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 ASSIGNMENT OUTLINE:

  1. Introduction – summarize what the assignment is about and what the reader should expect to learn from the work you have accomplished
  2. 2. Company profile
    • Name
    • Background (describe what the company does and offers)
    • Industry (as defined by the case)
    • Revenue/Profitability (last 5 years)
    • Company size (e.g., number of employees or sales)
  3. 3. Analysis
    • Business model (customer value proposition and business formula)
    • Vision, Mission, Values
    • External analysis
      • Macro-environment
      • Porter’s 5 forces
      • Overall opportunities and threats (2 of each)
    • Internal analysis
      • Ratio analysis (current strategic effectiveness)
      • Core competencies
      • VRIN resources and capabilities
      • (Sustained) Competitive advantages
      • Value-chain analysis (3-5 functions)
      • Overall strengths and weaknesses (2 of each)
  4. 4. Corporate/diversification strategies
    • Discuss the company’s corporate/diversification strategy and its effectiveness
  5. 5. Business/Competitive Strategies
    • Discuss the company’s business/competitive strategy and its effectiveness
  6. 6. International Strategies
    • Discuss the company’s international strategies and entry modes and their effectiveness. If the company does not have foreign operations, propose a scenario discussing the appropriate strategies and modes for international expansion.
  7. 7. Ethics, CSR, and sustainability
    • How well the company measures up against the competition on these criteria
  8. 8. Organizational Structure
    • Discuss important structural issues that pertain to your organization (e.g., type of organizational structure, span of control, corporate governance, etc.)
  9. 9. Key Issues and Problems
    • Based on your assessment of all aspects of the business (Point 1-8), you have to identify 2-3 key problems that the company is facing and/or issues it needs to address
  10. 10. Strategic Alternatives
    • Provide at least two strategic alternatives that can solve the key problems you identified. Each alternative must be broadly stated and incorporate elements from the company’s corporate and business strategies
  11. 11. Evaluation and Selection
    • Using your SWOT analysis, evaluate each alternative. Indicate how each alternative can solve the problems and/or address the issues you have identified. Which of the two better fits your SWOT? This will be the alternative that you can propose the company to implement. Make sure to explain how the winning alternative better fits your SWOT than the other alternative(s) you have proposes and considered
  12. 12. Recommendations
    • Detail the specific steps that the company has to make to implement the alternative you chose
  13. 13. Implementation Issues
    • State what the company should be weary of in relation to pursuing the desired course of action
  14. 14. Conclusions
    • Present your final reflections on your work, restating key points from the purpose of the project and your findings.

Parameters

  • Your project must be 3500-4000 words in length.
  • Cite all your sources. Use APA citations.

CASE 9

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Spotify in 2020: Can the Company Remain Competitive?

Diana R. Garza

University of the Incarnate Word

exponentially growing its number of subscribers,

multiple acquisitions that add new competencies

and capabilities, and brand-name partnerships

with

industry leaders such as Disney, Xbox, and Samsung

among others. Spotify’s ongoing transformation is

based on the rapid adoption of streaming music and

subscription services and its leverage with smart

phones, tablets, smart TVs, and high-speed internet

access. As early as 2015, digital streaming became

the primary revenue stream for recorded music, sur

passing physical format sales of CDs.

Spotify knows its user’s preferences perhaps bet-

ter than subscribers themselves. The company relies

on its analytical capabilities to create a competitive

advantage. Through the use of analysis, machine

learning algorithms, and its vast amounts of data,

subscribers are presented with personalized playlists

and other recommendations. The use of AI has also

created value for artists allowing them to understand

B efore streaming music, many consumers may

have been using file sharing services Napster,

LimeWire, Pirate Bay, and other companies

to download music. Using these services, cost the

music industry billions each year by downloading

and redistributing music (what we know as music

piracy and, in legal terms, copyright infringement).

According to the Recording Industry Association of

America (RIAA), piracy of recorded music has cost

the recording industry billions in lost revenues and

profits (2020). It is estimated that the U.S. economny

loses $12.5 billion in total output as a consequence

of music theft, and approximately 71,000 jobs in the

U.S. economy are lost.

Daniel Ek, one of the two founders of Spotify,

has not only transformed himself in the last 14 years,

his transformation is also reflective of his beloved

fasted growing streaming offspring-the world’s

music service-Spotify. Ek and Spotify came to revo

lutionize the music industry, Daniel Ek knows well

that to remain competitive, the company needs to

differentiate its products and services. In the race

to remain competitive, Spotify paid more than

$340 million just in the past year acquiring podcast

companies. Streaming services and the subscription

market will continue to grow from approximately

$8 billion in 2019 to over $17 billion by 2024. Spotifyy

has entered a race where the pace is quickening

with

Spotify’s average monthly users growing faster over

the last three quarters but also other music

services

adding podcasts and retooling themselves to

remain

strong rivals.

Spotify’s growth strategies include an ad-based

business model allowing for both a free and paid

subscription, global expansion into different markets

and visualize (through Spotify graphs) user engage-

ment, monthly/daily listeners, metrics, and demo-

graphic details. An added advantage of using data

analytics is being able to customize specific ads to

different regions.

Company History Founded in 2006, Spotify took the streaming musio

industry by surprise with its unprecedented growth in the last six years. Daniel Ek and Martin Lorentzo founded Spotify as a small startup in Stockholm Sweden. Their startup

response to a growing piracy problem in the musi. industry. Ek and Loretzon knew there had to be

music platform was i

Copyright 2021 by Diana R. Garza. All rights reserved.

betler way for artists to monetize tincir music and

give consumers a legitinate and simpler way to listen to music. ln 2008, Spotily tansformed music listen-

ing when it launched its streaming service, offering listeners access to a library of musie rather than

making users pay for downloading albums or tracks. The music industry, which had been suffering from spending declines. resisted this new business model Growth Year by Year of offering “unlimited access.” and favored the eur-

rent digital download model used by Apple ilunes Spotify began by offering its frec subseription by invitation only as a way to nmanage growth: paid sub-

scriptions were open to everyone. At the same time,

Spotify also announced licensing deals with music

labels In early 2009. Spotifjy opened its free registration

tier to the public in the United Kingdom only. Due to

a surge in registrations following the Spotify mobile

app’s release, Spotify closed its open registration in

late 2009 and returned to invitation only. In 2010,

Spotity integrated with Shazam to figure out who

was singing a particular song and would then pop-

ulate a playlist. Spotify was launched in the United

States in July 2011, allowing users a six-month free

ad-supported trial period to listen to unlimited music.

By 2012, the trial period expired, and users were lim-

ited to ten hours of music each month and five-song

replays. By March of 2012, Spotify removed all limits

and introduced its free ad-supported tier.

In 2014, Spotify pushed its two-sided business

model by offering a free ad-supported service to

attract new users with the goal of converting

them

into paid subscribers. The company was able to con

vert 10 million users to premium subscribers

from its

approximately 40 million active users. At

about the

same time, music artist Taylor Swift pulled her music

off Spotify, claiming a rapid decline in sales.

her music back on the platform. Jay Z, a ip-hop music mogul, also claimed unfair compensation to artists and launched Tidal in 2016 as his own music platform, becoming Spotify’s competitor. Other art ists who kept their music off Spotify included The

Beatles, Adele, and Pink Floyd.

By March of 2011, Spotify had a customer base of I million paid subscribers across Europe, and

by the end of September of 2011, the number had doubled. By August of 2012, the company reported 15 million active users, of which 4 million were paid

subscribers. By 2013, the company reported 20 million

active users with one million customers in the

United States. The growth for Spotify has been expo-

nential year after year reaching 286 million users, this

includes 130 million subscribers across 79 markets,

with 50+ million tracks, I million+ podcast titles, and

4 billion+ playlists as of March 2020.

IPOs Are Too Expensive

and Cumbersome

On February 28, 2018, Spotify filed a Direct Public

Offering with the SEC. Barry McCarthy, Chief

Financial Officer of Spotify, stated in an interview

with the Financial Times that the company opted

for a Direct Public Offering (DPO), also known as

a direct listing instead of an IP0 because “the U.S.

initial public offering market is broken.” A DPO is a

way for companies to become public without

a bank

backed initial public offering. Spotify opted for what

they called a free-market approach by selling

shares

directly to the public without paying an

underwriter.

The financial benefits for Spotify were savings

in

underwriter fees and avoiding the IPO discount.

In 2017, the company announced expan-

sion plans to move to the United States in

lower

Manhattan, New York City, adding approximately

1,000 jobs. In November 2018, Spotify

announced a poy nas strengthened

their competitive positior

Growth through Acquisitions

Spotify has strengthened their competitive positiorm

through a series of targeted and timely acquisitions-

Each acquisition has resulted in a stronger competi

tive position and new market opportunities. A lis

of Spotify’s acquisitions between 2013 and 2020 arn

presented in Exhibit 1.

total of 13 new markets in the MENA region (the

Middle East and North Africa), including

a new

Arabic hub and several playlists.

Spotify’s success has also

seen a few bumps

along the way. Taylor Swift

was one of the first art-

ists to speak out against the

company and its unfair

compensation to artists, calling

the music platform

an “experiment.”

Three years later, the feud between

Spotify and Taylor Swift ended,

and the artist put

2014-2016. In March 2014, Spotify acquired Th

Echo Nest. The Echo Nest was a music intelligene

and data platform for developers and media compa

ies. The company developed and personalized

mus

PART 2 Co, til atit! lij Stuiitegy

rowdAlbum weail.i erhance and tighten

nection bctwee EXHIBIT 1 Spotify’s Acquisitions

is and their fans.

In 2016,

polly acquircd Cord Projec #nd Soundwave,

tnese

COmpanies focused on nessaging and sharing.

1hese

cquisilions would allow users to share

new musi

DUild profiles, and message friends and

folloWers

wilhout lcaving the Spotify app. Preact was

the 1ast

cquisition of 2016. Preact was acquired to find trends

and behavior patterns through machine learning and

analytics to grow the premium customer base.

between 2013 and 2020

Company Year Gompany Buslnes

Tunigo 2013 Users tind, create, and slhare music and playlists.

The Echo 2014 Music intelligence and data platform company develops music applications.

Nest

Seed 2015 Data science consulting firm

2017. In March 2017, Spotify acquired Sonalytic.

Sonalytic was an audio detection technology that

identified songs, mixed content, and audio clips and

tracked copyright-protected materials. This acquisition

improved the company’s personalized playlists and the

company’s publishing data system. MightyTV was a

startup company focusing on video recommenda

tions. The company was acquired and shut down. As

part of the deal, MightyTV’s founder and CEO Brian

Adams became Spotify’s VP of Technology, focus-

ing on marketing and advertising. In the same year,

Spotify acquired MediaChain, a startup that focused on leveraging blockchain technology. The goal for this company was to develop technology to connect

artists and other rights holders with the tracks hosted on Spotify’s service. Niland was Spotify’s fourth acqui- sition of 2017. Niland was an A.l. company focused on providing personalized recommendations for users. SoundTrap, an online music studio startup, was Spotify’s last acquisition of 2017. SoundTrap, was the maker of the freemium (paid and free) cloud-based, collaborative music podcast recording studio. Spotifyy’s plans for the company were to assist artists by using its

platform, including offering rea-time streaming data through a mobile app.

Scientific

Company collects photos and videos of performances.

Crowd Album 2015

Cord Project 2016 Social messaging and sharing

2016 Social app focused on finding and sharing music

Soundwave

Preact 2016 Cloud-based service focused on helping companies acquire and retain subscribers.

Sonalytic 2017 Audio detection technology company

MightyTV 2017 Company provides video recommendations

MediaChain 2017 Company focused on leveraging blockchain

technology to solve problemns Labs

with attribution.

Niland 2017 Company provides search and recommendation options for music.

Soundtrap 17 Online Music Studio Loudr 2018 A music licensing platform

Gimlet 2019 Podcast Network

Parcast 2019 Podcast Network

Anchor 2019 Podcast Network

SoundBetter 2019 Music and Audio production

2018-2019. In 2018, Spotify acquired Loudr, a music licensing platform that built products and ser vices for content creators and digital music servicesto identify, track, and pay royalties to music publishers providing a more transparent and efficient musicpublishing industry. In 2019, Spotify acquired the Dodcast networks Gimlet Media and Anchor FM Inc..establishing itself as a significant player in podcast-ing, Gimlet added its best-in-class podcast studio, pro- ction, and advertising capabilities. Anchor added its platform of tools for podcast creators. Later that ar, Spotify also acquired Parcast, a podcast that spe- cializes in crime, mystery, and Science fiction shows. Parcast added its curated library of highly produced

and collaboration

marketplace. The Ringer 2020 Sports and Entertainment

Podcast

Source: Businesswire-https://www.businesswire.com/portal/site/

home.

applications. In June 2015, Spotify also acquired Seed Scientific, a data science consulting firm, to lead an advanced analytics unit within the company.

CrowdAlbum, a startup that collected photos and videos of performances and shared them on social media, was acquired in 2016. The work created by

C-115

CASE 9 Spotty in 2020: Can eionpaiy Remain Competitive?

cuture content. The addition of The Ringer expanded Spotify’s content offering and audience reach. This acquisition is one more example of Spotify’s growth strategy.

shows and its loyal audiences. To round off the year, the company acquired SoundBetter, a music production marketplace where people in the music indusiry collaborate on projects and distribute music tracksfor licensing. SoundBetter brought with it a strongreputation and committment to support all cre Growth through Partnerships ators worldwide; the company joined Spotify with Spotify’s Partnerships have also strengthened the com

180,000 registered users in 176 countries. 2020. Spotify’s latest acquisition was Bill Simmon’s The Ringer in February 2020. The Ringer was a creator of sports, entertainment, and pop

pany’s competitive position by expanding its market access and strategic collaborations mostly through bundling of services. A list of Spotify’s partnerships between 2011 and 2020 are presented in Exhibit 2. EXHIBIT 2 Spotify’s Partnerships between 2011-2020

Company Year Company Collaboration Scope 2011 Integrated into the Facebook page, users can listen simultaneously with friends.2011 Leading mobile discovery company

Facebook Shazam

SoundHound 2011 Sound and discovery search companyCoca-Cola 2012 Global partnership to share music with consumers around the world.Harman 2014 Premium global audio and Infotainment group.BandPage 2014 Artists and groups engage directly with fans Sony 2015 Added to Sony PlayStation 3& 4 and Xperia Consoles Starbucks 2015 Integrated into Starbucks App Uber 2014 Riders can listen to their playlists while riding in an Uber Adidas 2015 Integrated into the Adidas Go app where streaming music was fused with fitness metrics.

Tencent 2017 Spotify and Tencent acquired shares from each otherMicrosoft 2017 Provide access to streaming music South by Southwest 2017 Access to SXSW genre-specific curated playlists on Spotify hub Waze 2017 Users can access Spotify playlists from Waze navigation WNYC Studios

2017 Podcast available through Spotify Discord 2018 Users can highlight and share music Hulu 2018 Premium bundle of music and TV Ellen DeGeneres 2018 Create opportunities for undiscovered talent Samsung 2019 Spotify preinstalled in new Samsung devices AT&T 2019 Collaboration allows AT&T Unlimited & More customers to choose Spotify Premium as an entertainment option.

Xbox 2019 Spotify can be played in the background while playing videogames

Bouygues Telecom In France, Spotify and Bouygues offered a six month free trial for customers of Bouygues

2019 Magalu Conecta 2019 Brazilian customers of Magalu Conecta were offered a free four-month trial of

Spotify premium.Vodafone 2019 Eligible Vodafone Australian users received a free 30-day trial of Spotify premium added to their mobile plan.Disney 2019 Disney Playlists on Spotify aimed at boosting family memberships

ESPN 2020 Spotify created music and podcast playlists for viewers to watch after The Last Dance

docuseries of former Chicago Bulls player Michael Jordan. The Joe Rogan

Experience 2020 Popular podcasts in diverse topics such as neuroscience, sports, comedy, health, and

ever-changing culture. Source: Various Spotify press releases.

https://www.businesswire.com/portal/sita(l

C-116 PART 2 Casos i Kaiidcxeulin1 Strategy

Cach other. Tencent operated the largest social media

platform in China and providei an extensive cataiog

Of music services to hundreds of millions of users.

2014-2015. Spotily’s partnership with Uber started in 2014. Riders were allowed to control the driver’s sound system by connecting to their Spotify accounts and streaming their tunes while riding in an Uber.In 2017. Spotify considered ending its partnership with Uber after mounting scandals concerning Uber’s CEO. Also, in 2014. Spotify joined forces with the musician profile service BandPage so artists and groups could engage more directly with their fans and offer concert

tickets, merchandise, and VIP experiences. In January 2015, Sony announced a new plat

form, Play Station Music, a new music service with Spotify as an exclusive partner. With this partner- ship. Spotify was included into Sony’s PlayStation 3 and PlayStation 4 gaming consoles and Sony Xperia devices. The platform was introduced in 41 markets around the world. This partnership allowed subscrib-

2018. In April 2018, Spotify partnered with the

gaming-oriented voice chat service Discord to be dis-

played on desktop clients. This partnership allowed

users to display their currently-playing songs as a

presence on their profile and invite other premium

Spotify users to group “listening parties”. In April of the same year, Spotify and

Hulu

announced a partnership. The two companies bun dled their services and offered them through a single

subscription plan of $12.99-a-month bundle. This

partnership was the first time Spotify partnered with

streaming TV platform, and it came at a time when

the company was rethinking its video offerings. With

Tom Calderone, head of video and podcasts, depart ing the company, Spotify decided to focus on expand- ing video offerings on Spotify playlists. In August

2018, the company introduced an upgraded Spotity Premium for Students plan bundled with Hulu’s

streaming library and SHOWTIME’s premium enter tainment content for $4.99.

ers the convenience to link their accounts between PlayStation and Spotify, or sign up and subscribe.

In the same year, Spotify also partnered with Starbucks and was integrated into the Starbucks app. The Starbucks and Spotify partnership encouraged active participation among members who could cre- ate their own in-store playlists. Spotify and adidas also formed a strategic partnership to create a pre mium app called Adidas go that tracked running met- rics and selected music based on running speed. At the time, the app introduced a 7-day trial period to

Spotify Premium with the goal to convert runners to premium subscriberTs.

2017. In March 2017, Spotify partnered with South by Southwest (SXSW). Users were able to access SXSW genre-specific curated playlists on Spotify SXSW 2017 hub in “browse” on desktop and mobile devices as well as the SXSW Go App. Two more partnerships were announced in March, one with WNYC Studios and one with Waze. WNYC was the most listened to public radio station and mother station for podcasts like Radiolab, Studio 360, and

Freakonomics. Waze was a navigation app that allows users to access Spotify playlists from its app. In October of the same year, Microsoft and Spotify entered into a new partnership. Microsoft ended its collaboration with Groove allowing subscribers to move their playlists and music collections to Spotify. This partnership allowed Spotify to be downloaded to

Windows for P.C., including Xbox gaming consoles. In December 2017, Spotify and China-based

Tencent agreed to partner by acquiring shares from

2019. A groundbreaking partnership was that of Spotify with Ellen DeGeneres in late 2019. Ellen DeGeneres is known for not only loving music but also for creating opportunities for new tal- ent. This partnership expanded these opportun- ities and tapped into new markets. Also, in 2019, Spotify and Samsung announced the expansion of their collaboration. Samsung provided users with access to Spotify on Samsung mobile devices, and all new Samsung mobile devices globally would include the Spotify app preinstalled. The new devices included the Galaxy S10, S10+, S10e S10 SG. Galaxy Fold, and select Galaxy A series. Eligible Samsung owners qualified for six months of free Spotify Premium. Following this partnership, Spotify and AT&T teamed up in a new relationship that allowed AT&T Unlimited &More PremiumWireless customers to choose Spotify Premium as their entertainment option, initially in a trial periodand afterward at a rate of $9.99.In 2019, Spotify als0 entered into four globalpartnerships; the first was with Xbox. Xbox and Spotify teamed up to deliver value in gaming and music. Spotify offered gamers in the United States and United Kingdom who joined Xbox Game Pass Ultimate or Xbox Game Pass for P.C. (Beta) for the

C-117 CASE 9 Spotify in 2020: Can the Company Reman ipetitive?

use of artificial inteligence and machine learning algorithms has beer a driving force behind the com- pany’s success.

It all began in 2012 with the company’s “Discover” feature, which started as a playlist of a user’s favor ite artists and soon became a sort of recommenda-

first time a six months trial of Spotify premium. The company also entered into partnerships with French

company Bouygues Telecom Broadband com pany: customers on mobile tariffs of > 1GB could add Spotify Premium to their existing mobile plan. A second partnership included Brazilian Magalu Conecta, a country top retailer that offered technical Support, cloud storage, phone protection, and Wi-Fi

spots; customers received a free four-month Spotify Premium trial. The last global partnership was with Vodafone, Australian largest mobile network; custom- ers received a free 30day trial of Spotify Premium.

To boost family membership, Spotify and Disney entered into a partnership that would create a Disney Hub with Disney playlists with liked soundtracks from Disney, Pixar, and Marvel movies, Star Wars instrumentals, classics, sing-alongs, and more.

tion engine. In 2019, Spotify updated to “Discover Weekly,” a feature that creates custom playlists unique to each listener’s activity, which is curated by machine learning algorithms. The algorithm further analyzes other users’ playlists to find common music themes and use that information to develop new play- lists. Users also have a “taste profile” of microgenres that are used to further customize playlists. It is not only about what music users listen to, it is about the user’s interaction with the song. Spotify’s program is able to recognize if a user changes the track within 30 seconds giving it a thumbs down and removing it from the playlist, or, if a user adds a song to a playlist and listens to the entire song, the song is aligned with the “user’s taste,” a factor that helps the algorithm develop the user’s overall taste profile.

Aside from “Discover Weekly,” Spotify also uses a function called “Daily Mixes,” these are playlists separated by genres that the user gravitated towards and includes songs the user either saved or added to a playlist, are written by the same artist, or are from new artists or albums the user does not know of yet. Spotify algorithms change the songs of these playlists as well as introduce a few extra new songs.

Not only does Spotify use analytics to under- stand a user’s music tastes, they also use data to improve customer experiences. The data generated by consumers is used for ad campaigns and to bet- ter target consumers. The company uses what they have learned from users to develop ads that strategic- ally target an ideal audience. The company has seen the impact of using listener data to develop ad cam- paigns that increase their sales and user engagement. Some examples of successful ad campaigns include a display ad in Williamsburg, New York, where the company used listening history to develop funny ads, the first ad, read “Sorry, Not Sorry Williamsburg, Bieber’s hit trended highest in this zip code.” This ad was displayed in a “hipster area” known for its notori- ously high concentration of music snobs. Some pop ular campaigns included holiday ads, a set of 2018 Goal ads, and a set of “meme-inspired” ads.

As of April 2018, Spotify announced that free users would have access to explore 15 of Spotify’s

2020. On May 1, 2020, Spotify, ESPN, and Netflix teamed up to curate podcasts around Netflix’s The Last Dance docuseries of former Chicago Bulls player Michael Jordan. The partnership built on every brand’s respective strengths, and for Spotify, it was on content curation and playlists. Spotify’s latest partnership was with “The Joe Rogan Experience,” a podcast with a loyal and engaged fanbase around the world. The podcast debuted on September 1, 2020.

The many strategic acquisitions and partnerships Spotify formed strengthen the company’s competitive position as the most significant and leading music

streaming global platform. Through market penetra tion, the company has been able to grow its number of users. Economies of scale are evident as new users and artists are added. Product development is also part of Spotify’s growth strategy and can be seen in the latest acquisitions of Podcast companies.

Spotify’s use of Big Data Spotify is continuously looking for new “habits in their streaming intelligence” to learn more about how people stream. The company calls this “under- standing people through music.” The company’s use of innovation and technology creates superior products and services to meet the growing demand of existing and potential subscribers. Spotify intro- duced Spotify.me, a data analytics program to cap- ture a subscriber’s listening habits. The captured data allows the company to generate content that users consider in line with their tastes, creating a unique user experience, and keeping users engaged. Spotify’s

C-118 PART 2 Cases in Crating and Executing Strategy

most popular playlists. including “RapCaviar” and “Discover Weekly.” While this was great news for free users. the company had a data-driven reason behind this decision. Spotify would now generate data from the listening habits of over 124 million more users allowing for bettercustomized experience using data

and algorithms. Data leads the way to understand trends, and

this includes the music industry. Music streaming has outranked music purchases, and the only way to

understand how the public is responding to music,

artists, and albums is through the use of data. Spotify understands this well and continues to focus on

experience through a proprietary Music Genome

Project and Podcast Genome Project” Technology

through its mobile app. Pandora experienced a year-on

year decline in monthly active users (MAUs)

between

2018 and 2019 of 8.7 percent. According to the com-

pany’s quarterly financial results, Pandora has nearly

6.2 million paid subscribers, up 9.5 percent Y/Y.

Pandora offers two tiers, Pandora Plus and Pandord

premium with discounts for families, students, and the

military. The free tier is ad-supported and asks users

to

view video ads, a drawback for many users.

Tidal is a streaming music service owned by

hip-hop mogul Jay Z. Artist empowerment is a core

tenant of this platform and was created in response

to Spotify’s perceived unfair payout to artists. The

company claims to have over 60 million trackS

in

lossless audio quality and 250,000 videos. They

offer subscribers exclusive music and videos, behind

the scenes documentaries, and events including

live experiences, pre-sales, and ticket giveaways. As

with most companies, subscribers get a 30-day free

trial. The company’s subscription tiers include a pre-

mium family plan, and a student and military plan

at discounted rates. The company also has HiFi sub-

scription tiers at higher rates. The number of Tidal

subscribers was not disclosed by the company.

Tidal.

meeting user preferences through unique, differenti

ated services based on what the company has learned

through user data.

Spotify’s Competitors Apple Music.

is one of Spotify’s biggest rivals, with an extensive

library, human-touch radio, and full integration into

Apple’s iOS ecosystem. Apple reached over 60 mil

lion premium subscribers worldwide as of mid-2019.

The company claims to have over 60 million songs

outdoing contenders such as Amazon Prime Music

and Jay-Z’s Tidal. With Apple Music, users can listen

to local radio stations around the world, download

and stream music to an Apple Watch, enjoy music

in a car with CarPlay, and ask Siri (Apple’s A.I.) too

search for songs. Apple offers three subscriptions,

a student, an individual, and a family tier. Because

Apple does not have a free tier, other than its initial

3-month free trial, they have secured more exclusives

Although a newcomer, Apple music

YouTube Music. YouTube Music is a streaming music service that allows subscribers to find albums, live performances, and remixes by searching lyrics or describing songs. Subscribers receive recommenda- tions based on their tastes and searches. YouTube premium allows users to listen to music ad-free. offline, and while their devices’ screen is locked (desktop or phone). YouTube Music has two tiers, the free ad-supported tier, and the premium music

service which includes benefits like background play, ad-free music, and audio-only mode. YouTube Music is the successor to Google Play Music who decided to put its marketing emphasis on the YouTube Music platform since Youlube has billions of viewers. YouTube Music has over 20 million subscribers

with artists.

Amazon Prime Music. Amazon Prime Music gives

users access to over 60 million songs. The company

has an individual, family, student plan, and a single

device plan (echo or fire tv). A Prime Music sub-

scription is free with Amazon Prime membership

with access to 2 million songs, and Prime Unlimited

is its paid subscription with access to up to 60 mik

lion songs. Originals& Exclusives Pandora. Pandora is a leading music and rius podcast (“O&E”) Content

discovery platform. They are a subsidiary of Sirius XM

and boast of being the largest streaming music pro-

vider in the United States with an industry-leading dig

ital audio advertising platform. They offer their more

than 70 million users a highly personalized listening

As of June 2019, Spotify introduced a new version of its library to premium users that mixes form with functions. Users are able to get their contentfaster and stay up to date with podcasts on Spotify.

Ci19 CASE 9 Spotify in 2020: Can the Company Remain

Competitive?

those in Taiwan. Every word on Spotify is also trans- lated into the local language(s) whenever possible.

Spotify wants to “look just right” no matter where

users access the app. The company spends time mak-

ing sure users relate with the images, they focus on

the emotional content of images, the approach to cul sensitivities, and how they handle image locak

ization. It is about the Spotify experience of allowing people to feel that they belong.

Music unites people and yet it is highly localized and a personal experience; therefore, Spotify’s focus is

on delivering a country-to-country, culture-to-culture, and person-to-person unique experience that varies but is equal in measure. A group of editors works together to minimize localization challenges. The Spotify rel- evance starts with translating the experience into the appropriate language(s), followed by using the same or different images based on the country. Connections are created when users open Spotify and find images that are relevant and resonate with them. For Spotify,

representation matters. this could be the connection to a particular playlist and added users.

Podcasts can be managed in three distinct sections:

episodes, downloads, and shows. The Episodes tab allows users to find or resume podcasts. The down- loads tab serves as a repository for downloaded pod- cast episodes that users can listen to them offline. The shows tab allows for users to quickly manage podcasts they follow.

The launched 78 Exclusives (“0&E”) podcasts globally and completed its latest acquisition of The Ringer: The Ringer is a

platform rich in popular sports and media podcasts. Gimlet was acquired by Spotify in early 2019; they are a Swedish digital media podcast network that focuses on narrative podcasts. The company brought with it a dedicated L.P. development team, produc- tion, and advertising capabilities. Parcast is a pre- mier storytelling-driven podcast studio based in Los Angles, California popular for Unsolved Murders, Cult, Serial Killers, and Conspiracy podcasts. Spotify acquired Parcast in the second quarter of 2019.

Spotify now has over I million podcasts available on its platform, with more than 70 percent powered by Anchor. Anchor is a podcasting platform that has added its suite of tools for podcast creation, distri- bution, and monetization to Spotify’s community of more than 200 million users. Anchor joined Spotify in early 2019 after discussions of joining forces and the similarities of their company mission statements: “to unlock the potential of human creativity

Spotify experienced a shift in listening patterns in the first quarter of 2020 due to COVID-19, but the company remained excited about its growth trajectory and adoption of podcasts at a global level. The com-

company Originals &

Royalties, Artist Compensation & Spotify Spotify was created in response to protect artists from piracy and to compensate them for their work. But the road to a business model that makes sense

pany saw an increase of 3% from Q4’19 to Q120 in

podcast engagement, and consumption continued to grow at triple-digit rates year after year. Spotify posi tioned itself to become the premier producer of pod- casts and the leading platform for podcast creators.

for Labels, music producers, and recording artists has been challenging.

As of December 31, 2019, Spotify had paid more than $16 billion in royalties to labels, publishers, and collecting societies for distribution to songwrit- ers and recording artists, an increase of 30 person from 2018. Spotify has become the biggest driver of growth in the music industry, and the biggest source of overall music revenue in many places. Performance Royalties. payments made to a songwriter or publisher for a pub- lic performance. Public performance refers to playinga song on the radio, television, in bars, nightclubs, concerts, and other public places. The Performance rights organizations collect the songwriting royal- ties from music users and distribute them to the

Performance royalties are Spotify’s Web Image Matters

Spotify takes the design of their website very seriously. The company believes in designing for belonging. The company knows that millions of people around the globe open Spotify, so its focus is on localizing content. People in India can easily find Bollywood in India, Malay Pop in Malaysia, and Sertanejo in Brazil. While playlists may share a theme, they fea- ture different songs in different parts of the world, so happy songs in the United States are different from

legal owners. These organizations include ASCAP in North America and SACEM internationally. Mechanical Royalties. A mechanical royalty is earned through the reproduction of a copyrighted

C-120 PART 2 a n n atey

work either in digital or physical form. ihe scopo of mechanical reproductions cOvers any opyrighted audio composition that is rendered mecianically and includes: compact discs, vinyl records, tape record ings. musie videos, ringtones. MIDI files, DVDs. computer games, and downloaded tracks.

By 2019, music streaming accounted for 80% of the music industry revenue and included indus- try leaders such as Pandora, Apple Music, Spotify. and others. The Industry Association of America reported total revenues of $5.4 billion in the first half of 2019. The increase in revenue can be traced

tie company launched “Spotily for Ar’1sts page 11 2017, il was a placc wirere artist t:ams,

tais. atil

Istrihutors could manage their proíies, see. and èra

y7e their data, and pitch playlists. Artists and iheir

eams come together to make decisions about release

stratcgies, tour schedules, and to connect with 1ans

Spotily Analytics was also launched for labels and dis

tributors to access and creatc playlists as they support

(hcir artists. Artist picks, a separate tool, allows artists

to know who is playing their music and where tney

are listening. After music is released, artists can See

streams in real-time and watch their fan base grow

Spotify’s innovative ideas continue to surprise

the music industry. At the end of 2019, the company

announced that record companies would soon be

able to pay to have their artists promoted to targeted

fans within the Spotify platform via “Music For You

VISual pop-up ads. The goal of the ads was to alert

fans of new releases, and for Labels to manipulate

which fans see what by digging into their wallets.

Premium users could turn off the alerts, but free

users would not have this option. Recommendations

would be based on listening tastes. This paid-for pro

motion began as a test in the United States only. This

new source of income from advertising comes from

Spotify’s biggest suppliers of music. Charging record

companies to promote their artists on the platform

increases the company’s profit margin generated at

the end of the year (Exhibit 3).

back to more consumers signing up for subscription services and sales from downloads. Streams generate both mechanical and performance royalties.

Streaming Payouts. Most streaming services use a “platform-centric” payout distribution model. Digital

streaming providers negotiate payout rates with con- tent owners, mainly major labels. The negotiated rate

is then applied to all services revenue resulting in the total sum that the streaming service will pay to right

holders. Spotify does not pay artists directly, rather

they pay distribution companies and Performance

Rights Organizations. Payout, however, depends on

multiple factors such as how many ways the royalty

is divided and in what country the stream occurred.

On average, the per-stream payout will vary

depending on the types of streams the artist gets; this

payout is also dependent on the artist’s contracts with

labels and distributors. If a stream payout is calculated

at .00437, and a song has 1000 streams on Spotify, then EXHIBIT 3 Spotify Total Monthly

the rights-holder(s) of the musical work will earn $4.37 Active Users by

Region, 2020 Spotify. Spotify’s largest expense has

been royalties

paid to different companies. The company was once

ranked as the worst royalty payer but increased its

payments, and as of 2019, they began paying between

$0.00331 and $0.00437 per stream to rights holders

(Digital Music News, n.d). It has been estimated that

it takes approximately 500,000 ad-supported streams

to generate $100 in mechanical royalties and 180,000

premium tier streams to generate a monthly mini-

mum wage in the United States.

North America Europe

35% 26%

Latin America Rest of

World 17%

22% Spotify for Artists and “Music

for You Platform”

Supporting artists on the Spotify platform has become

a focus for the company. Spotify has built a powerful

suite of tools for artists to maximize their presence

and help them find and connect with an audience.

Source: Spotify Technology S.A. Announces Financial Results for First Quarter 2020. https://www.businesswire.com/news/home/ 20200429005216/en/Spotify-Technology-S.A.-Announces Financial-Results-Quarter.

CASE 9 Spotify in 2020: Can the Compeny Remain Competitive C-121

Spotify’s Financial Performance Total MAUs grew Despite the global uncertainty around coVID-19 in the 2014 first quarter of 2020, Spotify met or exceeded its fore cast. With more than ¬1.8 billion in liquidity, the com- pany remained optimistic about its underlying growth. Figure 3 shows Spotify’s first quarter of 2020 growth by region. Monthly active users (MAUs) grew faster in first quarter 2020 than it did in first quarter 2019, with growth in North America showing a second consecu

tive quarter growth followed by Europe, Latin America, and the rest of the world. Exhibit 4 was a snapshot of

Monthly Active Users (MAUs). 31 percent year-over-year to 286 million between 2019 and 2020. Spotify’s first quarter 2020 was the third consecutive quarter, with growth above

30 percent. North America region showed accel- erated growth, with the United States being the best performer. Europe grew by 35 percent, Latin American region by 22 percent, and the Rest of the World by 17 percent-see Exhibit 4.

At the end of first quar- ter2020. Spotify had 130 million premium sub- scribers globally; this is an increase of 31 percent

Y/Y. The Spotify Family Plan was a driver for this increase. Spotify Kids. a stand-alone app designed for children. was launched in eight additional mar

kets: Australia, the United Kingdom, Mexico, Brazil,

Argentina, the United States. Canada, and France. The Duo Plan. premium plans for two people, was

further introduced in three more markets: Canada,

Premium Subscribers.

the company’s user and financial metrics. The decline

in first quarter 2020 of MAU’s was traced back to the

COVID hard hit markets like Spain and Italy. Car, Wearable, and Web platforms dropped by

double digits. However, TV and game console use

increased over 50 percent over the same period. Ad-supported MAUs in the United States game consoles were a top two or three platform in con-

sumption in March and April 2020. While Car and Commute consumption had changed dramatically due to an increase of work-from-home, there was

an increase in podcast listening. Two in five people

surveyed in the United States stated they listened to music to manage stress, which explained the increase

in podcasts related to wellness and meditation.

France, and Japan. This plan already existed in

23 markets (Exhibit 4).

Revenue. Total revenue of ¬1,848 million grew 22 percent Y/Y in first quarter 2020. Premium revenue

grew 23 percent Y/Y to ¬1,700 million, which was in

EXHIBIT 4 Summary User and Financial Metrics for Spotify Technology S.A., Q1 2019, Q4 2019, and Q1 2020o

9% Change

Q1 2019 04 20199 Q1 2020 YY Q/Q USERS (M)

217 271 286 31% 5% Total Monthly Active Users (“MAUS”)

100 124 130 31% 5% Premium Subscribers 123 153 163 32% 7% Ad-Supported MAUs

FINANCIALS

1,385 ¬1,638 ¬1,700 23% 4% Premium 17% (32) 148

¬1,848 Ad-Supported 126 217

¬1,511 1,855 22% Total Revenue 373 474 472 27% (1) Gross Profit

24.7% 25.6 25.5% Gross Margin (47) e (77) e (17) Operating (Loss) Income

-3.1% 4.19 -0.9% Operating Margin ¬ 209 203 (9)

Net Cash Flows (used in)/from operating activities

173 169 (21) Free Cash Flow

Source: Spotify Technology S.A. Announces Financial Results for First Quarter 2020. https://investors.spotify.com/financials/press-

release-details/2020/Spotify-Technology-SA-Announces-Financial-Results-for-First-Quarter-2020/default.aspx.

C122 PART 2 CasOs mChi dxocuiitt ltey

EXHIBIT5 Spotify Technology S.A. Annual Income Statements, 2015-2019 in EUR millions, except share ancd per share data)

2010 2018 2017 2016 2015 Revenue C6,704 C5,259 A,090 C2,952

1,940

Cost of services (5,042) (3,906) (3,241) (2,551) (1,714) Gross proft 1722 1353 849 401

226

Research & development expenses (G15) (493) (396) (207) (136) Sales& marketing expenses (826) (620) (567) (368) (219)

(105) (461)

General & administrative expenses (354) (1,795)

(73)

(283) (1,396)

(43)

(264) (1,227)

(378)

(175) (750) (349)

Total operating expenses

Operating income (loss) (235)

Interest income 31 25 19 5 2

Finance income 275 455 118 152 36

Finance costs (333) (584) (974) (336) (26) Share in (losses)/earnings of

associates & joint ventures (2) 10 (186)

(535) Finance income/costs)-net (58) (130) (855

(225) (1,233)

2 Profit (loss) before tax (131) (173)

5 Income tax (expense) benefit 55 (95) 4 Net income (loss) attributable to

owners of the parent e(186) ¬(78) e(1,235) E(539) e(230) Net loss attributable to owners of

the parent per share

E(3.63) E(1.62) ¬(8.14) E(8.14)

Basic ¬(1.03) E(0.44) Diluted ¬(1.03) E(0.51) E(3.63) E(1.62) Weighted average shares

outstanding-basic Weighted average shares

outstanding-diluted

180,960,579 177,154,405 151,668,769 148,368,720 141,946,600

180,960,579 181,210,292 151,668,769 148,368,720 141,946,600

Consolidated Statement of Cash Flows Data

Net cash flows from/(used in) operating activities ¬573 ¬344 ¬179 ¬101 E(38)

Net cash flows used in investing activities (218) (22) (435) (827) (67)

Net cash flows (used in)/from financing activities (203) 92 34 916 476

Net increase/(decrease) in cash and cash equivalents 152 414 (222) 190 371

Selected Other Data (unaudited)

EBITDA 14 (11) (324) (311) (205) (92

Free Cash Flow 440 209 109 73 Spotify Consolidated Statement

of Financial Position Data

Cash and cash equivalents 1,065 891 477 755 Short term investments 692 915 1,032 597 830 Working capital (208) 7 38 689 Total Assets 5,122 4,336 3,107 73 2,100 Convertible Notes 944 1,051

1,106 Total Equity/(deficit) attributable to owners of the parent 2,037 2,094 238

(240) Source: Spotify. Investors: Financials-Annual Report 2019 AR, https://investors.spotify.com/financials/dafaulh

229

CASE 9 Spotilyin 2020: Can llhetinany Pemai otitrye? C-123

line with expectations. Ad-supported revenues grew 17 Operatin Expenses/Income percent Y/Y but fell short of expectations, according to the company. this decline was a result of COVID- 19. Ad-supported revenues of ¬l148 million were below the company forecast by more than 20 percent. March 2020 saw several previously booked businesses cancel and buyers pulling back, leading to this decline.

(loss). Operating expenses tolaled ¬489 miliion in quarter one, an

increase of 16 percent from quarter one 2019 but below expectations.

At the end of quarter one 2020, Spotify had ¬1.8 biilion in cash, cash equivalents, restricted cash, and short-term investments on its balance sheet and

no indebtedness. Gross Margin. Gross margin finished as 25.5 per- In the race for market domination, Spotify

has been busy hiring talent, making acquisitions and forming partnerships, and as CEO Daniel Ek stated in a Feb. 5, 2019 interview, “the company is

cent in quarter one, exceeding company expecta- tions. The driver of this performance was the core

royalty component due to product mix. Spotify renewed its global licensing partnership with Warner Music Group. This renewed partnership covered existing countries and a few additional ones, it was not expected that this deal would impact music econ- omies. Premium gross margin increased to 28.3 per- cent in quarter one 2020 from 27.4 in quarter four 2019. Ad-supported gross margin declined to 6.6 in quarter one 2020 from 11.6 in quarter four 2019.

focused on its goal of being the world’s No. 1 audio

platform.” Reid Hoffman, founder of Linkedln and partner at Venture Capital firm Greylock Partners described Spotify’s growth as “blitzscaling,” a term coined by Hoffman that typically applies to young companies but as Hoffman stated, “Spotify isn’t act- ing its age.”2

ENDNOTES

‘As quoted in “Why Spotify Is Still Sprinting for Maximum Market Share,” Billboard, March 4, 2020, www.billboard.com/ articles/business/streaming/9325846/ spotify-strategy-market-share-analysis.

As quoted in “Why Spotify Is Still Sprinting for Maximum Market Share” Billboard, March 4, 2020, www.billboard.com/ articles/business/streaming/9325846/ spotify-strategy-market-share-analysis

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