Within the music industry, the USA is considered one of the biggest music publisher in the world, and the total revenue is expected to reach $22.6 billion by 2021. In the 1990 centuries, the music industry was heavily affected by piracy, iTunes was the very first method to compete against online piracy, which was essentially a method to sell albums on the internet.
However, in 2006, the entrepreneur Daniel Ek, started a venture: Spotify. It consists of a software which offers songs; listeners would access to songs and albums for free. The application gives the opportunity to download songs into the devices, but to do so it is needed a monthly fee of $9.99. The Swedish application also worked efficiently to fight piracy in Europe. Before the launch in the US, Europe was the biggest music market. Ek found important that the launch in the US should be after the launch in Europe. The launch into European countries has been considered fundamental for Spotify’s growth because its expansion helped the service to localise itself in the market and establish against its competitors.
Currently, Spotify is classified as the largest growing music streaming service in the world with millions of active users. Therefore, with the monthly fee, the company has an obvious impact on the music industry in the US and Europe. Music streaming allows users access to tracks from their own devices legally and free of charge, a service now viewed as a path to the future of the music industry. The research question has been chosen particularly because of the increase in technological devices, and the increase of music media services around the world.
The music streaming service growth will be analysed in different markets and in different continents, determining if there is a future for applications like Spotify. The analysis and answer of this question will be done by using secondary research like media articles because there is a huge range of sources and the analysis would be done through tools like the Ansoff Matrix to predict the future growth strategy. The SWOT Analysis to provide an understanding of the current market, Position Map determines whether the success among a new market would be successful as it is in the US and Europe. The Porter’s Five Forces Model is used to assess the current music industry market. Spotify BackgroundSpotify was officially launched in October 2008, by founder Daniel Ek who took the opportunity to create a service to replace piracy. After the great success as the second largest digital revenue in Europe, Spotify entered the US market in 2011.
Spotify employs over 1400 people and is available in 23 countries and consists of two types of accounts, Spotify Free and Spotify Premium (Figure 1 shown below). By offering a free option, Spotify encourages free users to turn into paying users; meanwhile, the premium subscription of $9.99 per month offers unlimited listening and offline access to playlists on devices. It is estimated that ‘the average premium subscribers in the US is worth $16a year, while the average buyer of digital downloads or physical is worth about $14 year’. Figure 1: Users Availability, “Difference Premium and Free Users”Figure 2: “Spotify Global Listeners map” (2016) Its success was directly noticed and a partnership with Facebook was inaugurated.
Members who listen to music from Spotify could share playlists and tracks; Spotify brought Facebook into the music business. It can be considered a significant music distributor in all aspects (figure 2), Facebook played a significant role in Spotify popularity as seen in the figure below. Consequently, an additional partnership was made with the car brand BMW that provides an easy connection with the car and the Spotify application. Figure 3: “Spotify Global Listeners” Google Images2.1 The ArtistsThe future of Music Coalition stated there are six principles for a musician to make revenue. Musical composition, songwriting, sessions earnings, merchandise sales and sound recording where artists earn from a percentage of the wholesale price; superstars would only get 20% but most artists just earn from 12% to 14%.
Also touring and live performances make an artist earn revenue; but still only a really well-known artist could actually earn 60% of revenue for a show. If an artist does not play for six nights for more than 500-600 people per week, it is hardly possible to make a living.Therefore, how does Spotify affect the music industry and the artists? Is it worth it for artists to expose their music on Spotify instead of selling CD’s, iTunes or Amazon? According to SpotifyArtists.
com, which is solely for the purpose of clarification of the royalties rates, figure 4 is how Spotify decides to give revenue to artists: The Spotify Royalty Formula.Spotify states that 30% of the revenue received from the artist’s catalogue stays with Spotify, while the 70% is given to the holders like distributors, labels and publishers, who will then use the 70% given to pay the artists, and generally these variables have an average “per stream”. Spotify goal is to have a higher percentage of Premium users. Therefore, it also depends on customers, as the number of premium subscribers grows, then the payout of artists would also grow. Figure 4: “Spotify Royalty Formula”2.
1 SWOT Analysis Figure 5: Spotify SWOT Analysis, 20 May 2017 StrengthsExtended media playlists Cost structure (Premium/Non-Premium)Large Market (Social Media)Large amount of users High Quality ServiceWeaknessesLoad of commercials (unless is paid)Extended media playlistsLimited offline streamingOpportunitiesGrowth in new marketsEnd piracyDiscoveries for new music Sell merchandise (Band Page) ThreatsPiracyCompetitionArtist against serviceStrengthsSpotify has always been promoting itself as the main service for music; Spotify’s main strength is the service itself, they offer the same 20 million songs available, regardless whether or not users subscribe. Another Spotify’s strength is its pricing strategy, divided into Premium Users and Non – Premium users. Non – Premium users have advertisements and do not have the access to skip to the next song, while Premium users have the ability to listen music in offline mode, therefore even when they are not connected to the internet.
This strategic pricing gives the consumer a “preview” of the service for free for instance the service give the possibility to the users to listen to music without adverts for 30 minutes, obviously if one then becomes loyal to the service it will eventually, turn from Non-premium User to a Premium user.Moreover, Spotify does not only play a major role on the music market but also on social media, to increase the possibility to enhance their brand image and attract new customers. For instance, in 2011 Spotify joined Facebook, and this act had an even larger impact and surely stimulated their growth, and within a year Spotify users doubled from 10 to 20 million.
This deal gives the opportunity for users to share and send playlists or songs. Spotify does not use social media just to attract new customers but also to interact and provide more personal experiences.Spotify also gives more than 20 million original songs, this mean the service it is retained as high quality service, because Spotify bought artist’s’ Intellectual Property of all the artist which are listened on Spotify. WeaknessesEven though the pricing strategy can be an advantage for the service, many non-premium users can perceive advertisements annoying, this will lead customers to change music service, since there are other digital streaming services that allow business to listen music freely without interruptions. Moreover, for non-premium users the access to listen to music on offline model is not given, therefore for a free user the Spotify service can be useless and this would again lead to move to another music service which satisfy the customer need, rather than Spotify. The extended media playlist offered by Spotify could also be considered a weakness, the service does not have no solution for recommending new songs or artists to users, so they have to discover their own music by themselves. OpportunitiesSpotify is available in 64 countries worldwide, this means that by now Spotify is huge in its market but it will only see a continue rise in customers as it becomes available in new countries. Furthermore, Spotify is succeeding to end piracy, the act to download files or music illegally; this is an opportunity for the whole music industry, not just Spotify.
It introduced an algorithm which gives the solution from the past: recommendations for new music, this algorithm consists of a playlist which has a fairly week discovery tool. Plus, Spotify also took the possibility to work directly with artists. For instance, the new service BandPage, which consists of selling merchandise directly to the listener, it is an area not completely efficient but a great opportunity to increase revenue which benefits both the artist and the listener.ThreatsPiracy even though it is on decline, it is still a major problem for the music industry. Music companies including Spotify will fight this threat until users have other opportunities besides illegal download.
Probably the major threat is competition with other companies such as Beats Music or Deezer which offer same type of service as Spotify. Another threat for Spotify are the artists many of them expressed dissatisfaction with Spotify, for example Taylor Swift stated: On Spotify, they don’t have settings, or any qualifications for who gets what music.’ , ‘It’s my opinion that music should not be free, and my prediction is that individual artists and their labels will someday decide what an album’s price point is’. Comments from artists will surely affect the brand image, users cannot find releases of particular artists.
This will cause Spotify to have less users. Spotify in the music industry – Porter’s five forces modelBargaining power of suppliers The bargaining power of suppliers is very low. There are few artists which do not share the thought to let their music stream. If an artist refuses to stream their songs then they will not let it be streamed by any other provider, not only Spotify. However, Spotify always have different agreements with artist, for instance Adele wanted to restrict her fifth album “21”, which sold over 31 million copies worldwide, to only Premium users but Spotify would have needed to change its selling strategies to accommodate her. Eventually the album was not available for any of the users, only later on it became available for streaming devices. Moreover, AC/DC a rock band, allowed firstly Apple Music so sell their music and then later on the availability for their music to be streamed in services like Spotify, this could affect Spotify service since the music streamed are available sooner in different music services.Figure 6: “Porter’s Five Forces”Threat of Substitute Products or ServicesThe threat of substitute is currently quite high, and many of them offer the same service as Spotify’s, such as Pandora, Soundcloud, iTunes, Deezer, iHeartRadio and many others.
But since Spotify was able to establish itself within the music market it is quite difficult to be replaced by other services. However, it can be argued that the greatest threat for Spotify are not mainly the competitors but the non-premium users, because obviously the goal would be to achieve the highest paid users. Bargaining Power of Buyers The bargain power of buyers is completely controlled by Spotify. They have. Consumers can choose between Premium users and Non-Premium users. If Non-Premium users do not want advertisements, they can easily change to Premium. Spotify continuously adds new options, for instance the chance to partner with BandPage where users will feel closer with their favourite artists.Threat of New EntrantsAt this stage a threat of new entrants it is quite low, Spotify even though it can be criticised by the amount of revenue and its service, it still has a well-known brand image and it was able to establish itself in a great position within the market.
It can be argued that it would be harder for new entrants than services like Spotify and iTunes to keep their position. The image represented below shows Spotify against the competitors present in the music streaming market, with the description of features similar to Spotify’s ones.Figure 7: “Spotify Competitors”Rivalry Among Existing Competitors Spotify is facing a high level of competition from the existing competitors such as Apple Music, Google Play, Deezer, Amazon Music, Ridal and many others. The competition on the streaming music market is quite strenuous, since all the various existing music application have mostly the same service to offer to consumers. The most successful competitor against Spotify is Apple Music, which is an application offered by the Apple brand, a global force with an extremely wide loyal customer base.
However, a drawback of the application is that its availability is only given to Apple customers. Obviously, this an opportunity for Spotify since it does not depend on any requirements to download the application therefore making it free for any device. Another competitor is Tidal, a music service launched by the rapper Jay Z.
It offers high quality music streams, gives exclusives music context not available to other services and offers occasional pre-sale tickets.The digital music market in United States and EuropeThe US marketThe streaming of music began in 1983 with compact discs. The MP3 files were introduced giving the possibility to share, send via email and download; MP3 granted music to be portable. In 1999 Napster was introduced, a platform which allowed users to access whichever music they wanted. Eventually, the service has been shut down for copyright infraction but its startup still affects the US sales ‘music sales in the US have dropped 47 %, from $1406 billion to $7.
7 billion’.Later on, Apple launched its first generation of music players, the iPod, which allowed users to take their track in a convenient way, Apple sold more than 500 million tracks because of the iTunes music store. By 2012 iTunes music store assumed for 60% of worldwide digital music sales for the market.
Consequently, a lot of on demand music subscription emerged, such as Spotify, Deezer, and Rdio. This service allows users to play high quality music at a very low cost. At the start, musicians could make a living by just selling records and touring, but when the internet became mainstream and services like Napster were introduced, income streams for musicians have changed drastically. With the figure below we can see the difference in years that Spotify has been through and in only matter of years Spotify became a worldwide musical streaming application.Figure 8: “Apple Music vs. Spotify Subscribers” The European MarketEven though Spotify had an extreme success in the US, Spotify’s recognition is also spread among the European countries.
At the very beginning, Spotify was first launched in Sweden and only in 2011 Spotify was introduced in the US. In several years, Spotify has gone from being a start-up venture to the most talked about and fastest growing application.Spotify localisation strategy has been very successful; Spotify’s growth in Europe was a slow planned success, Scandinavian countries first and then the rest of Europe. During the expansion in Europe, Spotify introduced many abilities that now we can choose from, like the “Top 10” and “Summer Hits”. And in 2014 to expand, even more, it introduced the discount program for students. According to this, students pay $4.99 instead of $9.99 a monthly subscription.
This option was firstly available only in the biggest markets like US, United Kingdom, and Germany, and then it was introduced into 33 other countries across Europe, Asia North and South America and Oceania. Thanks to this strategy and a better recognition, Spotify was able to overtake iTunes royalties earnings by 10%. The decline of iTunes meant a shift away from downloads in favour of streaming, giving Spotify a greater chance to increase a number of users in Europe, and it is one more clarification of why Apple decided to buy Beats Music.Figure 9: “Spotify and Apple publishing income comparison”based on the figure above, the first quarter is a huge milestone for Spotify; in the third quarter, iTunes earnings were 32% higher than Spotify then in the fourth quarter only 8% higher. The diagram shows that the European total publishing revenues are much higher.In 2015 Europe is considered a diverse region with adopting streaming services at varying stages and rates.
But in Scandinavian countries, the streaming revenue is 69% of the market. While Germany, the fourth largest music market, increased streaming revenue up to 73%. The digital marketing is still evolving and there is plenty of room for growth in Europe.
Spotify’s growth strategy Localization as main strategyOne of the reasons why Spotify is so successful is because of its unique localization strategy, meaning it localises their marketing to fit a country music taste. This strategy is different from competitors such as Deezer that expanded rapidly focusing on getting into as many countries as possible. On the other hand, Spotify growth was much slower gambling success in the United States and later on, in other countries. The music industry is global and Spotify objective is to have a global vision for a streaming application and to work efficiently it requires a large base of both artists and listeners. For instance, in 2013 Spotify added Singapore, Malaysia, and Hong Kong artists to the feature of the 20,000 new tracks in the service. Spotify is using co-marketing and partnership to increase its brand image, growing audience in young adults with social media like Facebook. With these current strategies Spotify has reached an excellent result, the potential strategy can be used to increase customers base and revenue. Considering the Ansoff matrix below, Spotify’s strategy can be considered as Diversification, Spotify will eventually grow and enter new markets.
In new markets such in Asia, the service provided by Spotify is new. Other streaming services might have similar features but Spotify would be a completely new service. For instance, in China, the main music service is QQ Music and the features are different than those in Spotify’s.Whereas competitors, such as Deezer they can be considered in Market Development they can enter new markets but the services would be the same and similar to many other services such as Napster and Apple Music.Figure 10: Ansoff matrixSpotify’s revenueNew revenue streams are introduced due to the continuous growth of new digital streaming services. It appears that people are paying more than ever for music, specifically within the range of 17 to 25 years, this could be a positive factor for digital streaming services but not so much to the artists. But with these many new streams services, artists still earn revenue like fifteen years ago. This is because digital payments will continue to happen over the life of an artist.
Instead of receiving one-time profit from a purchase of a track, artists will earn revenue per stream, and this would basically take more time for an artist to receive revenue than having it right away. In an interview with Berklee College of Music, Mike King stated that an average download of a listener spends $60 per year, while the subscriber $120 per year, meaning that streaming is more expensive than a download. Form the figure below we can see the growth that Spotify has made. Revenue has grown gradually in just a couple of years from 2012 to 2016 Spotify has generated 2.64 billion euros, which is $1.
19 billion; as of March 2017, Spotify has 50 million paying subscribers. Figure 11: “Spotify revenue from 2012 to 2016″Spotify’s position mapFigure 12: “Spotify’s Position Map”With figure 12 we can analyse the current situation of Spotify, competitors, and users. The Position Map shows the users willingness to pay for the music service and the features given to users. Spotify demonstrates high features and strong willingness from users to pay Spotify Premium making a total of $120 per year. While Pandora costs $4.99 making a total of $60 but with fewer features and fewer users willing to pay.
Spotify’s future development Spotify might have a big focus on Europe but countries like Poland, Czech Republic, and Hungary may not follow the biggest markets. The streaming for these countries might not be as important as it is in other countries in Europe, for instance in Poland where physical collections dominate with 80% share of income. Moreover, in 2015 Spotify shelved to launch Spotify in Russia due to concerns of the economic and political crisis in the country, but the Swedish company may revisit its decision in few years’ time. Spotify may be the best solution in Eurasia to fight against the high level of music piracy. However, in 2013 the founder illustrated in a press conference how active are the users, the company stated that it had over 6 million paying users and 24 million active users.
With the positive outcome of active users, in the same conference, Ek launched Spotify in Slovakia, Cyprus, and Hungary all these new markets would have the smartphone and tablet features.ConclusionIn responding to the question How has Spotify expanded into the US and European music market and what will be their future growth? Taking into consideration all the strengths, weaknesses, opportunities and threats (SWOT analysis), we can finalise that Spotify expansion throughout Europe and the US was definitely a success for the business, and with the expansion into new markets during further grow the business would expand effectively. With the Ansoff Matrix, the future of the business is clearer, during its growth we considered different threats and opportunities in specific areas, with this analysis we could set Spotify past and future growth through the use of diversification. Meanwhile, with the position map, which helped to determine users position and their interests on Spotify, was useful as we detected Spotify’s popularity among other competitors and users. With the position map we can detect how Spotify is placed just above average.
Compared with other application with low features, Spotify has a greater chance of growth.All these analyses were enough to state future developments, like what happened in Eastern Europe and future development will surely take place in Asia too. The research question has been analysed through many aspects and with the information reported and the final statements, Spotify was one of the greatest expansion along with Facebook. The business was able to expand successfully in Europe, Oceania, and America in only two years, the growth of the business was successful in many views.
Spotify future can be very successful if the localisation strategy will still be followed, the shelve of Spotify in Russia is a perfect example that Spotify is rational about every country. Throughout the essay, I found myself in a good position since I organised myself to find the most important information before starting it. Yet, issues occurred with the original research question which made me have to do much more research to find a proper question and information to answer the question accurately. Moreover, I believe that to make the analysis more accurate I could have searched for more information in the finance aspect of the music industry.
Instead, I focused myself in different data such as subscribers and artists. If I could have done more research on the financial part of the topic than I could have given a more detailed answer.However, I am satisfied with the outcome and I believe I researched enough to make an accurate overall answer to the research question.