Spotify
A breakdown of the world's largest streaming
company
Author: Zixuan Cao, Jens Hjelmberg,
Hampus Carlsson, Lara Ludwigs, Adeola
Ogunsi
Supervisor: Heidi Coral Thornton
Semester: Fall 21
Course code: 1IR593
Table of content
1.
Abstract .............................................................................................................................. 1
2.
Introduction ....................................................................................................................... 1
2.1 Digitalization .................................................................................................................... 2
2.2 Competition ...................................................................................................................... 2
3.
Globalisation of Spotify .................................................................................................... 2
3.1 Drivers .............................................................................................................................. 2
3.2 Barriers ............................................................................................................................. 3
3.3 Cost ................................................................................................................................... 3
4.
The Macro environment ................................................................................................... 4
4.1 Political ............................................................................................................................ 4
4.2 Legal ................................................................................................................................. 5
4.3 Technological ................................................................................................................... 5
5.
The Market ........................................................................................................................ 6
5.1 Market Power ................................................................................................................... 6
5.2 Customers of Spotify ......................................................................................................... 7
6.
Competitive Environment ................................................................................................ 8
6.1 Industry Rivalry: ............................................................................................................... 9
6.2 Competition from New Entrants: ...................................................................................... 9
6.3 Substitutes:........................................................................................................................ 9
6.4 Customers: ...................................................................................................................... 10
6.5 Suppliers: ........................................................................................................................ 10
7.
Conclusion ....................................................................................................................... 11
Bibliography ........................................................................................................................... 12
Table of Figures
Figure 1:Reach and development costs of Spotify worldwide from 2013 to 2020 in million ... 4
Figure 2:Market tendencies ........................................................................................................ 6
Figure 3:US Spotify demographics vs Apple Music .................................................................. 8
Figure 4:Spotify subscribers by region ...................................................................................... 8
1. Abstract
This paper aims to analyse the operation of Spotify as a current international streaming media
music company facing the global market. The content structure of this paper is divided into
five parts. Through the analysis of market structure, this paper discusses the relationship
between Spotify and its main competitors. Through the macro environment, pestle model and
Porter's five forces model, this paper analyses a series of challenges faced by Spotify in the
market, including some problems to be met in the future.
2. Introduction
Spotify is the world's biggest music streaming platform by diverse subscribers. Users of the
service need to register to have access to one of the biggest-ever music collections in history,
plus podcasts and other audio content. Spotify was founded in 2006 in Stockholm, Sweden,
by Daniel Ek and Martin Lorentzon. The two wanted to create a legal digital music platform
to respond to the growing challenge of online music piracy in the early 2000s (Iqbal,
Mansoor, 2021).
It provides free and paid services. Free users will be interrupted by advertisements when using
Spotify's services while paying users to have no advertisements and have better sound quality.
As the most prominent music streaming provider and a successful media company,
globalisation and internationalisation must follow. According to Spotify's annual report, the
company's mission is to unleash the potential of human creativity by allowing millions of
creative artists to make a living from their art and billions of fans the opportunity to be
inspired by these artists. With a presence in 187 countries and territories and growing, the
Platform has 345 million MAUs and 155 million premium subscribers as of December 31
2020 (Spotify , 2021). Spotify's press release for the fourth quarter of 2020 shows that
monthly active users are mainly spread across Europe and North America, 35 per cent and 24
per cent, respectively. Latin America is at 21 per cent and the rest of the world at 11 per cent.
Premium subscribers also show a similar distribution.
1
2.1 Digitalization
In principle, both scalabilities and social influence processes may have gained bearing after
digitalization and streaming. On the one hand, digitisation reduced the marginal costs of
music production by eliminating the need to manufacture an album. Some transaction costs
for digital music remain, such as copyrights and distributing platform fees, but overall, the
barriers for music to flow across countries are substantially lower than in the pre-digital era
(Bello & Garcia, 2021).
2.2 Competition
However, with digitalisation and the growth of technologies, more and more media
companies are popping up in different markets. Its competitors are severely testing Spotify.
The explosion of streaming media has also given rise to music streaming services such as
Apple Music, Tencent Music, Deezer, Google play music, Amazon music unlimited and
Youtube music. Their advantages have left many competitors vulnerable as the music
streaming service providers with the longest uptime and largest subscription volume.
However, now Spotify faces its biggest threat yet: Apple Music. Apple Music, formerly
known as Beats Music under Beats, a well-known headphone brand, was transformed into
Apple Music after Apple acquired Beats in 2014 (Karp, et al., 2014). Spotify, Apple Music,
Amazon Music and Tencent Music rank in the top four market shares. Their market share is
32%, 18%, 14% and 11%, respectively. However, Spotify is still the leader because it has two
modes of operation compared to Apple Music: free and paid. Moreover, its music library is
ahead of its competitors.
3. Globalisation of Spotify
Globalisation is a significant and crucial part of every major corporation. Suppose you can
conquer some of the globalisation barriers, such as expanding beyond the traditional four
economic blocks or finding a way through tariffs and countries' policies. Then there is
potential to succeed globally (Hamilton & Webster, 2018, p. 32).
3.1 Drivers
Spotify has succeeded well in that aspect. Out of 245 recognised countries, Spotify is in 187
of them (Spotify , 2021), So it is safe to say that Spotify is a truly global company when it
2
reaches outside of the four blocks, West Europe, USMCA, Japan and China. Since Spotify
works in software and streaming, there are little to no goods that need to be ship around the
globe. They do have some foreign direct investment by owning different offices in 14 other
countries. (Spotify, 2021)
Barriers such as technical standards do not exist either since Spotify operates on Apple IOS,
Android OS and Windows. Geography and corruption is not a significant barrier as well, 60%
of the world population have access to the internet already (Johnson, 2021)
It is safe to say that globalisation was the best way for Spotify to thrive. If they had stayed in
Sweden or Scandinavia, their paid subscribers would be very limited compared to a global
market. Sweden is also an excellent place to try new technological services since swedes
quickly adapt to new ideas and set recent consumer trends (SACC-USA, Why Sweden?).
Sweden was, therefore, a perfect place for Spotify to grow into the global market.
3.2 Barriers
There are, however, some barriers to Spotify, for instance, policies. The second-largest
economy in the world, China (International Monetary Fund , 2021), does not offer Spotify's
service to its citizens. Partly because of the domestic streaming service Tencent Music
Entertainment has an 80% market share of streaming rights in China (BBC, 2021). Because
China is making it difficult for foreign companies to establish in China (Bristow, 2010), worth
noting here is that Tencent and Spotify made a Stock swap in 2018, giving them ownership of
9% in each other (Wang, 2018).
3.3 Cost
Another significant barrier is the increase of cost during its globalisation. As a music
streaming service, Spotify has to pay royalties to the music creators, and with global
expansion comes a higher cost of goods. In 2013 the price was 618 million EUR, and in 2020
it had surged up to 5.8 billion (Statista Research Department, 2021). Spotify has struggled
with profit for a long time and has had to resort to loans from investors, but after its IPO on
the New York stock exchange and its Tencent deal, its financial situation has calmed down
(Schleifer & Kafka, 2018). Recently Spotify expanded its services to include podcasts, and
with that, the revenue started to climb without the same cost as in music (Songtrust, 2021).
3
Spotify's Platform is phenomenal, and there is no doubt about that. It is the biggest Platform
for podcasts in the United States (eMarketer Editors, 2020) and the biggest Platform for music
streaming worldwide (Statista Research Department, 2020). But this does not come for free.
Spotify's Research and development cost increased from 73 million in 2013 to 855 million
(Statista Research Department, 2021).
Reach and development costs
1000
800
600
400
200
0
2013
2014
2015
2016
2017
2018
2019
2020
Figure 1:Reach and development costs of Spotify worldwide from 2013 to 2020 in million (Statista Research Department,
2021)
4. The Macro environment
As Spotify is a company consisting solely of online services, they face a new market age, and
with that comes new possibilities and difficulties. The company and the industry have
benefited for many years because there were few laws and regulations governing streaming.
However, this is beginning to change as new legislation on royalties has been enacted. Several
US states have started to pass new tax laws for streaming services.
4.1 Political
In October of 2018, the Music Modernization Act (MMA) was signed by now ex-president
Donald Trump. This legislation aimed to modernise the current music industry to better
support songwriters in music streaming (Copyright , 2021).
The Mechanical Licensing Collective (MLC), a non-profit organisation, was set up to handle
the royalties, help the individual make claims and uphold the Music Organization Act (MLC,
2021). By 2021, the MLC will have received over 424 million dollars in royalties from
various streaming companies. Apple Music and Spotify unsurprisingly paying the highest
amounts, 163.34 million and 153.23 million, respectively (Forbes, 2021).
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4.2 Legal
Numerous states in the US have begun implementing a higher tax on streaming services, there
among Spotify. The reason is that the number of subscribers to online services has increased
significantly over traditional television, and as consumer behaviour changes, states are
adopting. Ned Lamont, governor of Connecticut, says: " Movie theatres charge a tax, and
Netflix should be treated the same " (CNBC, 2020).
S&P Global writes that 33 of the 45 US states with general taxes have added streaming
services to their sales tax brackets. This is a significant increase from 2018, when only 17
states taxed the streaming industry (S&P Global, 2019).
However, the approach and implementation of these taxes vary between the states, issuing
different percentages and categorising them differently. S&P Global shares quotes from
Richard Auxier, a researcher from Urban-Brookings Tax Policy Center, who says that since
the last decades' economy has changed rapidly, the states are now trying different methods to
catch up. (S&P Global, 2019)
These changes and raises negatively affect Spotify and the consumer since the higher price
can make people feel less inclined to pay for the subscription, ultimately affecting the
company.
4.3 Technological
If we compare the world from when Spotify first launched in 2006 to today, a lot has changed.
The advancement of the internet this last decade and the widespread access to a smartphone or
computer has made it much easier for the consumer to access Spotify's services on the go
(Datareport, 2021).
The world is catching up to the streaming industry, setting up new laws and updating the
taxation. It is most likely to occur even more changes in attempts to adapt to this relatively
new market in the coming years.
5
5. The Market
To analyse the market and understand the industry in which Spotify operates, it is first
essential to define the market and clarify the parameters.
For this purpose, it is to decide what kind of goods and services need to be compared. Then,
the companies offering these products need to be compared and finally, the assortment or the
place where the goods/services are sold must be determined (Hamilton & Webster, 2018, p.
120).
In the case of Spotify, it is the product of music streaming. This service is also offered by
other streaming providers, but not nearly with the success of Spotify.
The market structure in which Spotify finds itself is one of monopolistic competition. This
type of market structure is based on a large number of companies offering similar or identical
products. There are no barriers to entering such a market (Hamilton & Webster, 2018, p. 125).
5.1 Market Power
Spotify takes about 34% of the market, while Apple Music, which is Spotify's direct
competitor, only takes 21% of the market in the second quarter of 2020. Even other
companies that are market leaders in different business areas cannot compete with Spotify.
For example, Amazon Music has a market share of 15%, while YouTube Music has a 5%.
Q1 2020
Q2 2020
Spotify
19%
32%
YouTube Music
11%
Spotify
13%
Apple Music
34%
12%
YouTube Music
Amazon Music
14%
18%
6%
Tencent Apps
Apple Music
Amazon Music
15%
Trencent Apps
Other
21%
Other
5%
Figure 2:Market tendencies (Iqbal, 2021)
6
The development of the market share can be observed. At the beginning of Q1 2020, Spotify
had a market share of 32%, which increased to 34% in Q2. However, there is also evident
competition in terms of market share. In the same period, Apple Music rose from 18% in Q1
to 21% in Q2 (Iqbal, 2021).
5.2 Customers of Spotify
The two customer segments targeted by Spotify are, on the one hand, the paying premium
subscribers, who have unrestricted access to the entire range of Spotify music. And on the
other hand, the advertising agencies focus specifically on marketing towards young people
under 29 years (Venbrux, et al.). The advertising agencies are in direct contact with the
company. Without this contact and the advertising that comes with it, Spotify would not offer
the freemium form to its users. The freemium format is based on the fact that the user has no
costs but can only use the Platform's service in a limited way. The limited access to the
service is used as a marketing tool. In this way, the user who uses the service free of charge is
shown what possibilities the service has and thus increases the likelihood that this user will
become a paying user (Business Insider "What is the freemium business model"). The
restriction includes that the music tracks are transmitted in lower quality, an internet
connection must be ensured, only a certain number of songs can be skipped, and there is a
regularly recurring advertising circuit. Through the targeted advertising, which is adapted to
the respective target groups based on a unique algorithm, the advertising agencies can
precisely place advertisements in particular demand in the target groups. Through this type of
advertising, more people of a specific target group and their subgroups can be addressed
(Spotify.Advertising).
Premium subscription users account for around 91% of Spotify's total revenue. Spotify's gross
profit generated by Spotify premium users amounted to 2.01 billion Euros in 2020. In direct
comparison, the gross profit from the Freemium ad-supported segment was only 6 million
Euros. The number of premium subscribers was 165 million in Q2 of 2021. This increased
89.09% since Q1 2015 when Spotify premium was launched (study_id21423_spotify-statistadossier, 2021).
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US Spotify demographics vs Apple Music
Spotify
Apple Music
56
56
44
29
26
17
23
16
18-24
25-43
22
11
35-44
15
45-54
19
44
23
55+
Male
female
Figure 3:US Spotify demographics vs Apple Music (Iqbal, 2021)
Based on the demographics of the USA, a trend can be seen. Spotify is most popular with the
under twenty-nine age group. However, Apple Music holds the dominance in the 35+ age
group. This can be attributed to apple's complementary product concept.
Spotify subscribers by region, millions
Spotify
62
45
33
17
Europe
North America
Latin America
Rest of the World
Figure 4:Spotify subscribers by region (Iqbal, 2021)
Spotify's primary market is Europe with 62 million users, closely followed by North America
with 45 million users. And Latin America with 33 million users.
6. Competitive Environment
Spotify has affected the Music Streaming industry and the Music industry at large in a
significant way. The company’s service has become a key growth engine for the sector
8
(Olenski, 2017). To understand the competitive environment in which the company operates,
we consider the following:
6.1 Industry Rivalry:
The main competitors with Spotify are Apple and Amazon music. With the growth of the music
streaming industry, the tech giants entered the industry along with their bottomless pockets and
the advantage of being makers of devices, the iPhone and Echo devices which have capacities
where listeners can access their music. Despite this, Spotify has been able to maintain market
domination, Spotify as of Q2 2021, has its market share at 32%, while Apple and Amazon have
16% and 13%, respectively (Seitz, 2021).
To maintain market dominance and accelerate growth, Spotify entered into a partnership with
the Chinese Tech, Tencent Music Entertainment. This further provides other defence against
Apple and Amazon (Nusca, 2019). The Partnership gives Spotify an advantage in China, where
it would ordinarily not have operated.
6.2 Competition from New Entrants:
According to the International Federation of the Phonographic Industry (IFPI), In 1999, the
global recorded music industry revenue was $25.2b. When Spotify launched in 2006, music
revenue had fallen to under $2b (International Federation of the Phonographic Industry, 2019).
After years of revenue decline, the music industry bounced back primarily through streaming
services. The total value of the recording industry is $21.6b as of 2020, with 62.1% of this from
streaming services.
The competition will be relatively low for new entrants into the streaming market. Presently,
Spotify has painstakingly worked to keep its position, followed by Apple and then Amazon.
New entrants will find it quite challenging to be successful or gain a small market sect even
after conducting a thorough market analysis.
6.3 Substitutes:
Presently, the threat of substitutes to Spotify (music streaming) is low. Spotify was created as
a substitute for Live Music, CDs, and Vinyl records (de Ferrari, et al., 2020). With the global
pandemic, it is almost now impossible to have live music. Music consumers will instead have
their playlists with unlimited access available on the go instead of CDs and Vinyl records.
9
6.4 Customers:
As of Q2 2021, Spotify has 365m Monthly Active Users and 375m paying subscribers globally,
which translates to a revenue of €2.3m (Spotify, 2021).
To retain and provide a seamless service for its subscribers, On June 16, 2021, they launched
the Spotify Greenroom, an initiative to introduce the company to the live audio space. They
also partnered with Storytel, one of the world’s leading audiobook streaming services, giving
Storytel subscribers the ability to enjoy their library of audiobooks on Spotify (Spotify, 2021).
Due to Spotify's freemium model, it is easy for its customers to switch from Spotify to a rival
streaming firm. Spotify has to offer new options continually, listen to their customer preferences
and requests to stay competitive and reduce the bargaining power of the customers (buyers).
6.5 Suppliers:
The singers and the record labels make up the Supplier base for Spotify, with over 70 million
songs and 60million more songs added daily.
Based on the freemium business model of Spotify, they monetise their freemium users and
advertise to get more paid users. The company is also constantly looking for ways to attract
customers and increase revenue and ultimately market share.
The cost of songs, being payment in royalties to their suppliers, especially the record labels,
hinders the revenue growth for the company. To reduce the bargaining power of suppliers,
proper negotiations need to be agreed upon, and they must find ways to leverage against any
surge of costs from them.
Based on the above analysis, Spotify holds a strong position in its competitive environment,
being the first to successfully launch the music streaming service in 2006, saving the Music
Industry. Furthermore, the company is still holding a significant market share of the industry,
albeit by a thread.
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7. Conclusion
As the world changes, so must all entertainment company's do as well. Vinyl became
cassettes, cassettes became CD's and CD's became digital. It is safe to say that if you do not
follow or make the trends, you will be outrun by new, hungry developers. Spotify showed the
world that in the beginning, it only took two people in a mid-size town in Sweden to have a
great idea and the will to conquer obstacles to make the world's most comprehensive
streaming platform. However, this does not mean that Spotify is safe. What says that there
will not be some new hungry people with a new great idea?
To establish themself on the market for the future, they have added podcast and their new deal
with audiobook company Storytell. Spotify is growing beyond the limitation of just music.
Competitors like Apple and Amazon, with a much bigger market cap and a bigger budget,
will always take market share in the streaming business. They have the complementary
product advantage and brand loyalty of the older generation. However, as the younger, more
Spotify friendly generation grows up and they continue to catch the newer generation, the
future looks bright for Spotify.
Globally they still struggle to initiate streaming in the Chinese market. However, this is a
problem for all globally streaming companies, and since Spotify already owns 9% of Chinese
Tencent Music Entertainment, they have the upper hand.
Let us look at the streaming format of movies, the giant Netflix, Amazon Prime and HBO.
They already produce their own movies and TV shows, limited for only their platform. A
possible future for Spotify is to produce Spotify only tracks and albums. If that happens,
popularity and subscribers would surely rise. Just like it has with Netflix and others.
11
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