Spotify : Face the

Music

BUSINESS MODELS
FOR DIGITAL
ECONOMY CASE
STUDY
SUBMISSION

FEBRUARY 28

GROUP 8 | SECTION F
ASHISH (318) | KANIKKA (329) | KESHAV (332) |
KRITIKA (333) | PAYAL (342) | VIBHOR (367) |

1
1. Who Are the Major Players in the Music Industry? And who Is
the Strongest Player?
There are three levels of players in the music industry. Major players within each
level are discussed below:
a) Major Labels
As of 2016, there are three major labels holding 70% of the market share –
Universal Music Group (28.9% market share), Sony Music Entertainment (22.4%
market share) and Warner Music Group (17.4% market share). Music market
witnessed concentration post 1999. BMG was bought by Sony in 2008 and EMI
merged with Universal in 2011. Universal emerged as the strongest player post
the merger and controlled the largest shared in the recording industry’s global
market. These majors controlled distribution of music. The labels acted as
publishers and producers. Royalty payments were made to these labels.
b) Pure music streaming services (standalone)
Music streaming experienced exponential growth from comprising 34% of the
market share in 2015 to 51.4% of the market share in 2016. Meanwhile, the
shares of physical recordings and downloaded music fell. Physical recordings held
share by way of positioning as vintage collection items. Spotify was the market
leader holding 43% of the global streaming market (active subscribers) in 2016
and hence, was the strongest player in this space. Spotify had 140 million users by
mid-2017 of which 60 million paid subscription fee. However, Spotify also started
to expand its scope with addition of music videos, music themed-documentaries
and video podcasts. It faced competition from Napster, Tidal and Deezer of which
Napster was the largest with 4.5% share of the global streaming market.

c) Integrated streaming services

Some of the players offered music streaming as part pf the bigger bundle. In
effect, these players provide integrated array of services. Apple Music, Amazon
Music (bundled with Amazon Prime) and Youtube Red (bundled with Google
Music). Apple dominated the download market as well through iTunes. All these
players had the advantage of availability of funds for investment unlike the
traditional music streaming players and could use these funds to attract
customers through attractive throwaway pricing models. Of all these integrated

2
 service providers, Apple was the strongest player in the streaming space and held
20.9% of the market share (active subscribers).

Strongest Player
Streaming service providers were experiencing exponential growth. Their
dominance in the music industry was evident as they controlled greater than 50%
of the market share. Although labels held greater control in terms of negotiating
royalties but through the case (though speculations) we can see that during the
new deals being negotiated, majors agreed to lower royalty rates by 3% with some
constraints. It means somewhat the power of labels was levelling. Power dynamic
was titling towards music streaming service providers in the market with wide
subscriber base. As far as market leadership is concerned in the current streaming
market (mid 2017), Spotify’s share far exceeded by double the share of the next
player i.e. Apple. Spotify is the strongest player in the music industry. However,
Spotify faced financial pressures as opposed to integrated service providers such
as Apple and Amazon which had deep pockets for investment. In case Spotify
doesn’t manage to move to profitability by continuously developing compelling
offerings, such players would gain greater control.

2. How is the rise of streaming affecting the music industry? Is

streaming the future of the music industry? And how would you
characterize the competition among online music services?

We are well aware that the days of purchasing entire physical albums are long
gone. Now even those records are not purchased as mp3 files; they are mostly
streamed through subscription-based platforms. In the last few decades, the
evolution of music consumption has happened very quickly. Today we have the
streaming services which allow consumers to play music without downloading an
3
 individual file. Among some of the streaming giants, (based on the number of
subscribers) are Apple, Tidal, Spotify, Pandora, each with its unique offerings.
This change in the consumption of music is significantly changing the music
industry in both positive and negative ways and shaping the future of music —
• Some fans are concerned that the increased quantity of tracks available on streaming
websites is affecting the quality of music produced.
• A positive effect of this novel music format is that it gives a platform to independent
indie artists to create and share their sound independent of music labels.
• Now there is more focus on creating hit singles rather than whole albums, which has
changed the revenue models for both music labels and streaming services.
• Listeners can range over millions of tracks – the “universal jukebox,” create and share
playlists socially, discover new artists effortlessly through “artist radio,” and listen
anywhere (even downloading temporarily for times when their smartphone gets no
signal).
IS STREAMING THE FUTURE OF MUSIC INDUSTRY?
In this era, music has become so accessible and easy to download; there is hardly
any chance that people will be going back to downloading mp3 files or purchasing
albums. The average person’s listening preference today is streaming services
only as it rids them of the hassles of data storage, offers personalization and
allows the convenience of changing artists and genres.
• With over 100 million subscribers across streaming platforms, it has been a
notably beneficial venture for the record companies - though not traditionally
(through sales), but through a percentage of the streaming subscriptions and
advertisements on their artists’ records.
• Downloading music to systems permanently by acquiring ownership rights does
not serve the purpose in terms of facilitating variety of songs.
• Streaming services have saved the music industry, and years after its demise, the
music industry is back in action now with increased customer satisfaction through
streaming platforms and digitization of listening to music.

4
But still, the streaming services struggle to see a route to operational profitability,
and it is a perennial issue. So, the future of the music industry depends on the
profitability of these services and they will have to reinvent themselves to achieve
this and keep the momentum of growth going forward.
COMPETITION AMONG ONLINE MUSIC SERVICES
Competition in the industry is quite dense with standalones streaming service
providers such as Spotify and Napster, and integrated service providers such as
Amazon, Apple and Google. Spotify leads the music streaming market with 43%
of the global market, while Apple Music is second with 20.9% market share. This
cut-throat competition among the big players is forcing them to reinvent their
service style and technologies to remain relevant and capture new markets.

• Apple has been acquiring new technologies to augment with Apple Music.
Apple has the advantage over its rivals that it can integrate Apple Music into
its hardware and software ecosystems, including iPhone, MacBook, iPod,
Apple watch and HomePod.
• Shifting its business model from ‘one song purchasing’ to music streaming was
the best thing Apple could have done to continue their growth.
• With the big players gaining market share, the simple arithmetic is that smaller
players have lost it and the share accounted for by all other services has fallen
significantly.

5
3.How do you evaluate Spotify’s business model? Is it beneficial
for artists, labels, consumers, and advertisers?

The Spotify followed freemium business model whereby many services were
available to paid subscribers only. The app was available for desktop as well as
mobile. The main differences between free users and premium users were the
interruptions by advertisement after few songs and song quality were also lower than
the paid users. For mobile app users, paid users had option of on demand music
whereas free users had to use “stations” where similar types of songs were played
and max 6 skips were available per hour. They paid royalties to artists, labels and
developers.

• Customer: For the customers, app was a better offering than the existing
competition. With many features available, the overall offering can be termed
as beneficial for the users. The third-party integration was one of the best
features offered where people were sharing their playlists or could access
other people’s playlists. The unlimited songs accessible to users made it one
stop for users to find their music. The predictive song suggestions based on
user’s listening habits made it more attractive than the competitors.
• Artist: Artists not only got revenue in form of royalties but was also a great
promotion tool. Some alleged that the payment from the Spotify was so low
that some artist were paid less than the US minimum wage. Many high-profile
6
 artists spoke against the app. Although the app is the potential tool for the
artist, but due to low percentage of royalties it also turned to be unprofitable
for them to list their music on the app.
• Label: The royalties were directly paid to labels which was a great incentive for
them to list their music on the app. Although per play revenue was low, but
majority of it was given to labels. Around 55-58% of revenue was paid to
publishers of which majority was retained by the labels.
• Advertisers: Since majority of the users were Free users, the advertisers had
good positioning on the app and website. But with increasing features for the
paid users and incentives for it, the paid users were increasing. This would lead
to less views for advertisers. Increasing paid users was in benefit for the Spotify
but which meant decrease in revenue from advertisement also.

4. Analyse the power of the different players in a value chain and

the relationships that are established between them. Also,
analyse how value is created and captured in a changing
ecosystem.

Distributers and Suppliers: Suppliers exercise medium to high power over Spotify
because of multiple options available for them to supply to.
7
 ➢ Major labels are distributers in this case who have multiple options like
Amazon, Apple and others.
➢ Distributers can leverage on the negotiating power over Spotify because of
the other funding options available to them like Apple and Amazon who
have bottomless pockets unlike Spotify.
➢ Competitors leveraged their bargaining power by providing bundled
services. For example, they bundled music with movies, television shows,
music videos etc. All of these for a fee similar to Spotify’s
Content Creators: Artists have low bargaining power over Spotify.
➢ There are a few artists who refuse to have their music available through
Spotify’s streaming service because of receiving lower royalty rates
compared to other distribution methods, but they had limited
opportunities with their artist-owned streaming service.
➢ This is because of the staggering growth and dominance of streaming
services industry and with a multitude of alternatives and consumer
preferences. So, artists as content creators have low power.
Consumers/End-users: Consumers enjoy high buying power as there are many
alternatives available for both the types of services: On-demand and Internet
Radio.
➢ Consumers have many options for both online streaming as well as
downloading, like, Apple Music, Pandora, Napster, Amazon Music
Unlimited, Google Play Music All Access, Tidal etc.
➢ Their major competitor Apple Music came up with additional features like
allowing interaction of artists and fans, integration with Siri (voice-
command feature of Apple) etc. at the same price as that of Spotify’s
premium service.
➢ There are still illegal downloading services like uTorrent, Pirate Bay etc
which is available to consumers.
Competitors: There is a high risk of rivalry from other players in the market
because of the intense competition.
➢ Competitors like Apple Music, Amazon Music and Google Music provide
premium services at similar fee as that of Spotify.
➢ Competitors did not stand still as Spotify kept growing. For example,
Rhapsody acquired Napster, Pandora launched its own on-demand
streaming service, other players expanded in different geographies.

8
 ➢ There were several new trends that signaled market disruption and
evolving market which posed a threat to Spotify if it rested on its laurels
while the market changed.

Competitive advantages of Spotify based on the Value chain analysis

➢ Bundled Services: Spotify entered frequent deals with carriers and other
streaming services to offer bundles and discounts which made it very
attractive to potential consumers
➢ Installed base of users (as per June 2019)
• Available in more than 79 countries
• 232M active users & 113M subscribers
• Largest streaming service with a market
• share of 37%
➢ Comprehensive catalogue
• Contract with all 3 music majors- Sony, Warner & Universal
• Library of 40M+ songs of diff. genres & languages
• Large no. of new & independent artists on board
➢ Simple UI and functionalities: Spotify’s functionality was simple which
allowed users to browse, access songs, playlists etc
• Discover Feature: This feature suggested new artists based on the user’s
listening habits.
• Social Features: Users could follow their friends, artists, bands and other
personalities
• Integration with social media: Integration with apps like Facebook,
twitter and telegram allowed users to see their friend’s activities,
favorite music and artists
• Playlists: Spotify's user generated playlists are its biggest competitive
advantage. Playlists could also be shared and this had become a very
popular feature of Spotify

5. Is Spotify’s business model sustainable and what extra it need

to do to make it more sustainable?
For a business model to be sustainable, it shall be commercially successful
and should be future ready. In terms of its business model, Spotify offered
two service tiers in most of its markets: free and premium. The company’s

9
performance during its short span had been exceptional, where it posted
astonishing growth rates. In 2014, it had revenues greater than 1 billion
Euro and it was growing at fanatic pace, with increasing user base.
However, it’s losses were simultaneously expanding, along with increasing
criticism from artists for the lower amounts they were receiving. Moreover,
the competition in the segment is also intensifying due to presence of
players like Apple Music, YouTube Red, etc. Overall the business model of
the company show signs of commercial success, though it needs to evolve
to face competition from emerging players. The emergence of business
segments where online streaming services develop their own content
seems like Netflix, seems to be the future of streaming industry. Its features
like ‘Discover’, ‘Follow’, along with user friendly application interface and
large customer and song collection provides a competitive advantage over
others, there is a need for more unique identifiers which make it future
ready.
In order to make its business model more sustainable, the company can
look at following aspects:
1. Diversifying into new markets: Company can increase its presence
in new markets, which will give it a competitive advantage. Also the
company can increase its focus on more regional content to ensure
that it services wider customer base.
2. Vertical Integration: The company shall look at the possibility of
entering the area of content development. Like the case of Netflix, it
will give Spotify an upper hand, it will be able to better render
content as per user requirement. So also it will help the company in
better controlling the value chain.
3. Strengthening platform for advertisement: The company can look at
opportunities to increase its revenue from advertisements. It can
seek to optimise its platform to better deliver targeted
advertisements. This will help the company in shoring up its revenues
and narrowing the losses.

10