Theory: aN ANALYSIS OF SPOTIFY
SWOT Analysis
Strengths:
· Easy access to a huge library of songs to suit varying tastes/mood
· Fast access, no need to download songs
· 50 million monthly users – (25% - Premium users) (Gluskin, 2014)
· Impressive growth – Paying users up from 5 million to 12.5 million between 2013 and 2014 (Gluskin, 2014)
· Huge platform for companies to advertise – enabling Spotify to offer the free version (Cooke, 2014)
· Spotify’s strong marketing has encouraged a very diverse range of businesses to advertise on their application
· Cheaper than competitors – Spotify has a free version or users can make a monthly payment for premium access
· Available on all major platforms – (Android, iOS, Blackberry, Windows, Desktop PC)
· Geographic Accessibility – currently available in 58 countries
Weaknesses:
· Despite revenues of around $1bn (£656m) in 2013 (Sisario, 2014), Spotify were still unable to report a net profit, reporting net losses of around $80m (£52.5m) (Sisario, 2014)
· Operating costs are so high that it would seem nearly impossible to envisage Spotify turning a profit in the near future, though losses were down by $35m (£23m) (Sisario, 2014), between 2012 and 2013
· Suffered publicised criticism for the free version of their application and have been encouraged to alter this to ensure artist’s talent is rewarded
Opportunities:
· Potential to alter service in order to reward artist’s and reduce costs as Spotify is currently paying out around 70% of its revenue to record companies and music publishers
· Opportunity for growth in most markets as Spotify that Spotify have entered, especially regarding a number of markets they have entered a recently as 2014 such as Canada and Brazil
Threats:
· Major artists such as Taylor Swift withdrew their music from Spotify in 2014 and this may lead other artists and record labels to do the same
· Without the existing deals that Spotify has with record labels and licensing agencies they would be unable to offer the same attractive service to their users
· Other competitors such as Apple are reportedly considering entering the music streaming market in the near future
· Strength of competitors such as Pandora in key markets such as the U.S.
· The threat of current competitors deviating from the ‘Freemium’ (Free/Premium services) service model which has brought Spotify so much success could force their hand into changing the service that they offer
Barriers to entry
"A barrier to entry is anything that prevents an entrepreneur from instantaneously creating a new firm in a market" (Carlton and Perloff, 1994, p. 110).
Speaking specifically about Spotify and looking in particular at the online space in which the music streaming service operates, there will undoubtedly be less barriers to competitions than for a business looking to set up as a physical entity. As Timothy Worstall said 'there’s just no limit to the number of people when trying to enter this space'. (Worstall, 2011). Anyone can create anything in this market, but there are a number of factors they have to take into consideration when creating a music platform on the internet. There are many problems in the form of accessing the material required to stream music. Copyrights can be difficult to obtain and are required for a service such as Spotify to stream the music of any given artist. Companies must guarantee that they are acting legally and that their users are unable to extract their content.
To prevent unauthorized usage of their material, Spotify uses digital rights management (DRM). By agreeing with Spotify’s terms and conditions, users agree that they should not look to copy any of the material that Spotify provides.
The barriers to entry in the music streaming market may not be too difficult to overcome initially but the huge challenge is perhaps not the setting up of a music steaming service but surviving in a market of fierce competion. There are a number of huge competitors worldwide who are very popular, with some streaming services controlling a very significant portion of the market. For example, Pandora controls 31% of the crowded audio space in the United States, compared to Spotify who weigh in at around 6% of users (Statista, 2014).
4 P’s
Innovation can be divided into four main categories: Products, processes, positioning and paradigm. However, these categories have ambiguous boundaries – firms can chase them all at the same time (OECD et al, 2005).
'A product innovation in a service involves new or significantly improved characteristics of the service to be offered to customers' (OECD et al, 2005). Therefore, Spotify can be seen as a product innovation, as it changes the way you can listen to music online and on your mobile devices, making it easier for the customers. When paying for this service, instead of getting an album or a song – as customers would have traditionally, you can now just buy the possibility of listening to all the songs you like, without being connected to the internet, free from advertisement and portable on any device.
An Incremental product innovation concerns an existing product whose performance has been significantly enhanced or upgraded. Since the service already existed – the possibility of listening to music on an online platform - it can also be considered an incremental innovation.
Diffusion
Recently, studies of innovation have been descriptive and have attempted to identify some consistent patterns, such as the communication process (Utterback JM, 1974). Diffusion refers to ‘the process which innovation is communicated through certain channels over time among the members of social system’ (Rogers, 1995). Diffusion plays a vital role in successful innovation as this is how a product or service becomes public knowledge. Robinson (2010) classifies there are mainly four elements which can be used to identify the diffusion of an innovation: the innovation, communication channel, time and social system, moreover, according to Rogers’ diffusion theory Robinson (2010) also conclude several critical elements of diffusion in relation to Spotify are listed below:
- Relative advantages and compatibility
- Browse amazing play-lists for every mood and genre, collect music all over the world, adapt to the different cultures and tastes of customers. (Spotify, 2014)
-Simplicity:
Can listen to music anytime and anywhere
-Trainability”
Cost saving, lots of promotion activities makes it cheaper to enjoy the music
-Observability/networks”
Music can be shared through Facebook, Twitter between friends. Lots of advertisement on internet, apps and other routes.
The characteristics above make Spotify an attractive proposition which naturally makes diffusion easier. However the above characteristics are still too ambiguous to describe what stage of diffusion Spotify currently belongs to and how it might develop in the future. Rogers has extensively investigated how innovations diffuse in markets since 1950s and introduced an s-shaped curve (increase slowly from innovators to early adopters, increase exponentially from early adopter) which shows how the diffusion of innovation evolves with population in different time period (Rogers, 1995).
The y axis denotes the cumulative product penetration rate, in other words, it can also be seen as the adoption rate of customers, the x axis is used to calculate the specific time period. According to the adoption rate, the model defines 5 categories of customers occurring in different specific time frames. The company may target different segments differently dependent on the stage of diffusion. The model will help us understand the diffusion of Spotify.
Spotify was launched in October 2008 and now has around 50 million users around the world (Candice Katz, 2014). We know that all of the people around the world like or have an experience of listening to music. However it is difficult to research exactly the number of people who would like to use apps such as Spotify or who would like to pay for listening to music; therefore it is difficult to calculate their overall penetration of the worldwide market. The best indicator of Spotify's rate of diffusion is to look at their growth rate over a specific period of time. The coefficient of the tangent line of s curve can be used to describe the increasing rate of users. It took 2years for Spotify to grow from 10 million users to 20 million users from 2010 to 2012 and another 2 years from 20 million to 40 million. Both time periods increase 100 percent, the coefficient is close to 1 according to the characteristic of the s curve as stated before (increasing slowly from innovators to early adopters, increasing exponentially from early adopter, increasing afterwards). Spotify is likely to be somewhere between early adopter and early majority. If Spotify are able to promote and communicate effectively, Spotify could celebrate an exponential increase in users with further penetration of the market in the future.
First Mover Advantage
First mover advantage are the benefits that an entrepreneur or firm can get through being the first one who offers a service or product to the market. The benefits can be identified in different forms. First mover is also claimed as a risk taker, due to the uncertainty and unpredicted risks in the market. Although there are a number of costs associated with being the first mover, the financial rewards may be far greater. Referring to Boulding and Christen (2001), the advantage can be obtained in terms of customer lock-on, strong brand recognition and high impression on customers. The early entrants can achieve a demand premium. According to the learning curve, the more time to do it, the better performance it achieves. First movers can benefit from experience of the market, which competitors do not have, to gain an advantage over the followers. Once customers have a strong bond with the first mover in a market, the customer is likely to be bonded with the high quality offered by the initiator and customers would potentially have high shifting costs to other suppliers (Baron and Shane, 2008).
Although Pandora obtains a major part of the digital music market, the web radio is different from the music streaming service in nature. The personalization of web radios could be a customer need, yet the non-interactivity of Pandora marks the distinction from a music streaming service. Spotify takes the first mover in the interactive personalized web radio and obtain its own market share in the music streaming market. Pandora’s licensing is based upon the Copyright Royalty Board (CRB), which gives restrictions on music choice browsing. However, Spotify provides a board range of music choice for users without any restrictions. Spotify does not only take the first mover advantage in the interactive music streaming service, but also because of the business model. As with non-interactive personalized web radio such as Pandora, the revenue is mainly ad-supported with supplementary subscriptions. This might discourage the growth of revenue for the firm as the amount of money generated is limited. However, Spotify has taken a ‘first mover’ advantage on the 'freemium' and subscription models. The freemium model offers a trial for a specific period of time, a wide range of music and exposure to advertisement. The paid premium membership offers free from advertisement streaming, limited music browsing and both desktop and mobile access. Spotify gets revenue from both advertising on their free version as well as subscriptions (Tschmuch, 2013).
Value proposition
Spotify's free version is good value for the customer. Users are able to stream songs from their desktop with limited commercial interruption. This offers an insight into the service but if you want to take your playlists mobile or offline, you have to pay for the premium version. Nowadays people consume music by building and sharing playlists. This means that the value of Spotify to the end user increases over time.
The Value Proposition Canvas Model
Customer Segments
There are three segments in the mass market: Premium Listeners, who are able to use Spotify mobile and offline; Unlimited Listeners, who pay a small amount for more time to use Spotify; and the Open Listeners, these customers have limited access, do not have to pay but have to listen to commercials and have a limited listening time of max. 20 hours (Westelaken 2014).
The multi sided platform works together with one of the segments of the mass market, the Open Listeners. Advertisers get a specific value for their money, which means they are also customers. The Advertisers and Open Listeners need each other because Spotify needs listening customers to be able to promise value to the Advertisers and the Open Listeners need the Advertisers to be able to get a free of charge Spotify service (Westelaken 2014).
Strategyzer. (2014). The value proposition canvas. Available: http://www.businessmodelgeneration.com/canvas/vpc. Last accessed 2nd January 2015.
The canvas is split up into two sides, on one side you have the customer segment needs. This looks at what the product or service is doing in helping the customer get the job done. In this case, Spotify's job for the consumer is providing them with unlimited music choices to play wherever and whenever they want.
‘Pains’ refer to the negative aspects for customers e.g. costs. However, to sign up and use Spotify is not a problem for general users but to gain access to a premium account, there is an additional monthly cost.
‘Gains’ is the opposite to ‘Pains’ and this is the benefits for the customers e.g. quality of service. Therefore, if Spotify user pays for a premium account each month, they receive the benefit of being able to access all of Spotify’s service, from creating a profile to listening to every genre of music.
On the following side you have Value proposition which includes ‘products and services’ indicating the offers i.e. function, social or emotion the customers gets that helps to 'get the job done'. For example, Spotify has an App for Android which users can download to get access to the service on the go.
‘Pain Relievers’ help reduce negative emotions e.g. eliminate risks that customers fear. In this case, this could be the fear of computer viruses which Spotify ensures are prevented. ‘Gain Creators’ are the benefits customers receive, for example buffering time for songs to play, free service so you can save money and ease of use.
The canvas is split up into two sides, on one side you have the customer segment needs. This looks at what the product or service is doing in helping the customer get the job done. In this case, Spotify's job for the consumer is providing them with unlimited music choices to play wherever and whenever they want.
‘Pains’ refer to the negative aspects for customers e.g. costs. However, to sign up and use Spotify is not a problem for general users but to gain access to a premium account, there is an additional monthly cost.
‘Gains’ is the opposite to ‘Pains’ and this is the benefits for the customers e.g. quality of service. Therefore, if Spotify user pays for a premium account each month, they receive the benefit of being able to access all of Spotify’s service, from creating a profile to listening to every genre of music.
On the following side you have Value proposition which includes ‘products and services’ indicating the offers i.e. function, social or emotion the customers gets that helps to 'get the job done'. For example, Spotify has an App for Android which users can download to get access to the service on the go.
‘Pain Relievers’ help reduce negative emotions e.g. eliminate risks that customers fear. In this case, this could be the fear of computer viruses which Spotify ensures are prevented. ‘Gain Creators’ are the benefits customers receive, for example buffering time for songs to play, free service so you can save money and ease of use.