case

insight

SPOTIFy

A model
of
business
unfounded?
62FIRST QUARTER 2015 NUMBER 24 exhaleinsight
 caseinsight SPOTIFy

THE STREAMING MUSIC SERVICE has excited

investors, artists, and the public. But the benefits shine for their
absence and the competition is increasing. What to do in the face of a few
results that do not give the expected grade?

a
At first glance, Spotify seems like a story. to be listened to more than a hundred times for the author or authors
of success. The well-known music service earns the equivalent of an MP3 download.
streaming has convinced millions of This has caused a resounding animosity towards
people to pay again for some musicians. At the end of 2014, for example, Taylor
listening to music. But, after five years of growing in Swift removed her entire catalog from Spotify claiming that the
popularity and users, a series of obstacles put in Canon seemed unfair to him. And that is precisely the...
the optimistic forecasts that saw in Spotify top-selling artists, like Swift, those who earn the most.
the salvation table of the limping music industry. Spotify should do everything possible to find a
Despite the 50 million users, 10 million of business model that rewards talent so as not to bite
which are paid, Spotify has not yet registered the hand that feeds him. But if he cannot avoid
benefits. Moreover, the latest available data indicates the intermediaries (record labels) and becomes unfriendly with the
losses of 58.7 million euros in 2012, almost 12 most successful artists, the long-term consequences
millions more than the previous year. they could be very serious.
What are the reasons for those negative results? It's true.
that the operating expenses are high, but the real rain of competitors
the problem lies in the income, coming from two sources: When reconsidering the business model, Spotify
the advertising, which should offset the cost derived from You must keep in mind that you are not alone. In view of the
let 40 million people listen for free popularity of this type of service, the competition in
All the songs you want, and the premium users, the paid digital music market has increased.
they pay ten euros, dollars, or pounds a month to enjoy Beats Music, acquired by Apple, has everything
music without ads. As happens with other models dreams of becoming Spotify's biggest rival. But the
of freemium business, the great difficulty is to get the the competition doesn't stop there: iTunes Radio, Google Music
users become paying customers. Play, Rhapsody (which was bought by Napster), Deezer, and YouTube
In the absence of other sources of income, the bulk of the are other alternatives. How can it be focused
financing continues to come from venture capital, with 538 Spotify in addressing its structural problems with
millions of dollars invested until the end of 2013, to the so many competitors nipping at their heels?
that various extensions have been added. Now that Apple guarantees the dissemination of Beats Music
Spotify must show that it can resolve mismatches. through their iPhones and iPads, wouldn't Spotify be interested?
or else, you will lose the confidence of investors. building bridges with device manufacturers
When the survival of startups depends on rivals? Although there may be other options: leaders
frequent capital injections, in the end it is the money that global companies like Apple or Google seem willing to
make the decisions, so surely the investors increase their share of the digital music pie and
they end up pressuring Daniel Ek, CEO of Spotify, to give Spotify could be appealing to them.
with the right key of profitability. After all, numerous protagonists of the
digital scene have followed that path. Could it be that
committed talent Daniel Ek was waiting to sell the company for
Another element that adds pressure is rights. several billion dollars, just as they did
of the author who pays Spotify, which accounts for 70% of their Jan Koum and Brian Acton with WhatsApp? To some
income. Although the company presents them as the entrepreneurs are only interested in selling a
proof that your business model is positive for the project to take the music elsewhere.
musicians and a viable alternative to piracy, it doesn't seem The truth is that if Spotify wants to continue being un-
convince all the artists. pending, needs to find new sources of income
Spotify is negotiating a fee with record labels and that they refine the business model.
afterwards, these are the ones who distribute the money among their
musicians, but the artists complain that the amounts The case 'spotify: Face the music' (sM-1613-E), of
they are too low. Spotify pays a few cents professor at IESE Govert Vroom and Isaac Sastre Boquet, is
every time a song is played, so it must available inwww.iesep.com.

to go outinsight NUMBER 24 FIRST QUARTER 2015 63

 caseinsight SPOTIFY

The fight is going to be tough, but Spotify has a lot.

numbers to come out victorious.

Resist and you will overcome

After all, consumers are willing
positions to pay for truly products
by Adrian Zaugg Good. Thus, although the smartphones of Sam-
Strategy Director
corporate they are cheaper, the iPhone has not lost a
Swiss Radio Television peak of popularity. Spotify must aspire to be
that type of product.
Not even the controversy surrounding the affront
DESPITE THE UNCERTAINTIES, Spotify has Taylor Swift is totally harmful: the sim-
many advantages in his favor. Perhaps it wasn't the pio- the fact that some musicians complain because
neither of digital music, but the first in they don't charge enough evidence that at least
offer it legitimately and with great success Spotify co-sponsors the copyright
Now it has a wonderful catalog and corresponding. And that comforts the
an attractive image: independent, users, who think that those from Spotify
swedish and "cool". Maintain They are 'legal types'.
The competition in the field of music the model Spotify should explore new
digital sica is fierce and I still don't know freemium.
collaboration formulas with the artists
a clear winner emerges, you are going to negotiate the release of albums
so Spotify is going to have as a complementary service for their
that invests a lot if paying clients. In this way, I could with-
wants to get hold of it convert more users into subscribers.
title. Improve the offer If Spotify really wants to improve its
The potential is addressed to the customers man, you must correct the associated weaknesses
there, but it is necessary- it has rapid growth and consolidates its
paid: downloads
I make decisions permanents, audio user network and their team. He has had to
difficult. In the meantime growing very fast to get here,
high resolution,
what a strategist, them pre-launches of and that costs a lot of money. It takes time
I would recommend continuing. make the investment profitable. The problems of
marketing...
with its business model Spotify are understandable, but they need to
freemium. The free one resolver. If your resources are limited-
provides scope and, always tados, why is it not going public?
that there is no clear winner, the
Tips for Undoubtedly, the battle is going to be
Reach is everything. refine the modelhard. Yours is a vo-industry
Spotify does need to improve its látile and no one can predict what
offer directed at paying customers. it will happen, in addition to that it must
I could offer them permanent downloads to face such strong competitors
nents, that is, the possibility of impressive companies like Apple and Google.

keep them on their devices Exploit the factor But Spotify is well positioned
even after unsubscribing. "good vibe": it is a nothing: has the recognition in its favor
One of the great trends service that pays the "good vibes" factor and
things I noticed in the Consumer rights of a solid customer base.
author,legalineverything
Las Vegas Electronics Show Regarding the strategy-
It was high-resolution audio. the senses of the Well, in Europe we usually have less
After ten years of listening to MP3s of word. number of followers - observation,
low quality, the new format is being adaptation, incremental changes–
turning into a decisive element but, if you want to stay in the game, Spotify has to
for the music industry. Therefore, Spotify I just have to be a pioneer this time. And if that's what they want
I should try to capitalize on this phenomenon. its owners is to sell, the sooner the better.

64FIRST QUARTER 2015 NUMBER 24 to be borninsight

 caseinsight SPOTIFy

Spotify has a good user interface.

but it can give much more of itself.

There is room to grow

discover and share music, but there is the opor-
by Alejandro Arnaiz opportunity to do more things: find events,
buy related items and tickets, do
Director of Development
business and MNO Americas gifts between users, sharing something more than can-
Skype actions or lists and allow interaction with the artis-
There are messaging apps that have integrated
purchase functions or brand accounts (in this
SPOTIFY HAS NOT REVOLUTIONIZED THE INDUS- case would be artists), resulting in a greater cre-
MUSICAL TRIAD, but has contributed to its evolution growth, engagement, and sales. This combination
by offering an access model that exposes to the con- options should keep the casual user in mind.
consumer more music than before. Now, Spotify Considering the monetization options
needs to consolidate its position in the market the easiest way may be the similar charge
is increasing its user base and the charged to non-subscribed users. It is
engagement of these, adjusting prices and since, if the product has value,
working with the artists. people pay for it. Considering
In my industry I see apps that ... Increase the base the fixed costs of Spotify, also
they reach one hundred million users of users I would consider increasing the base of
in less than four years. Spotify still payment offering paid users and in optimizing the
more interfaces
there is space to grow, improve chain to the end user.
attractive. The key argument is that there is
their results and positioning
with a view to a possible price elasticity of music.
buy or an outing to In 2010, the annual spending was between
bag. The key is in 45 and 65 dollars, very much in line with the sales
become part Intensify the CD previews or online music. Spotify, which is
go into everyday life collaboration with in the double, I could renegotiate lower rates with
user Diana, the operators of the record labels to attract consumers with
with which it will be in mobile telephony less income. Without a doubt, an analysis is required
better situation for manufacturers to reach the ideal price.
control your destiny. artists. Optimizing the chain means working harder.
To increase the base with the artists. Taking advantage of
of users, I would eliminate Tips for its presence on co-devices
friction points for them. A fine-tune the model connected and social channels, Spotify
strategy, proactive and preventive, has a greater and faster range
it would be to establish a broad echo- what traditional media.
device system that per- Position oneself as It can and must position itself as
I will access the service in which- marketing channel a channel of promotion and marketing
what time of day. For promotion: records deodorant for launches, concerts-
that has a relevant impact new, concerts, terms, tickets and merchandise des-
one must think about the market ticket purchase from the app. According to the basis of
massive. Due to the nature of it- merchandising through users and their activity grow,
from the mobile.
two devices, also think- artists will see more value in the
would create wider relationships platform and will want to be exposed-
with mobile operators, manufacturers and to their users. The record labels
similar distribution channels. they have their own objectives, but the
User engagement and growth the direction that the music industry is taking
viral will result from frequent interaction with the being- it's not going to change and everyone will be interested in rowing in
vice. The interface of Spotify is good for searching, the same address.

to sneezeinsight NUMBER 24 FIRST QUARTER 2015 65

 caseinsight SPOTIFY

In addition to seeking synergies with other companies,

Spotify should give visibility to paying users.

The factor "ego"

to collaborate with other brands and services to complete
mentioning them with the added value of Spotify. By
Porreza Ghassemi for example, a customer of wuaki.tv would be untargeted
COO and CMO, Shot & Shop
Alliance Manager suitable for trying to turn it into a subscript
strategic, Google Spain payment tower of Spotify. And it could also be signed
agreements with Internet providers for com-
to weave their service offerings.
MOST OF US THINK ABOUT On the other hand, all the information that is given-
SPOTIFY as the service for listening to music the company has over 50 million users
online par excellence. But the career of music Rios can help improve the experience
the streaming has only just begun. Even- how to generate a new source
that Spotify has an advantageous position, it would be of income, sharing the new ten-
it is reckless to take their victory for granted, since preferences and interests of users
the sector has many contenders with third parties. These can be
relevant. Search actors in the music sector or
opportunities
Apple is about to integrate Beats, its advertisers who want to reach
co-marketing
music streaming service, in all its a untargetconcreto.
with marks of
devices, and although it is not clear how many Another section in which to-
third parties.
users will end up subscribing there is still a wide margin
to the paid version, the damage that of improvement is the social. Many times-
can make Spotify is con- we users do not take the step to
considerable. Furthermore, Google, with premium services simply by pere-
on Play Music and YouTube Mu- Take
Take advantage for o, what is worse, because we think that 'na-
advantage
yes Key, also doesn't intend to leave big datadata
the big "he does more to it." To avoid the latter, Spo-
to pass this opportunity. And not
generated by
tify could seek inspiration in the brilliant
there are other options missing, perhaps
the users.
and simple solution from LinkedIn, which includes
lesser known for the great very clear the premium stamp in the per-
public, like the French Dee- Tips for payment users thread for
zero, which seems determined to per-fine-tune the model they can show it proudly among
remain in the race and to close her contacts. Take advantage of the factor
I am doing an aggressive campaign with Sonos; or "ego" of the users and make it known
Wimp, which is expanding to new- Promote that a premium user in the inter-
your countries. Foster the Spotify's social face would help others to
the exhibition
exhibition of
The good news for Spotify is ofthe
theusers
users make the leap to the paid version.
that, according to the latest reports, the premium. Finally, Spotify needs to resolve
premium
incomes seem to already surpass the gas- as soon as possible your disputes with the dis-
tos. Like 90% of these income pro- dark actors of the music industry. One
comes from the premium users, the better relationship with artists, composers and
model and the main mission of the rest of the relevant links in the sector generate-
it should be to increase their number, would create new ambassadors and prescribers for the
either by converting users brand. This would help increase the base of
of basic service or capturing Improve
Improve thethe basic service users, who could arrive
relationships with
new users who register relations with to become paying users. Even in the
the
the industry
industry
high directly in the service- in case we do not manage to improve the ratio of
payment deadline.
musical.
musical. conversion to premium, long-term increase
A very effective way to the user base would result in a larger number
achieving this last thing would be a tail- number of paying users in absolute terms.

66FIRST QUARTER 2015 NUMBER 24 itchesinsight