Case: Legal and Profitable?

Spotify
The Challenges of an Online Music Service

Overview…
- 30 million titles, 58 countries, 75 million users in 2015
- Problem: while revenues are high and increasing because of awareness, profits are
incredibly low even resulting in a deficit in net income + struggling to satisfy both
customers (low price/free, instantaneity, accessibility, flexibility) and artists (value
placed on music, better compensation)
- Canada issue: supplementation (by having other global artists on Spotify platform,
Canadian artists/talent is overwashed
- Main revenue: subscriptions from Premium service (91% of revenue or 679M euros),
and Free ads made up 68M euros
o In 2013: 36 million active users  8 million (Premium) & 28 million (Free)
o In 2015 (58 countries): 75M active users  20 million (P) & 55 million (Free)
 Spotify has 27% paying users, Deezer (France) has 38% & free is only
available via computer, WiMP has no free offer & does well in its market
o Costs: 70% of gross revenue goes to music rights holders (fixed % of gross
income rather than fixed rate); other costs are technology related
 Rise in customers would only result in a higher rate, a higher cost
- Artists refuse to offer music on streaming platforms (ie. Taylor Swift): low payout every
time their song is played vs iTunes (higher payout per song download/sold)
o Music is an art and artists determine price point based on how much value they
believe their art/music holds  Spotify ruins this, undermine value of music
o Criticism of low income, devalue music, cannibalize traditional digital sales
revenue (download)
o Music right owners are paid $6-8 per 1,000 views
- Social Media: Spotify engages & connects customers, builds popularity on certain apps
o Facebook: music is social, allows friends to see what you’re listening to
o Twitter: sharing playlists & discovering new artists

1. Compared with illegal, free platforms, what are the advantages that prompt Internet
users to subscribe to Spotify?
 “Freemium model” = Allows customers to listen to music for free with ads, or pay a
premium price ($9.99) per month for no ads and ability to download music to play
offline = free advertising & premium paying subscriptions (100% legal)
 Subscription = unlimited songs available/accessible to users, while iTunes has users
pay for songs individually ($9.99 would buy you 10 tracks on iTunes, or 1 album)
 Thematic playlists & Personalized recommendation system (plays music based on
user’s preferences)

2. What are Spotify’s advantages over other legal music streaming services?
 Search advantages: playing favorite tracks without needing to download it
  Tailored advertisement
 Rise in cell phone usage = tripled the # of daily users
 Many songs available: 30 million titles

3. Does Spotify have a competitive advantage over iTunes?

Spotify iTunes
Business Model Subscription-based ($9.99/month) Purchase-based ($9.99 per album,
or $0.99 per title)
Cost 70% of revenue, for music rights $0.69/title, or 30% of revenue
Accessibility Unlimited songs & albums Per song/album purchase
Digital music % of 27% from streaming services 67% from downloading music files
world revenue

 Spotify’s competitive advantage: cheaper, data analytics (personalized experience &

music recommendations), free/ad-supported segment, can be used on various devices
(smart speakers, game consoles, tablets, computer)

4. Can the company better leverage these competitive advantages?

 Bundle subscriptions with complimentary service to get more paying customers
 Utilize data analytics during new-customer trial periods to give more personalized
experience to newer customers & introduce them to more music recommendations
 Get more advertisers & endorsements as free users are the biggest segment on
Spotify
 Too many free users and the free advertisements don’t make up much revenue:
either increase cost of advertisement OR add more limitations to free user experience,
ie. more ads, more frequently (& encourage to switch to Premium customer)

5. Could the company consider other advantages that would enable it to reach more
customers or charge them more to subscribe?
 Adding official music videos to the songs played to consumer (interactive, colorful,
fun)
 Customizing page schemes or allowing artists to be creative with their own pages
 Utilize data analytics to research & target customer needs that are not met
 Target a bigger customer base: those who prefer downloading songs over streaming
(understand why)