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SPOTIFY
An Analysis of Spotify’s Market Strategies

Spotify

Spotify

AN ANALYSIS OF SPOTIFY’S STRATEGY

Spotify is a Swedish online music streaming service that was launched in 2008. Since, its launch Spotify has had a meteoric rise and currently boasts a library of around 15 million music tracks and about 20 million users. Though Spotify still lags behind Pandora, the market leader, it is interesting to understand how Spotify managed to succeed in the competitive music streaming industry. The following report will start off by giving a brief overview of the music industry, Spotify’s features and the competition Spotify faces. We will then analyze how Spotify managed to succeed in the competitive music streaming industry. Finally, we will discuss the risks Spotify faces and future strategies it could undertake in continuing its success in the online music streaming industry.

DIGITAL MUSIC INDUSTRY The digital music industry can be divided into two submarkets: the streaming market with numerous competitors and the digital download market dominated by iTunes and Amazon. Digital music industry revenues have grown by 8% in 2011 reaching a valuation of $5.2 billion. Currently the streaming market only generates 10% of digital music industry revenue but the growth rate of this market is greater than the growth rate of the download market. Competition within the streaming industry is very strong as many companies operate in this market with similar business models. Companies differentiate from one another with variations in packaging, licensed music libraries, regions of operation, and features. Switching costs are quite high for customers as there is limited compatibility and transfer possible between streaming services. Moreover, streaming companies are trying to create network effects among their services by including social components. Several services allow people to follow what their friends are listening to and also allow users to create collaborative playlists. This network effect can attract more customers to a service as it adds value to the product. Record labels are natural and essential partners for streaming companies and thus the market has strong indirect network effects. Content availability is fundamental to attracting customers: the larger the music library, the more the streaming service is likely to become popular. The streaming industry is thus as a two-sided market: companies must be able to create a virtuous circle between record labels and customers. The more users and subscribers a service has, the more record labels will want to have their music available on those services and subsequently, a greater number of customers will be attracted by the large library available. Though obtaining streaming rights to a large library is a key factor in the success of a streaming service, differentiating their product by implementing different features remains a primary tactic in gaining market share.

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Spotify

COMPETITION AND FEATURES Spotify is a music streaming service started in Sweden that offers DRM streaming of licensed music. Spotify currently has more than 18 million users, up from 10 million users after their United States launch. The service requires users to have a Facebook account to use and is split into 3 different product categories: Free, Unlimited, and Premium. Free users are trial periods given to initial registrants for 6 months for them to evaluate the service, after which they restrict music listening to 10 hours per month. Unlimited users are able to stream music without advertisements or restrictions as well as listen to music offline, but only on their computers. The Premium service extends the Unlimited service to mobile devices such as iPods and Smartphones. Users have the ability to see what their friends are listening to via Facebook integration and are able to generate collaborative playlists with them as well. Users are able to set up ‘radio stations’ where...
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