Spotify

Product Model






Spotify is a music streaming platform which provides users content from record labels and media companies. Spotify employs a ‘Freemium Model’: users can enjoy a free version paid for by advertisers, and a premium, ad-free version. Accordingly, Spotify operates both a multi-sided business model and a product business model its free and premium versions, respectively.

Spotify aims to convert its free users who are using the streaming platform to premium customers. With the premium version, users pay a subscription for advertisement-free streaming and unlimited mobile usage as well as offline access to playlists. Despite making revenues of 1.95 billion Euros, which was an 80 per cent increase from 2014, Spotify reported a net loss of 173 million Euros. (Ft.com, 2016).

Spotify’s largest expense is the amount it pays to the music industry for the use of its songs and recordings. The royalty and distribution fees increased by 85 per cent in 2015 to 1.63 billion Euros. Unlike its rivals such as Youtube and Vevo, who pay a share of revenue to the music right holders, Spotify pays music right holders a minimum per stream. This implies that despite the amount of revenues music holders make, Spotify is required to pay the agreed amounts.

History

Over the past decades, the digitisation of music has created a massive rupture in the music industry value chain, with the rise of counterfeit plaguing incumbents’ profitability. Spotify was a pioneer in the provision of a right-protected, cloud-based music-streaming platform.

Spotify was founded by Daniel Ek and Martin Lorentzon in Stockholm, Sweden, in 2006. Spotify has over 75 million users worldwide, with 30 million being paying subscribers that have access to 30 million songs. Spotify accounts for more than 41 percent of the world’s playing music subscriptions as of 2016. (International Business Times, 2016).

Customers – who they are:

Spotify caters to two main customer groups: users and advertisers.

Spotify users are individuals who legally listen to music that is streamed on the platform. Users can save music to their library, create playlists and easily navigate through the platform to search for music based on song, artist or album.

Advertisers typically embody consumer-product companies seeking to efficiently target a broad and global customer base.

Engagement – Value Creation Proposition

Users of the free Spotify version can enjoy legal streaming access to a wide ad-supported catalogue (30M songs) bundled with carefully selected playlists (mood, genre etc.), but are limited to shuffle-play and are forced to listen to advertisements. Users can also add other friends on Spotify and view their public playlists as well as see what they are currently listening to, which allows them to be introduced to other music and explore various genres.

Spotify’s value proposition is extremely attractive insofar as their consumption is subsidized by advertisers, who pay to reach Spotify’s vast customer base via its targeted advertisement algorithm. Where Spotify gathers vast amounts of data – regarding its users’ music consumption patterns, such as artists’ fans location, types of media consumption etc. – ads broadcasted on Spotify become even more attractive as they promise to efficiently reach a global and diverse customer base. They can advertise via audio ads, display ads, branded playlists, sponsored sessions, video takeovers and home page takeovers. Audio ads, being one of the main advertising forms, plays an audio commercial up to 30 seconds long between songs. Audio ads appear every fifteen minutes on the free service exposing users to ads they cannot skip.

On the other hand, the premium version offers ad-free streaming and downloads to a vast library of high-quality music. Premium users can choose and listen to their music offline, across multiple devices. Spotify Premium costs £9.99 in the UK and $9.99 in the US. Spotify also offers a Family Premium package which provides the premium service for up to five family members for 14.99 pounds and dollars respectively. Students receive the Premium service for £4.99 or $4.99.

Delivery – Value Chain

Spotify signs deals with record labels, pays royalties "split amongst the rights holders in accordance with the popularity of their music on the service. The label or publisher then divides these royalties and accounts to each artist depending on their individual deals” (Hatmaker, 2013).

Spotify is available on PCs as well as smart phones. Users require internet access to browse and listen to music – including songs and playlists curated by Spotify. Spotify’s users both free and premium, receive the same songs and have unlimited access to it. After having downloaded their songs onto their devices, premium users can listen to their content offline, anywhere they want.

Monetization – Value Capture

Spotify firstly generates revenue through its subscription payments on the premium tier, accounting for 92.5% of revenues (Hatmaker, 2013), thus limiting advertisers to contribute the rest. 2015 reports disclosed that majority of Spotify’s revenue -$1.95 billion – comes from its 30 million paid subscribers, while $219 million came from advertisements.

However, in paying out royalties to record labels – between $0.006 and $0.0084 each time a track is streamed (Plaugic, 2015) – Spotify re-distributes over 70% of its revenues.

References

AdWeek. (2016). Spotify Launches Display Ads That Guarantee Viewability. [online] Available at: http://www.adweek.com/news/technology/spotify-laun... [Accessed 17 Aug. 2016].

Anon, (2016). [online] Available at: https://www.linkedin.com/pulse/spotify-business-re... [Accessed 16 Aug. 2016].

Education Marketing Agency | Touchpoint Digital. (2016). Spotify Advertising. [online] Available at: http://www.touchpointdigital.co.uk/services/spotif... [Accessed 17 Aug. 2016].

Financial Times. (2016). YouTube’s increase in streaming hits music labels’ revenues - FT.com. [online] Available at: https://www.ft.com/content/60f1ee76-47d2-11e6-8d68... [Accessed 24 Aug. 2016].

Ft.com. (2016). Spotify revenues double but losses widen — FT.com. [online] Available at: https://www.ft.com/content/b34cb170-2107-11e6-9d4d... [Accessed 24 Aug. 2016].

Hatmaker, Taylor. "Spotify Demystifies Its Business Model, Sort Of—But Disgruntled Artists May Not Care." Readwrite. 2013. Web. 01 May. 2017.

Mic. (2016). How Does Spotify Make Money? Here's the Business Model Behind the Streaming Service. [online] Available at: https://mic.com/articles/137400/how-does-spotify-m... [Accessed 16 Aug. 2016].

Plaugic, L. (2015). [online] Theverge.com. Available at: http://www.theverge.com/2015/12/7/9861372/spotify-... [Accessed 24 Aug. 2016].

Shields, M. (2016). Spotify Looks to Ramp Up Ad Business. [online] WSJ. Available at: http://www.wsj.com/articles/spotify-looks-to-ramp-... [Accessed 16 Aug. 2016].

Spotify for Artists. (2016). Spotify Explained. [online] Available at: https://www.spotifyartists.com/spotify-explained/ [Accessed 16 Aug. 2016].

Telegraph.co.uk. (2016). Rise of a tech giant: the history of Spotify. [online] Available at: http://www.telegraph.co.uk/technology/technology-v... [Accessed 17 Aug. 2016].

Theweek.com. (2016). The Catch-22 in Spotify's business model. [online] Available at: http://theweek.com/articles/626139/catch22-spotify... [Accessed 17 Aug. 2016].

VatorNews. (2015). How does Spotify make money?. [online] Available at: http://vator.tv/news/2015-09-25-how-does-spotify-m... [Accessed 17 Aug. 2016].

Disclaimer

Written by Pooja Valechha and edited by Danielle Reza under the direction of Prof Charles Baden-Fuller, Cass Business School, in September 2016. This case is designed to illustrate a business model category. It leverages public sources and is written to further management understanding, and it is not meant to suggest individuals made either correct or incorrect decisions. © 2017



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