Master's Thesis
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M. Sc. in Management of Creative Business Processes (CBP) MASTER’S THESIS How Spotify can benefit from guiding the listener into the long tail of niche artists through music discovery Author: Teit Listoft Løngreen Signature:______________________ Supervisor: Gareth Garvey Date of Submission: January 15th 2018 Pages: 79 Characters with spaces: 149.857 Copenhagen Business School 2018 ABSTRACT This master’s thesis investigates how Spotify’s music recommendation and features can help the niche artist getting more exposure, but also benefits Spotify in return. The theoretical framework for understanding the structure and capabilities of Spotify are provided by Chris Anderson’s filters in order to sort through the supply of music, and understand the convenience with Barry Schwarts’ “the paradox of choice”. Through the examination of these capabilities is primarily focused towards Spotify Discover Weekly, but also Spotify’s data-analytic tools through Spotify for Artists, and the playlist among others. After the valuation of Spotify’s features and capabilities it is analyzed if Spotify can keep their market leader position in a highly competitive market place. In Jay Barney’s resource- based view it is analyzed if Spotify is able to have a competitive advantage through their acquired capabilities through the acquisition of the market leader in music technology intelligence, The Echo Nest. Through the analysis of Spotify’s financial statements it becomes evident how the big three, the major record labels, are benefitting from the increased spread of listening diversity through Spotify’s music recommendation features. The conclusion of the thesis is that the niche artist is not benefitting from Spotify’s music discovery features, because the music recommendation systems are biased by popularity, and therefore not able to guide the listener into the long tail. Furthermore, Spotify’s features and music recommendations might only benefit popular artists signed by the big three. Spotify can consider their capabilities of creating music recommendations as a competitive advantage, even when these recommendations lacks novelty. This competitive advantage might not be sustainable in the future due to the increased data-driven competition in the market place. Keywords: Spotify, The Long Tail, Chris Anderson, Music Discovery, Music Recommendation, Discover Weekly, Music Streaming, Spotify’s Business Model, Royalty Payments, Resource- based View, VRIN-model, Music Industry, Subscription Models, Paradox of Choice, Niche Artist, Big Three 2 TABLE OF CONTENTS Chapter 1 – Introduction ................................................................................................................... 6 Research question ......................................................................................................................... 7 Problem statement ........................................................................................................................ 7 Reading guide ................................................................................................................................ 8 Delimitations ............................................................................................................................... 10 Method ....................................................................................................................................... 11 Hermeneutics .......................................................................................................................... 11 Pre-understandings.................................................................................................................. 12 The hermeneutic circle ............................................................................................................ 13 Motivation ............................................................................................................................... 14 Chapter 2 – Theoretical Framework ................................................................................................. 15 The complexity of creative products ............................................................................................ 15 Chris Anderson’s Long Tail ........................................................................................................... 16 More niche goods than hits (1) ................................................................................................ 18 Search costs in reaching niches are falling dramatically (2) ....................................................... 18 “Filters” can drive demand down the Long Tail (3) ................................................................... 18 The demand curve flattens when the search costs are lowered (4) .......................................... 19 The number of niches adds up (5) ............................................................................................ 19 When market barriers are removed, “natural” demand is revealed (6) .................................... 19 Democratizing the tools of production (1) ................................................................................ 20 Cutting the costs of consumption by democratizing distribution (2) ......................................... 20 Connecting supply and demand (3) .......................................................................................... 21 The paradox of choice ................................................................................................................. 22 Criticism of “digital optimism” and The Long Tail ......................................................................... 23 Chapter 3 – Part 1 - Music Recommendation & Other Features ....................................................... 25 Music recommendation ............................................................................................................... 25 Spotify Discover Weekly .............................................................................................................. 26 Data ............................................................................................................................................ 31 Advertisement and brands .......................................................................................................... 33 Other music discover features ..................................................................................................... 34 Spotify’s data-analytic features .................................................................................................... 35 Spotify for Artists ..................................................................................................................... 35 Fans First ................................................................................................................................. 37 3 Playlists ....................................................................................................................................... 37 Spotify listening diversification .................................................................................................... 39 Critique and discussion of Spotify’s music recommendations....................................................... 42 Conclusion of part 1 ........................................................................................................................ 44 Chapter 4 – Part 2 – Music Industry Analysis and Spotify’s Capabilities & Financials......................... 46 Music streaming and the music industry ...................................................................................... 46 Streaming market shares of the music industry ........................................................................... 48 Big three’s ownership of Spotify .................................................................................................. 49 Porter’s Five Forces ..................................................................................................................... 50 Bargaining power of suppliers: High ......................................................................................... 50 Threat of new entrants: High ................................................................................................... 52 Threat of substitutes: High ....................................................................................................... 53 Bargaining power of buyers: High ............................................................................................ 54 Rivalry among existing firms: High ........................................................................................... 55 Conclusion and summary of Porter’s Five Forces ...................................................................... 56 Jay Barney’s resource-based view ................................................................................................ 58 Valuable .................................................................................................................................. 58 Rare ......................................................................................................................................... 59 Imperfect imitability ................................................................................................................ 60 Non-substitutability ................................................................................................................