Todaro report v.2
- 1. Page 1 A Market Analysis for Spotify Inc. Chase Todaro Full Sail University Project & Portfolio II: Business and Marketing May 30th, 2021
- 2. Page 2 EXECUTIVE SUMMARY This report provides an in-depth analysis looks at the current financial status and future outlook of Spotify Inc. Areas of analysis include usage rates, competitors, and future revenue streams. The report finds that while Spotify appears in a safe space in the streaming space, they have several pitfalls that endanger them to lose their competitive edge and 7 year head start over their competition. Major areas of weakness are non-profitability, and ecological sustainability. Recommendations include branching out to alternative, more profitable forms of audio media such as audiobooks, radio, and further expanding their podcast selections, to cover the high operational costs inherent with music streaming while also consistently turning a profit.
- 3. Page 3 OBJECTIVE This report was created and complied to suggest changes and decisions and influence the trajectory of Spotify Inc. so that it may become a profitable company with a sustainable business model within the next 5 years. RESEARCH METHODOLOGY The information used in this report was gathered on the internet and online databases from a combination of internal and external sources from the past 6 years that measured different qualitative and quantitative metrics of the company during the month of May in 2021. Financial Information was current on the day it was sourced. RESEARCH AND KEY FINDINGS Spotify is the leading brand for music streaming in the world. The purpose of the company is to distribute, sell, and provide digital services for the distribution of content and advertising. (Company Register Switzerland, 2011) For music listeners all around the world, both casual and fanatic, Spotify connects you to music from all around the world in an easy to use, industry changing format in the palm of your hand. Avid music fans will be forever changed by the power of having this much entertainment at their fingertips.
- 4. Page 4 For the time being, Spotify is strongly maintaining their market share. While competitors are gaining traction in the space, none are close to overtaking the crown. Spotify’s few key strengths that set it apart from the rest are largely what is keeping them on top. They’ve had a 7 year head start in the streaming world and have largely maintained a dedicated userbase even as competitors increase. Their closest competitor, Apple Music has been operating full steam ahead and still can only reach about half of the amount of paying Spotify users (Iqbal, 2021). Spotify has largely remained neutral and quiet on many social issues, largely suspected to keep their users from all walks of life. However, at times they have made key moves to enhance their user experience and show their dedication to their fanbase, strengthening their bond. A good example of this is the diversification of playlists for different ethnicities and background. In the wake of the Black Lives Matter Movement in the summer of 2020, Spotify had made their statement expression their stand in solidarity with those fighting for equality and justice in the face of police brutality. (Bureau, 2021) Because of these displays of dedication towards their users, they have done exceptionally well creating a diehard fanbase that will stick with them through any changes and shifts the company may pursue. One large image problem that plagues all streaming platforms is the ecological and environmental toll the medium takes on the planet. While it has decreased the number of plastics the music industry has consumed by a large amount, the amount of energy generated to keep these platforms running is more harmful than physical waste ever was. (Wilson, 2019) This is Figure 1(Company Man, 2021)
- 5. Page 5 something to keep in mind going forward as the world turns its view toward global warming and climate change. The biggest weakness to Spotify’s growth is their inability to turn a profit. Since being founded in 2006, it has operated at a loss every year to this day. (Spotify Balance Sheet, 2021) While the loss has been shrinking in recent years, growth will be slowed, and Spotify will one day be overtaken by its competitors unless it becomes profitable soon. The main reason for this operation loss is that the licensing and exclusivity deals Spotify have in place with publishers and record labels. This is the same for all streaming services, many are barely or not profitable at all. There is not much to be done about that because the rights holders have most of the power in this scenario. Since Spotify’s reach is so massive in the music industry many people are losing the ability to ignore it, making an artist’s presence on the platform almost a necessity. However, if Spotify is to truly maintain its lead, diversifying before any others is the way to go. In the past 3 years Spotify has put more attention towards podcasts than music (Carman, 2019). Since their announcement in 2019 to invest in the medium, podcasts, like the popular “Joe Rogan Experience”, which Spotify obtained the exclusive rights to, have accounted for $700 million in revenue in 2020. (PodcastHosting.org, 2021) The overhead costs and licensing for podcasts is cheaper than for music catalogues, so Podcasts are expected to become a larger factor in revenue in the coming years. Figure 2 (Company Man, 2021) Figure 3Provided by techcrunch.com
- 6. Page 6 Spotify is in a unique position to expand into an audio entertainment hub. Its established dominance in music streaming and is now expanding into becoming the number one place for podcasts as well. It would be an imaginable move for Spotify to one day expand into audiobooks, a market they have not yet shown any interest in participating in. This move would keep Spotify’s lead over its competition for a longtime, solidifying their market share of streaming. CONCLUSIONS Spotify is doing very well against its competitors in terms of total users and brand recognition. The largest weakness to its success is its lack of profitability. While streaming is a notoriously unprofitable venture, many other streaming platforms are tied to larger companies that do make a profit, such as Apple Music and YouTube music, that gives those companies a safety net to operate at a loss without risk of shutting down. Since Spotify has no diverse subsidiaries, its future as a company relies squarely on its ability to become profitable. To achieve this, Spotify must further diversify its content library to profitable factors that can support the cost of music streaming. RECOMMENDATIONS Based on the research and conclusions, Spotify needs to find other sources of revenue to carry the overhead costs of music streaming while still turning a profit. The company’s expansion into the podcast bubble before its competitors was a good move in the right direction but it is not yet at a place it can stop. Spotify should take advantage of its head start in the space and secure the rights to dozens of podcasts before any competitors have a
- 7. Page 7 chance. This will maintain their market share in the podcast world even as their competitors catch up. This move alone may be the final push to break even on their operating costs. Additionally, Spotify should invest in green energy to counteract the increased energy rates that come with streaming. An emphasis on renewable resources will increase brand recognition and favorability among users who value sustainability and want to fight climate change. Long term, Spotify should expand into another market to further diversify its streaming platform by expanding into audiobooks and radio. Becoming the official destination for all kinds of audio entertainment would give them at least 3 different revenue streams, and since audiobooks and podcasts are cheaper to create, license, and distribute due to the lack of middlemen present in artists of large record labels, the new revenue streams would be able to absorb the operating costs of streaming while making enough money to turn a profit. Another Analysis report should be done in 2023 and 2025 as Spotify further expands into the podcasts space to ensure their growth stays on track and any unforeseen challenges are assessed as they arise. If by 2023’s analysis report Spotify’s Market share in the podcast industry reaches about 15% to 20% then the move to start providing Audiobooks should be greenlit. This move will likely gain Spotify a new user base from audiobook users on different platforms as well as users who want more services for their money from competing streaming services that switch and will therefore expand Spotify’s lead over its competitors by an even larger amount. If all goes according to plan, Spotify will break even in the next 3 years and will continue to increase their profitability as they expand into new markets. This is a strategic recommendation, it may not lead to immediate results, but will overall progress the company into becoming a profitable streaming powerhouse.
- 8. Page 8 REFERENCES Bureau, A. (2021, July 11). Spotify quietly shows support for 'Black Lives Matter' movement. Retrieved May 11, 2021, from https://www.afaqs.com/news/media/spotify-quietly-shows- support-for-black-lives-matter- movement#:~:text=Spotify%20quietly%20shows%20support%20for,boosting%20Black% 20musicians%20and%20podcasts.&text=Spotify%20announced%20that%20it%20will,raci sm%2C%20injustice%2C%20and%20inequity. Carman, A. (2019, March 05). Spotify's Grand plan for podcasts is taking shape. Retrieved May 06, 2021, from https://www.theverge.com/2019/3/5/18243729/spotify-podcast-strategy- gimlet-media-anchor-purchase Company Man. (2019, December 11). Spotify - why they're successful. Retrieved May 13, 2021, from https://www.youtube.com/watch?v=PBoz2XigTFA&t=49s Company Register Switzerland. (November 17, 2011). Spotify Switzerland AG (Spotify Switzerland SA) (Spotify Switzerland Ltd.). https://advance-lexis- com.oclc.fullsail.edu/api/document?collection=company- financial&id=urn:contentItem:548J-1XN1-DYNF-N0VS-00000-00&context=1516831. Iqbal, M. (2021, April 02). Spotify revenue and usage Statistics (2021). Retrieved May 11, 2021, from https://www.businessofapps.com/data/spotify-statistics/#1 PodcastHosting.org. (2021, April 10). 2021 global PODCAST Statistics, demographics & HABITS. Retrieved May 06, 2021, from https://podcasthosting.org/podcast- statistics/?gclid=Cj0KCQjwp86EBhD7ARIsAFkgakhQHk_WTp_wHGuAoorv0_OSEdG GQoSTJsGKEiMH64f92UP23MZnPvoaAusuEALw_wcB Spotify Technology S.A. (spot) Balance Sheet. (2021, May 06). Retrieved May 06, 2021, from https://finance.yahoo.com/quote/SPOT/balance-sheet?p=SPOT Wilson, S. (2019, April 09). Streaming music is driving up harmful emissions, according to study. Retrieved May 11, 2021, from https://www.factmag.com/2019/04/09/streaming- music-emissions- study/#:~:text=Streaming%20music%20has%20unintended%20environmental,change%2C %20a%20recent%20study%20says.