1. 21pts - page limit of 2 ½ pages.

How attractive is the mainstream music streaming market

in the medium to long-term? Make sure to separately discuss barriers-to-entry (9 points),
competition (6 points) and bargaining power within the value chain (6 points).
Music streaming industry has two key stakeholders – record labels who own the rights to the
music and consumers who listen to the music. Main source of revenue is paid consumer
subscriptions and advertising sales. Hence, the revenue is highly dependent on the number of
consumers – paid or free.
I feel the mainstream music streaming market is attractive in the medium to long term because
of the below given reasons.
Barriers to entry:
Music streaming has a high barrier to entry considering the fact that profitability is a problem
and a lot of contracts are required with many different organizations in order to be able to
make a library that is large enough to attract users – especially paid users. Combination of
these two reasons make it extremely difficult to enter and only large companies with deep
pockets, such as Apple or Amazon, to enter this industry. This gives big players in the space
such as Spotify, Pandora, etc. an upper hand over other music streaming company
• Economies of scale: Success of music streaming platform is based on its scale. First,
streaming services need to pay huge licensing fees (fixed cost) to record labels to be able to
stream on their platform. This will in turn attract customers (paid subscriber and to
generate ad revenue) and only then the firm starts to generate revenue. Hence, there is a
huge upfront capital requirement as fixed cost and a substantial number of users is required
for a new entrant to distribute the significant fixed cost thereby attaining economies of
scale. New entrants are forced to find creative and effective ways of enrolling and satisfying
early adopters. Most common way would be free trials whereas incumbents
So, a new entrant will be at a competitive disadvantage relative to an established player.
• Customer captivity: Most users on the streaming platforms create their playlists, share
music with friends, and follow friends/artists for recommendations. This creates a network
effect. Further, most established streaming platforms have distinguished themselves
through personalization features like plays lists, recommendations, etc., better user
experience (interface, search ability), and seamless integration with other devices/apps.
This creates a high switching cost for a user as they will have to recreate their playlist and
lack of personalized recommendation till, they are on the platform for a while.
• Learning curve advantage: There is no differentiation between music when it comes to
streaming – it’s essentially the same songs that can be available on different platforms. But
companies can create differentiation by offering additional features such as Spotify’s
recommendation engine which suggests songs to users based on their past listening
behavior, time, and mood of the day. Larger the past customer music activity data available,
better will be the recommendation. Hence, it provides a learning curve advantage to the
incumbents.
• Specialized scarce resources advantage: Here, the user data is also is available only to the
specific firm and not to competitors. So new entrants cannot purchase the user data to
 make better recommendation to the users. This alone provides a significant advantage to
the incumbent.
On the other hand, the actual music is owned by the record labels and they would be willing
to sell it to more streaming services in order to generate more revenue. They in fact like the
fact that there are several streaming services giving them multiple revenue channels.
Hence, the actual resource of music is not scarce; it is mobile resource that can be traded.
Hence, it does not give the incumbent any advantage though the value of music will be
more inside an incumbent like Spotify than a new entrant.
Competition:
Music streaming industry has too many players and highly competitive. While Spotify is
established as an on-demand streaming service, Pandora is established as an online radio
service. Further, there are new entrants with deep pockets such as Apple, Google, Amazon, and
Microsoft trying to get a piece of the pie.
Streaming industry provides consumers a wide variety of competitors and substitutes.
• Price competition: Music streaming industry currently faces zero sum competition. Key
reason for this is that pretty much every music streaming service provides very similar
services with the only differentiation being interactive platforms, and personalization.
Majority of services have similar sized music catalogs. Further, similar subscription fees of
music streaming services reduce switching costs for buyers. No product differentiation and
nonperishable product – unlike shrimp game – eliminates the temptation of price cut
further contributing to the zero-sum competition in the industry
• Entry strategy: Threat of new entrant in music streaming industry is moderately low. New
entrants will have to acquire music catalog comparable to the incumbents. Further,
incumbents have already a large number of user base and the corresponding economies of
scale. Finally, to acquire a respective music catalog and capture users, new entrants will
have to develop business relationships with record labels form a much lower bargaining
leverage than the incumbents.
• Rivalry: There are many streaming services platforms at present, so it is impossible to
maintain price leadership. Further, the demand is stable and predictable. While the
consumer can easily access/move to another platform most consumer stick with their
referred streaming platform based on the switching cost associated with the individual user.
However, the streaming services can compete by offering higher price to record labels to
cut out completion but that will give higher leverage to the record labels and ultimately end
up hurting the streaming service.
• Threat of substitutes: Music streaming services are confronted with various substitutes such
as physical records, digital media, TV and radio channels playing 24-hour music satellite
radio, video streaming services, and piracy. However, this threat if very low and most users
of music streaming are millennials who prefer to consume music through streaming services
on phone.
Bargaining power within Value chain
Major record labels such Sony Music, Universal Music, and Warner Music hold 80% of the music
industry’s market share and consequently own a large majority of the global music catalog.
Hence, when a music streaming service seeks to acquire the license to distribute a major label’s
recordings, record labels have extremely high bargain power.
• Value creation (Power of streaming services): Streaming services can only gain
bargaining power if they can significantly distinguish themselves through increased user
base, market share, or popularly. Of course, the supplier power will decrease the
smaller the label but it’s the major label’s song catalog that music streaming services are
dependent on.
From music streaming services’ point-of-view collaboration with the record labels is
desirable to create value.
• Value capture (Power of record labels): Major labels often use their bargaining power to
gain equity share from music streaming services. Agreements between record labels and
streaming services where opaque and varied by streaming services, label, and artists.
Agreements sometimes also restricted music that could be played on free ad-supported
programs.
• Power of Artists and Publishers: Record labels that own master catalogs can exercise
their power over the artists by leaving them out of negotiations with music streaming
services. Only a very few artists with very large clouts such as Tayler Swift have the
negotiating power to pull their catalog from streaming services. Further, artists and
music publishers have zero to very little power when it comes to negotiate with music
streaming services. Music publishers cannot simply withdraw catalogs from streaming
services
• Power of consumers: Consumer (buyer) bargaining power is moderately high. Price
sensitivity and increasing demand in quality forces the streaming services to
differentiate their products, while maintaining competitive prices. This bargaining
power is intensified through a high number of competitors with similar qualities as well
as substitutes in the form of video streaming services, illegal downloading, and
streaming platforms. However, consumers are increasingly accepting higher prices in
exchange for more differentiated services and experiences.
Even though the bargaining power of two suppliers, artists and publishers, is low, the strong
bargaining position of major record labels is enough to define “Bargaining power of suppliers”
as high and “Bargaining power of buyer (streaming services)” as low.
2. 8 pts – page limit 1 page. Of the players within the music streaming business, who do you
think has the strongest competitive advantages? Why? For how many players is there
room in this market?
As the music streaming industry was launched abruptly in early 2000, it is not easy to identify
which of the services existed first. However, it can be safely assumed that Pandora is the
“largest early music streaming services”. Today, Pandora and Spotify hold majority of the music
streaming industry market share. As the industry became more popular, it attracted more
dominant players from large technology companies such as Amazon, Apple, and Google.
Currently, consumers can choose from a long list of interactive and non-interactive music
streaming services. Hence, it can be safely said that no single music streaming service really has
a strong competitive advantage.
However, I feel Spotify has a competitive – though small – advantage over other players.

• Spotify is very good at capitalizing during one of the most important periods of any
brand’s relationship with customer – onboarding. Per the case, about 25% of listeners of
Spotify’s free services converted to paying subscribers and holds 20% of global music
industry revenue.
• Economies of scale: Its subscription price is the comparable to other competitors.
However, considering it has a larger customer base, it can distribute the fixed cost of
licensing fees to record labels thereby keep the cost low.
• Customer captivity: Spotify has a huge number of users and this scale presents unique
advantage to the company in terms of user data. It can use this data to improve user
experience by improving search functionality and content discovery. It also uses data to
personalize user experience. Its recommendation algorithm can help surface right
content at the right time based on time of the day and user context. Level of
personalization in tough to copy and Spotify’s scale gives it a distinct advantage in that
realm.
• Network effect: Spotify’s has a huge user base streaming more songs than other players.
This implies record labels generate more revenue from Spotify compared to other
players. Hence, in the long term, Spotify can leverage this network effect to gain higher
bargaining power over record labels.
I think there is room in the market for 2-3 players. There is not much in the way of exclusive
content for music streaming. Pretty much every on-demand service offers the same song
catalog. It is a zero-sum competition industry and only so many customers that would subscribe
to the streaming services. Unless, there are only a few streaming services, it will be difficult to
be profitable thanks to the high fixed cost they have to pay to the record labels as licensing
fees. Record labels can operate without the streaming services, but not the other way around.
A few streaming services will help better negotiate/bargain with the major record labels and
charge an increased subscription fees to the consumers to make actual profit.
3. 11 pts – page limit 1 ½ page. Do you think SoundCloud should (a) keep their focus on the
emerging artists or (b) enter the mainstream streaming business? Whatever your choice
is, please explain what monetization strategy Soundcloud should follow to ensure
profitable growth and how these strategic choices will affect the bargaining power of
artists, recording companies and listeners.
SoundCloud’s unique value proposition is the music uploaded by independent artists. This
implies users cannot get these music anywhere else. However, SoundCloud has not been able
to exploit it
1. Its business model is inadequate that makes attractive to artists and users
2. It still has not been able to leverage its ardent artist user base to create customer
captivity and network effect
SoundCloud’s advantage over competitors is its engaged and passionate resident artists and
users – mostly early adopters. I think SoundCloud should keep its focus on the emerging artists
than entering the mainstream streaming business.
Despite encouraging Open Innovation with the artists, SoundCloud has lagged Spotify when is
comes to customer captivity and network effect. SoundCloud is unable to sustain an advantage
due to the network effects of its’s larger competitors such as Spotify. SoundCloud’s “creator-
first” perspective is essential but must be complemented by an equal focus on driving more
listeners to this platform. Meanwhile, SoundCloud should explore machine learning to improve
the recommendation algorithm for listeners and data analytics for artists, leading to a more
relevant and targeted offerings and increasing stickiness (customer captivity) of the platforms
for all users.
Music streaming services is already over-crowded with several big players with deep pocket and
SoundCloud will find it extremely difficult competing against them. SoundCloud should focus
and attract emerging artists by better revenue sharing, instant availability, direct connection /
communication with fans, and faster transparent payout to artists. This will help them
differentiate themselves and act as a niche player – like RedBull did in the energy drinks
market.
Monetization Strategy:
1. Freemium subscription-based model for Artists: Continue with the current model for the
artists to pay a monthly fee to upload and share content with the users on the
SoundCloud platform. We can perform a price sensitivity analysis to check which price
point might attract more paid artist subscriptions.
2. Profit sharing with popular artists: Sign deals with popular well-known artists to create
exclusive content for SoundCloud. Pay the artist share of the profit based on the
number of times their music was streamed by users.
3. Freemium subscription-based model for users: Users can listen to ad supported on the
platform for free. But pay a monthly subscription fee for ad-free version. Price is in the
range of $3 - $5 which is lower than the $9.99 Spotify and other streaming services
charge currently.
Bargaining power of artists: While independent artists will have higher bargain power as they
will not have to deal with major record labels, but they also will not have access to the kind of
resources – managing the nuts and bolts of an artistic career – as an artist who signed to one
record label. In an industry where artists are skeptical about label involvement, SoundCloud is
attempting to offer new alternatives to traditional music distribution.
Bargaining power of recording companies: Very low to no bargain power considering
SoundCloud will not stream any music from the record labels. This also helps SoundCloud keep
the cost low as they will not have to pay to the record labels. Further, if more and more artists
start to use SoundCloud for content publishing, SoundCloud can have bargaining power over
recording companies to possibly license out new music to them.
Bargaining power of listeners: Listeners will have high bargain power as they have many options
for music consumption. Hence, unless SoundCloud artists publishes great content, users many
do not stick with it. In the short term, listeners will have a strong bargain power and even may
not want to pay for streaming. But in the long term as SoundCloud has more content on its
platform, it will have a bigger bargain power.

Conclusion:
Ultimately, I think SoundCloud should follow the Netflix model of creating its own content and
not be dependent on the record label companies to start a music streaming service. It will be
difficult in the short term but will be beneficial in the long term as SoundCloud’s music library
increases, it will have a strong competitive advantage as a niche player hosting music that is not
available anywhere else.