least help to tegic focus should be on boosting those numbers, grow the user base of the basic service, thereby either by converting more basic users to premium, increasing the pool of those who might eventually or attracting new users who join as paid subscribers switch over to premium. Even if the conversion rate from the start. stays the same, the net effect of having a larger user One way of achieving this would be to join up base translates into more money overall.
66 first QUARTER 2015 issue 24 ieseinsight