Rdio: of a Failed Business Venture - Case Study Example

Rdio: Case Study of a Failed Business Venture

Table of Contents

Introduction3

Causes of Failure4

Macro Economic Reasons4

PESTLE Analysis5

Meso Strategic Causes6

Weaknesses and Threats Leading to Failure7

Micro Economic Causes failing Rdio10

Reason of Exit for Rdio10

Conclusion12

Reference List14

• Introduction

When a company decides to enter a market it involves a great amount of risk. If the entrepreneur is able to successfully assess the competitive advantages of the business venture and organise strategies accordingly then there are less chances of a failure. However, it is not possible to be absolutely correct about the implication of all the strategies because market outcomes are integrated with economic uncertainities (Ucbasaran, et al., 2013).

In this paper, a case study of Rdio has been presented which has failed to perform in the market. Detailed analysis of the reasons behind its failure has been provided and specific focus has been rendered over identification of those strategies that failed to perform and its remedy.

Rdio was the first advanced music streaming platform, when Janus Friis (owner of Skype) and Niklas Zennström introduced the company in the market of America in the year 2010. During that time, smartphone was very new and Rdio charged $5 for web-only streaming keeping in mind the population without smartphones and also introduced an application under BlackBerry (The Verge, 2015a). The catalogue of Rdio consisted of only 7 million songs when it was introduced in the US market. After its entry in the US (United States) market, the company gained growth and was operational in around 85 countries around the world. However, the scenario changed after 2013 and by 2015, Rdio had filed for Chapter 11 bankruptcy (The Verge, 2015a).

Critics has expressed that the company from its inception lacked business sense and only focused on its products (CNBC, 2015). Rdio’s major labels consisted of Universal Music Group, Sony Music, EMI and Warner Music group along with some other minor labels. A major portion of Rdio’s revenue was accrued to these labels increasing its selling cost. However, the company had increased its general and administrative expenditure to irreplaceable limits as they were not supported by generation of additional revenue resulting in losses of $2million every month.

• Causes of Failure

The failure of a business venture is not a sudden phenomenon it is a gradual process and a number of factors are responsible for it. The failure of a company occurs when it closes down as it has neither met with its target growth objective nor its liabilities. There are various dimensions of a business and similarly its failure can also be explained through a multi-faceted analysis.

• • Macro Economic Reasons

When a business enterprise is not able to pay for the interest of its liabilities it becomes bankrupt and are forced to choose available exit policies. A company losses its ability to grow if it faces high turn-over rates and is not in a position to employ further skilled labour. The policy of non-hiring becomes a preventive measure to avoid additional losses. A business may also fail due to lagged retail sales. The revenue of any organisation is primarily dependent on the sale of its products and if those products fail to attract the customers then the business succumbs to losses unless it can devise any turnaround strategy. Sometimes entrepreneurs make voluntary exits from the market because they would prefer to maximize the return on their capital by investing them in an expanding market.

Rdio had experienced growth after its launch in the US market as it was one of its kind products in the market. The developing team was focused on providing a quality product to its customers so that they can make a firm footing in the market, securing future growth and thus worked for almost two years before the launch of its application at a global scale. The company had experienced an encouraging first year by giving an edge to its main competitor ‘Spotify’ and ‘iTunes’ in the global arena. Rdio had a greater appeal to the customer base but a music streaming company’s main source of revenue is its user base. Critics opined that Rdio in order to become more financially stable had neglected to reach to greater number of music listeners. Spotify, after its emergence in the market had attained a faster growth than Rdio and the later, in order to secure more market share, had undertaken huge expenditure in sales promotion general infrastructure and administrative cost. The net losses were increasing and finally in 2015, the company had applied for chapter11 bankruptcy (CMU, 2015). Rdio failure encompassed both increasing liability and shrinkage of its retail base.

• • PESTLE Analysis

PESTLE analysis helps in understanding the complexities of external marketing environment of a business venture (Cheverton, 2005). If an entrepreneur is able to observe the impact of all the above mentioned factors then the business idea can become a success otherwise the negative implication may cause failure (Bender and Ward, 2008). For a music streaming industry the main aspects are economic, social political and legal factors.

Political and legal factors- Rdio was required to own copyrights and licenses. For example, when Rdio offers the chartbusting hit of Taylor Swift’s “Fearless” in their catalogue, it is required to procure a mechanical license and a public performance license. They are to be obtained from the lawful owner of the music work and also from sound recording. However, the current rates of obtaining those licenses are hugely inflated for the online streaming industry (Forbes, 2015b).

Social and economic factors- The revenue of Rdio is depended on the number of users to who they are able to reach. When the company had launched its service, there was only one way of subscription that is $5 per month without any option for free listening. The unlimited subscription came at a whooping rate of $11.99 a month in a market which comprised people spending around $40 per year on buying music (Financial Review, 2015). According to the CEO of the company, the main issue was they were only making product for the premium customers leaving the majority mass of music listeners leading to losses in terms of revenue. The company in order to attract more music lovers had made an investment of $19 million with Cumulus Media which proved to be a dead end. The advertisement of Rdio in the radio stations were unsuccessful in pulling in new users even with its modern and innovative product (CNBC, 2015). The music streaming industry is such that the majority of the revenue is taken away by the record labels while exerting substantial amount of control over the brand. Against this backdrop, Rdio was required to increase its scale of business to earn profit but Rdio failed to generate a sufficient consumer base in spite of its global existence finally leading to bankruptcy.

• • Meso Strategic Causes

Meso causes of failure encompass the failure on part of the company due to structural inadequacy of the market and the industry. In this case, technological development plays an important role. When an organisation decides to enter a highly competitive market, it requires sufficient competitive advantage to survive and it can come from the technological advancement as well. Sometimes, a company many fail because of its inability to adapt to the changing nature of the market (Artinger and Powell, 2015). For example, the music industry has changed manifold from buying CDs and DVDs to subscription of on-demand service. This change in the structure of the music industry has been enhanced by the increase of population using smartphones and tablets.

When Rdio entered the market of highly competing music industry with its digital music service it provided a better experience to the music lovers. It banked on its simplicity like the grid presentation of the albums instead of complicated spreadsheets of iTunes. The application of Rdio incorporated adequate innovation in its social features where people were able to see the contents that their friends had streamed on a real time basis. The social form of the application was attractive to the users and the application earned many praises for its “heavy rotation” feature of the playlist highlighting the number of friends that had already listened to those songs. According to the belief of Chris Becherter (Head of Product in Rdio), people choose to listen to those songs more which had been recommended by their friends. However, all this innovative technological application could not make the company to sustain in the market and is now acquired by Pandora. The main folly was in the distribution and marketing department. It was a company which was facing stiff competition from well-financed organisation, Spotify which was doing business on the paid subscribers which Rdio did not notice. There was frequent change of the marketing head for which Rdio’s organisational framework lacked in having a clear direction (Insideradio, 2015).

• • Weaknesses and Threats Leading to Failure

SWOT analysis is used while explaining the competitive advantage of a business venture, its strengths, weaknesses, areas of opportunities and the threats that it had to face while doing business in the chosen industry (Pahl and Richter, 2009). When the strengths of a company outweigh its weaknesses and the areas of opportunities help in overcoming the threats of the market then it can set its course for achieving success. The scenario changes when the weaknesses and threats become so grave that the company fails in choosing the option to exit the market (Ferrell and Hartline, 2012).

Rdio had strength in terms of its product which was quality based and user friendly. They had a blue-white logo which was easy on the eyes and had a simple outlook attracting users. Rdio was having tie-ups with famous labels and thus, generating an improved product which was based on the benefit of social platform. However, in spite of having innovative approach towards product as its strength Rdio failed in terms of its weaknesses and threats. The first and foremost weakness was in its product name, the word “Rdio” is not awkward in terms of spelling but is also hard to pronounce. It may seem unimportant at first but later it was found to create confusion among the customers which became a pullback in marketing (Droid Report, 2015). The company had received funding of a total amount of $127.5 million at intervals but they were not sufficient enough to keep the company floating in the highly competitive market of music streaming industry (Crunchbase, 2016).

Figure 1: Rdio Rounds of Investments

(Source: DataFox, 2015)

The company was lacking in the marketing and distribution department with regular change in the head of marketing for Rdio. During its launch, Rdio had only one plan of $5 per month web-only service and a Blackberry application. The move was plausible as the Smartphone were very new and limited people had access to them and the owners of Rdio wanted more people to be its users. However, ultimately the move proved to be strategically weak as it was not coupled with the free option unlike Spotify that had introduced the free option and pay permonth option during its launch in the US market. Music lovers who were doubtful or unwilling to pay preferred Spotify over Rdio thus thinning the customer base of the later (The Jazz Loop, 2015). Although the company later had developed a free streamming option but it was too late since its competitors had already reaped the benefit of such a strategy. The investment in Rdio’s product cycle became futile as similar features were alredy in the market featured in the products of its rivals.

• • Micro Economic Causes failing Rdio

Rdio was sound in terms of product knowledge but lacked in terms of business sense. The main thriving factor for the organisation would have been its users which the company was unable to pull in. The tie-up with Cumulus Media only reduced its revenues because the sales promotion measures were far from being useful to attract new customers. In order to cover its administrative expenditure, the company turned to downsizing resulting in laying off almost a third of its employees in 2011 (Venturebeat, 2015). All these events slowly led to the rise in losses for the company and consequently to its bankruptcy. The entrpreneurs lacks in having clear strategic vision and foresight. They did not respond to the advent of their competion, like Spotfy and took a long time developing policies which could not produce any fruitful result for the company.

• • Reason of Exit for Rdio

The main reason to choose exit strategy instead to turn around was due to the incompetency of the management of Rdio that failed to ensure strategies at the right time to nullify the growth of its competitors. The marketing and distribution of the company were criticised heavily when the bankruptcy of Rdio was filed. The entrepreneurs lacked foresight because the strategies that they chose as turnaround were already under operation and were benefiting rival firms (Insideradio, 2015). By 2013, Spotify had captured a considerable stake in the US music streaming industry with 24 million users out of which 6 million were paid subscribers. The launch of Spotify was such that people dubbed it as free iTunes instead of seeing it as a streaming service because the company had offered the option of free downloads along with subscriptions on a monthly basis. In spite of having a powerful opening and good quality product, Rdio was not able to grow as fast as Spotify (CNBC, 2015). It was observed that Rdio was winning on the financial ground but was losing its appeal to the users. Slowly, this loss in terms of users affected their financial stability as there was only increase in liability without expansion in the market share.

The turnaround strategy that was applied was the tie-up with Cumulus Media as a result of which Rdio was able to offer the free tier system and advertisement supported version of services. Cumulus media got a substantial equity share from the company and promoted them across their 525 terrestrial radio stations (The New York Times, 2013). The management took long time to formulate its strategy causing it to become a futile measure (Insideradio, 2015). Spotify had been flourishing at that time based on the implementation of same policies much prior to Rdio; hence, no greater benefit could be obtained from those turnaround policies.

The company was successful in raising investments but the majority of it was put into product cycle primarily in refining its queue instead of creating an efficient management. However, this new approach could not become a differentiating factor since similar application was already present in the applications owned by its rivals.

When the turnaround strategy failed for Rdio in generating additional users for its product, the company had no other option but to choose its exit from the market because of its ever increasing legal accountability. Two events occurred simultaneously; firstly Rdio filed its petition for bankruptcy and secondly the announcement from the management of Pandora regarding it acquisition of the former.

Figure 2: Rdio's model of Organisational Failure

Causes of Decline

Response Factors

Firm's Action

Outcome

Arrival of new competitors with more advanced product

Delayed response from the management

Tie-Up with Cumulus Media to incorporate strategies that were already in use by Rdio's rivals

Bankruptcy

Inefficient management

Lack of foresight from the CEO

Unnecessary investment in product cycle to refine its play queue

Acquisition By Pandora

increasing liability without rise in users

Leadership lacking clear vision

Laying off one third of its employees

Frequent changes in marketing head of Rdio

(Source: Author’s Creation)

Pandora had been in the industry of music streaming for more than 15 years. It has more listeners who use it monthly to hear tunes than any other music streaming service excluding YouTube (Forbes, 2015a). The company purchased its assets at $75 million including technology and intellectual property on December 22, 2015 (The Verge, 2015c). Pandora had also expressed that they are expected to retain employees of Rdio. With this acquisition, Pandora is expected to turn around its slower growth rates that it has experienced in the recent years (The Verge, 2015b).

• Conclusion

Rdio came into the market in 2010, offering a new dimension to the on- demand music platform. The company had invested enough in devising a quality product which can appeal the music listeners. The first year’s results were encouraging much to continue its business operation. However, the advent of new competition in the US market changed the scenario for Rdio. Spotify included those features that were lacking in Rdio, like, offering a free tier as well as a plan for monthly subscriptions. The marketing and distribution system was disoriented as a result of frequent change in the marketing head of the firm. Rivals of Rdio were able to win more users and achieve faster growth.

Rdio had primarily focussed on the product cycle making changes in the look and operation of the playlist queue instead of developing a strong management. The turnaround strategy consisted of tie-up with Cumulus Media which ultimately allowed the company to offer free options of music streaming and promotion at 525 radio stations that were under the possession of Cumulus Media. This did come at a substantial share of equity for Rdio but it failed to generate ample response among the music listeners because they were already getting such services from Rdio’s rivals.

This paper has analysed the causes of the company’s failure from different perspectives. The main reason was the delay in response from the management in formulating competitive strategies and lack of foresight that resulted in the implementation of faulty policies and led the company towards bankruptcy. Rdio could have seen a different outcome had it done a proper survey of the market to decipher consumer preferences into their application securing a competitive edge over its rivals. The company was need of a strong leadership that could have guided the company in a right direction.

• Reference List

Artinger, S. and Powell, T.C., 2015. Entrepreneurial failure: Statistical and psychological explanations. Strategic Management Journal, 37(6), pp. 1047-1064.

Bender, R. and Ward, K., 2008. Corporate Financial Strategy. Abingdon: Routledge.

Cheverton, P., 2005. Key Marketing Skills: Strategies, Tools and Techniques for Marketing Success. London: Kogan Page Publishers.

CMU, 2015. Rdio to close as Pandora buys the firm’s assets. [online] Available at: < http://www.completemusicupdate.com/article/rdio-to-close-as-pandora-buys-the-firms-assets/> [Accessed 1 June 2016].

CNBC, 2015. Spotify rival attacks free streaming models. [online] Available at: < http://www.cnbc.com/2015/06/26/spotifys-free-streaming-model-is-silly-rdio-ceo.html> [Accessed 1 June 2016].

Crunchbase, 2016. Rdio. [online] Available at: < https://www.crunchbase.com/organization/rdio > [Accessed 31 May 2016].

DataFox, 2015. Rdio company profile and information. [online] Available at: <https://datafox.com/rdio > [Accessed 1 June 2016].

Droid Report, 2015. Goodbye, Rdio. [online] Available at: < http://www.droidreport.com/goodbye-rdio-11707> [Accessed 1 June 2016].

Ferrell, O. C. and Hartline, M., 2012. Marketing Strategy. Boston: Cengage Learning.

Financial Review, 2015. Rdio launches mid-tier music streaming, but the jury is out on its appeal. [online] Available at: < http://www.afr.com/technology/rdio-launches-midtier-music-streaming-but-the-jury-is-out-on-its-appeal-20150514-gh1kxq > [Accessed 1 June 2016].

Forbes, 2015a. The Pros And Cons Of Pandora's Rdio Acquisition. [online] Available at: < http://www.forbes.com/sites/bobbyowsinski/2015/11/18/the-pros-and-cons-of-pandoras-rdio-acquisition/#cf926147b028> [Accessed 1 June 2016].

Forbes, 2015b. Government Officials to Decide Future of Music Streaming. [online] Available at: < http://www.forbes.com/sites/chrisversace/2015/05/18/government-officials-to-decide-future-of-music-streaming/#79e961bf7df3> [Accessed 1 June 2016].

Insideradio, 2015. Rdio’s Failure—Good Tech, Poor Marketing. [online] Available at: < http://www.insideradio.com/free/rdio-s-failure-good-tech-poor-marketing/article_2b61c8fe-981d-11e5-9944-bf4c273a88fb.html> [Accessed 1 June 2016].

Pahl, N. and Richter, A., 2009. SWOT Analysis: Idea, Methodology and a Practical. Approach. Munich: GRIN Verlag.

The Jazz Loop, 2015. The Death of Rdio. [online] Available at: < https://thejazzloop.wordpress.com/2015/12/06/the-death-of-rdio/> [Accessed 1 June 2016].

The NewYork Times, 2013. Online Music Service Rdio in Deal With Cumulus. [online] Available at: <http://www.nytimes.com/2013/09/16/business/media/a-digital-deal-for-cumulus-and-rdio.html?_r=0 > [Accessed 31 May 2016].

The Verge, 2015a. Why Rdio died. [online] Available at: < http://www.theverge.com/2015/11/17/9750890/rdio-shutdown-pandora > [Accessed 1 June 2016].

The Verge, 2015b. Rdio is shutting down and Pandora is buying up the scraps. [online] Available at: < http://www.theverge.com/2015/11/16/9746220/pandora-to-acquire-key-parts-of-rdio > [Accessed 1 June 2016].

The Verge, 2015c. Rdio is officially shutting down on December 22nd. [online] Available at: < http://www.theverge.com/2015/12/16/10293662/rdio-shut-down-date-december> [Accessed 1 June 2016].

Ucbasaran, D., Shepherd, D.A., Lockett, A. and Lyon, S.J., 2013. Life after business failure the process and consequences of business failure for entrepreneurs. Journal of Management, 39(1), pp.163-202.

Venturebeat, 2015. Rdio is laying off more than half of its employees following Pandora acquisition. [online] Available at: < http://venturebeat.com/2015/12/03/pandora-is-laying-off-more-than-half-of-rdio-employees-following-acquisition/> [Accessed 1 June 2016].