Case Analysis Spotify Analysis for comparison
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Engineering
Case Analysis Spotify Analysis for comparison
- 1. Case Analysis: Spotify Prof Gautam Sinha
- 2. Spotify What are the important issues? • Offering free music • Music industry in crisis • Will Spotify ever make profit? • Money paid to music rights holders is pathetic • Who will create music in the future? • So many music sites, why should I pay? • Spotify is legal, so I may prefer it, but free! • Spotify platform is user friendly • iTunes is a viable alternative to Spotify • What happens when Apple Music comes? • ???
- 3. Spotify What is the business environment in which Spotify operates? PEST Analysis Political 1. Resistance of music rights holders lobby groups 2. Lack of government control over illegal music & difficulty in eliminating piracy Economic 1. Global drop in CD sales 2. Globally, major drop in music industry revenues 3. Increase in value of digital music market 4. Low price for access to digital music 5. Music rights holders paid very small share of revenue 6. Intense legal & illegal competition in digital music market Social 1. More people listening to more music 2. Piracy of digital music is everywhere 3. GenZ believes music should be free; major paradigm shift- accessibility, diversity & flexibility Technological 1. Rapid advancement in telecom, digitization of products & services 2. Technological advancements in storage, processing leads to constant presuure to lower prices & improve service/product
- 4. Spotify What is the business model of Spotify? Key partners Key Activities Value Proposition Customer Relationship Customer Segmentation 1.Music rights holders 2. Intermediaries for promotion & marketing 3. Advertisers & promoters 4. Clients (joint value creators) 5. Social media (FB & Twitter) 6. Commercial partners & advertisers 7. Venture capital investors 1. Acquire music 2. Negotiate contract with music rights holders 3. Create & share playlist on social media, blogs, forums 4. Relationship with advertisers & sponsors Key resources 5. Music 6. IT system 7. HR- tech, legal marketing 4. Consumer data 5. Social networks 1. Subscription plans: premium & free 2. Value added- free, not pirated 3. Legal 4. Centred around customer demand/ entirely customized 5. Diverse users 6. Experience, not ownership 7. Joint value creation 8. Sharing 9. Discovery 10. Accessibility 11. Instantaneous 1. Personalized 2. Instantaneous 3. Real dialogue Channels 4. Social networks- FB & Twitter 5. Website- in local language where Spotify has presence 6. Blogs & forums Structural Revenues 7. VC investments 8. Sponsors 9. Advt revenues 10. Member revenues 1. 58 countries 2. Two levels for payment 3. Caters to nearly all genres of music 4. Customers active on social media, blogs, forums 5. Some are aware of music piracy Structural Costs 6. Buy music rights of repertoire, contracts, royalties 7. HR & Tech resources, buy & maintain 8. Promotion, marketing, partnerships, customer relations
- 5. Spotify SWOT analysis of Spotify Strengths • Legal offer • Value-added service vis-à-vis pirating • Fast system • Large music library • Accessible & user friendly • Integrated with social media • Joint value creation with customer • Advertising & commercial partnerships • Instant, accessible & diverse- what GenZ wants • Few limitations on customers • Present in 58 countries Weaknesses • Only 25% paying customers • Cost>>Revenue; no profit • Low compensation for music rights holders • No ROI for investors so far Opportunities • Digital music market growing & evolving • Ability to acquire more customers & expand market • Ability to attract more paying customers • GenZ attracted to Spotify’s service, growing market • More companies like Reebok, Volvo, Ford, Coke inclined to link with Spotify Threats • Right holders may refuse to share or withdraw if compensation is not enough (fair?) • Customers may shift to to other legal or illegal platforms, if price is raised • Strong competition in virtually every market; loss of customer or reduction in library could be fatal • Unfair competition from illegal platforms (streaming/download)- government can’t control
- 6. Spotify Spotify’s performance? 1. Market performance (Exh 1) • Spotify:58 countries, 75 million users, 20 million paying customers (27%) • Smaller than Pandora (250 million worldwide)- 1.2% paying customers • Performance comparable with Deezer, 16 million, 180 territories • Apple Music: 110 countries, 800 million iTunes; links to record companies???? • Launch June 2015, 11 million subscribers in September 2015!!!! • If Spotify enlarges to include downloading, very much smaller than Apple Music • Apple Music available in 147 countries, 37 million library (Spotify 30 million) • Sweden, France, Italy: streaming more popular (Sweden 94% revenue from streaming) • Conclusion: Spotify is performing well in streaming services
- 7. Spotify Spotify’s performance? 2. Financial performance • Revenue & Profit/Loss • 2012: Revenue E 430 mn: Loss E 80 mn • 2013: Revenue E 747 mn (YoY 74% rise); Loss E 93mn ( increase 16.4%) • 2013: 91% revenues from 22% paying customers • 2013: 9% revenues from advertising ( to 78% free customers)- Fig 7 • Across years 75-80% customers contribute <10% revenue (through advertisement) to Spotify • Other companies earn more than 10% 3. Return on Investment • Till date $300 mn outside capital, no profit; Accumulated losses $200 mn • Revenue growth every year; investors believe in potential & continue to invest!!!! • Increase paying customers, much higher gross revenue, manage cost • 30% margin; manage to pay back accumulated losses??? • Conclusion: not good, needs much higher & faster growth to earn profit & good RoI
- 8. Spotify What should Spotify do? OPTION BENEFIT RISK Increase proportion of paying customer & limitations of use for free customers Revenue increase Possible loss of subscribers Eliminate free offer, thereby increasing paying customers Revenue increase Loss of subscribers Increase subscription Revenue increase Loss of subscribers Joint value creation with customers for promoting service & utilizing library/ repertoire Reduction in promotion cost, better utililization of asset (library); better profit margin Higher management cost; higher cost of repeated cost of involving customers for joint value creation Focus on commercial partnerships Increase revenue by acquiring new customers Might affect brand image Increase payments to right holders from 70% to 80% Decrease infrastructure cost Increase of titles in library; improve position visa-vis competitors Increase in profit margin Increase in current and accumulated losses Loss of skilled employees, service quality drop,