Spotify Case

Question 1

Industry

Answer 1

digital music streaming

Question 2

how much of music industry does streaming occupy

Answer 2

38%

Question 3

Threat of substitutes for Spotify (digital music streaming)

Answer 3

• other parts of the music industry
• –downloads, physical (CD, vinyl, cassette)
• –these are much of a threat, dropping in popularity
• video streaming

Question 4

Supplier power

Answer 4

• music labels
• – the big 3 have 70% market share
• also independent artists
• suppliers are more concentrated than the industry they supply to (meaning that supplier power is high)
• the goods are critical to Spotify success
• COGS show that supplier power is high since COGS are mainly the cost of rights (mid 70-mid 80%)
• to fight supplier power, Spotify invites artists to self-publish
• –backwards integration
• fighting in court for mechanical rights
• Spotify trying to publish original content
• in 2017 signed new contracts with publishers, which made Spotify more profitable
• –Spotify has large market share, such a big distribution channel
• -this suggests that supplier power isn’t as strong as it once was

Question 5

Buyer power

Answer 5

• consumers are the buyers
• there are low switching costs (increases buyer power)
• little differentiation in product (increases buyer power)
• many options
• advertisers are also buyer
• –have some bargaining power, because they have lots of options, but so does Spotify
• consumers have many options
• Spotify makes most of its revenue from premium subscription
• Spotify trying to offset bargaining power
• –increase switching costs
• —personalization, social features, diversification via podcasts
• Spotify faces pressure from both sides (buyers and suppliers)

Question 6

Threat of new entrants

Answer 6

• need size to be able to afford the rights
• threat of retaliation is present
• business model is not profitable for a while (capital investment is high)
• IT development costs are high
• even big companies struggle to succeed upon entry (Google Music, Amazon Music)
• despite entry barriers, threat is still high
• -> giants are entering, wanting share more than profits
• -> they can be loss leaders (like Apple) because they want to acquire customer and then monetize through other streams

Question 7

Rivalry among competitors

Answer 7

• Apple Music, Amazon Music, Google Music are considered the “Big 3” competitors for Spotify
• also other on demand streaming
• internet radio
• smaller services like Tidal, Deezer, Pandora
• Youtube
• piracy

-all of the above are competitors for Spotify, making rivalry pretty high

Question 8

summary of forces

Answer 8

all forces are high except substitutes, this squeezes profitability
-because of Spotify’s size, they can bargain a bit

Question 9

Summarize the problem for Spotify

Answer 9

• spotify makes money from streaming only, main competitors don’t
• face aggressive competitors who don’t care about making money (particularly from Apple Music)
• threat form Big 3 with deep pockets and much power/ability
• How does Spotify keep their position with the consistent pressure from competitors?
• –consider: partnerships (with video game companies for example)