Date – 12 November 2013
CASE STUDY: WHAT ARE THE INNOVATION
OPPORTUNITIES AND CHALLENGES FOR SPOTIFY?
“The question was how could we create something that both supported the artist and
favoured those who listen to music. We wanted to introduce a paradigm shift and we
worked hard at convincing the market that the business model for this would work.” Daniel
Ek, Founder of Spotify
This quote from Spotify’s founder echoes Schumpeter’s concepts of innovation and
entrepreneurial venture. In essence, Spotify is nothing more than its ability “to
employ existing goods to greater effect […] by carrying out new combinations”1.
With this in mind, we must understand that for Spotify to thrive beyond its
promising beginnings it must follow the pace of today’s quick innovation cycles.
As we will argue in this essay, as disruptive or innovative as Spotify might be today,
the increasing speed at which technology is enabling innovation means that within a
few years it might look very a different proposition. Its staying power will rest on
Spotify’s ability to continue disrupting the music sector and beyond while being
smart and “open about sharing or licensing technologies that don't fit with their
business model but might work well in another company's model.”2
Giving the Recorded Music Industry a lifeline
When peer to peer (“P2P”) networks such as “Napster disrupted the Recorded
Music Industry’s (“RMI”) lucrative copyright controlled business in 1999, there was a
complete lack of comprehensible Online Music Distribution (“OMD”) policy suitable
for our digital world”.3 It was not until Napster got shut down and Apple launched
1 Schumpeter, J. A. (1961). The theory of economic development: An inquiry into profits, capital, credit, interest, and the
business cycle (Vol. 55). Transaction Books.
2 Chesbrough, H. (2006). Open business models. Harvard Business Press.
3 Ku, R. S. R. (2002). The creative destruction of copyright: Napster and the new economics of digital
technology. The University of Chicago Law Review, 263-324.
iTunes that the possibility of a viable alternative to free “illegal” P2P music
downloads was created. Then, it was not until new streaming OMD led services
started to appear that central download services started to stagnate and that the
RMI had new opportunities to generate additional digital revenues.
P2P type: Napster, Grokster, LimeWire and BitTorrents (no $ for RMIs)
Central type: iTMS and Amazon MP3 ($ for RMIs)
Interactive type: Rhapsody, Napster, Grooveshark and Spotify ($ for RMIs)
Non interactive: Pandora and Itunes Radio ($ for RMIs)
As early entrants in the music streaming OMD, the likes of Pandora and Spotify were
instrumental players in appeasing and partnering with the RMI; giving back 70% of the
licensing revenues. With the propagation of OMDs, the RMI regained some of its
lost power and these new platforms become the darlings of the RMI, protecting their
heritage in copyright law and offering a new mode of distribution that enabled a
longer shelf life to tracks and albums while providing much needed competition to
the likes of Itunes.
The general outcome is that the RMI and OMD providers have started to interact
and work hand in hand rather than as competitors.
RMIs, the artists and engagement power
As more and more streaming services entered the market, the RMI become the
main beneficiaries. Based on its early entry through a positively disruptive model, will
Spotify benefit from the RMI’s support and newly found cash flow? With the big 4
RMI and Merlin Entertainment owning 17% of Spotify it would seem in their best
interest. However, could it be that the revenues generated from the increasing
number of players be an even bigger carrot?
Tuneefy.com/trends - 2013
Another important element in the OMD – RMI debate is the role of artists
themselves. While many are signed with sizeable labels and benefit from Spotify
ability to showcase their catalogue, the internet and its information distribution
power enables successful independents and smaller labels to work quite
independently of the big 4 RMI players. For these players, Spotify appears to be
playing to the hand of the RMI and does not provide sufficient revenue. In Thom
Yorke’s words, “Spotify is the last desperate fart of a dying corpse”. Radiohead,
amongst others have gone as far as to pull their catalogue from Spotify.
What this group of artists advocates is based on a formula Trent Reznor coined
“Connect With Fans (CwF) + Reason To Buy (RtB) = The Business Model ($$$$)”4.
This highlights that the value might no longer solely be the music but rather within
the experiences that musicians and their partners can offer fans. Possible partners
like Spotify might need to relook how to manage the virtuous circle between record
labels, artists and customers.
Membership and collaborative beginnings
The music industry’s macro-trends and “services such as Spotify have shown that
some users are willing to forego owning a finite amount of music if they are able to
4 Presentation: Trent Reznor And The Formula For Future Music Business Models, TECHDIRT.COM (Jan. 10,
2011, 3:51 PM)
get quick and easy access to millions of musical tracks for a reasonable subscription
fee.”5 Since Spotify generates approximately only 5% of subscription revenue via
advertising, the real difference and long term money maker for Spotify is the need to
amass new free users in order to drive premium subscriptions. Indeed, it makes
$540 via subscriptions (4M people pay $10 per month and 1M pay $5 per month)
and approximately $81M in advertising. The key is getting user hooked to the paying
service.
www.spotify.com
To its credit, Spotify has been innovative in the way it has navigated the concept of
open innovation and collaboration in its need to continue growing its membership
base and user experience. The company’s social media integration with Facebook,
and more recently Twitter, has allowed registered users to integrate their social
media accounts with Spotify. This provides social and sharing data to Spotify in order
to help them best tailor the consumer experiences. These tie-ups have also enabled
Spotify to gain additional reach. On the flip side, the quality of the new entrants is
questionable with the conversion rate dropping after the Facebook tie up. To ensure
sustainability, Spotify will need to find the right partners while successfully managing
these collaborations to bring ever-increasing value to its users.
5 Ku, R. S. R. (2002). The creative destruction of copyright: Napster and the new economics of digital
technology. The University of Chicago Law Review, 263-324.
Keep growing or die
Collaborations may be one of the best ways for Spotify to continue to build its
competitive advantage and create “systemic innovations” 6 to enhance customer
experiences through its service.
With this in mind Spotify has started increasingly looking to new partners to support
its service. This includes numerous brand partnerships as well as wrapping its service
within the bundles of Internet Service Providers (“ISP”). This trend should continue
as the costs ISPs pay Spotify is less then the revenues operators generate via data
usage. Could we see a trend of “music as data” rather than the current focus on
artists or RMI; could Spotify charge by data bundles?
In view of continuing to collaborate to enhance its service for ever more demanding
subscribers, Spotify has also “opened up an application program interface to its
catalogue of more than 15 million songs to any third-party developer for free […]
and has committed to creating a much richer, deeper music ecosystem than what
currently exists.”7 Spotify is now more focused than ever on enhancing the service
by enabling new and more tailored ways to connect with users and provide them
with a reason to pay for the service.
Finally, as OMDs such as Spotify require increasing users to build their subscription
model and increase advertising revenue, could we see large social networks or
6 Maula, M. V., Keil, T., & Salmenkaita, J. P. (2006). Open innovation in systemic innovation contexts. Open
innovation: researching a new paradigm, 241-257.
7http://www.deloitte.com/view/en_US/us/Industries/technology/014656e74eab9310VgnVCM2000001b56f00aRCR
D.htm
marketing and media corporations start to work even more collaboratively (or take
stakes) in the businesses that once brought them into the picture as friendly
partners? Could it be that these experts in consumer engagement be best placed in
providing “(CwF) + (RtB) = ($$$$)”?8 The likes of WPP backed Vice Group has
already made in-road into all aspects of the music value chain - Noisey (Record label,
event promoter and free video on demand), Boiler Room (Venue), Vice and the
AdVice Network (Content aggregation and distribution).
The innovator’s dilemma
The RMI, artists, ISPs, social networks, media and fans all offer opportunities and
challenges to Spotify but “successful visionary leading corporations are able to tap
and leverage these external resources to create systemic innovations by keeping the
credibility of their commitments in mind and using tools […] to create foresight to
shape the business environment over different time horizons.”9
At the moment Spotify carries good momentum from its original disruptive invention
but it will have to continue to innovate both internally and through wise partnerships
in order to stay competitive and safeguard its own future. “This ultimately means
that in doing what they must do, every company prepares the way for its own
disruption. This is the innovator's dilemma.” 10 That being said, if Spotify can
maneuver its internal innovation engine and partners to enhance the music
experience for fans, paying subscribers and revenue generating partners will continue
to be interested.
8 Presentation: Trent Reznor And The Formula For Future Music Business Models, TECHDIRT.COM (Jan. 10,
2011, 3:51 PM)
9 Maula, M. V., Keil, T., & Salmenkaita, J. P. (2006). Open innovation in systemic innovation contexts. Open
innovation: researching a new paradigm, 241-257.
10 Christensen, C. M., & Raynor, M. E. (2003). The innovators solution: Creating and sustaining successful growth.
Harvard Business Press.