Digital Music Industry - Essay Example

? Spotify Introduction Spotify is a London based company founded by Swedish entrepreneurs Daniel Ek and Martin Lorentzon in October 2008. Ek was former chief technology officer of Stardoll, and Lorentzon had cofounded digital advertising network TradeDoubler. The newly formed company, with offices in London, Luxembourg, and Stockholm, offered two core services, an ad-supported, free, listen-only music only player with access to 6 million tracks and a premium version for $12 monthly subscription (Aaker & McLoughlin .p.121). The premium version was free of advertisements and allowed users to customize playlists as well as gain sneak previews. After downloading Spotify’s application to their computers, listeners could select genres, create playlists, or listen to music “streamed” over the Internet. Users were not allowed to download or copy songs. Initially, the company was intent on controlling their customer base. To achieve this, Spotify was offered on an invitation basis only. In the first three years of operation, Spotify had spent $7500 on marketing, leveraging instead word of mouth and its members-only model to build a buzz in the press and the on-line blogosphere. The audience was growing by about 25% a month since its launch in March 2009, reaching the 1 million mark on August the same year. Critical to its business model was the cooperation of major music labels, which Ek secured following extensive negotiations. Under these agreements, Spoify committed to paying royalty for every song played, regardless of advertising revenue earned (Aaker & McLoughlin .p.122). It was evident from the collapse of competitors that an ad-supported model was not sustainable in an uncertain economic climate. Furthermore, with revenues from advertising underperforming, Spotify realized that, in order to grow and fund that growth, it needed to secure relationships with suppliers and other business network partners. By the end of summer 2009, an equity deal was agreed with one major music label, and a partnership had been formed with another company to sell tracks alongside its ad-supported and subscription based services (Aaker & McLoughlin .p.123). Management was confident that the next phase of their strategy could be implemented. Within the first three years of operation the company had reached a total user base of 20 million with 5 million of these users paying the monthly subscription fee of $4.99 or $9.99. In its short history, the company had grown and changed rapidly. In terms of the future directions, it was faced with a number of complementary opportunities; entering the US market, launching a mobile-phone-friendly version of its software, and partnering with investors like Li Ka-Shing to develop new business opportunities (Aaker & McLoughlin .p.124). Digital music industry The digital music industry can be split into two segments: the streaming market with so many competitors and the digital download whose main players are Amazon and iTunes. The industry has demonstrated potential with an 8% growth in revenues in 2011, in the same year the overall industry was valued at $5.2 billion. Presently, the streaming market is only responsible for 10% of the total revenues generated by the digital music industry. Optimistically, the market holds the biggest growth potential as compared to the download market. The numerous competitors in the streaming industry apply very similar business models. They rely on slight differentiations based on packaging, licensed music libraries, operating regions, and features to cut an alternate niche (Hartley et al 2003.p.243). There are high switching costs for customers as there is less compatibility making transfers difficult. Additionally, streaming companies are continually investing in new network effects across their service by incorporating social components. A number of streaming companies allow individuals to follow what their friends are listening and also accord them a chance to create collaborative playlists. This network effect can translate to more users as it presents additional value for the product’s consumers. The biggest partners in the streaming business are record labels a factor that strengths indirect network effect. The single most fundamental factor in the business is content availability, the larger the library, the wider the variety, a factor that help attract greater traffic. This fact makes the streaming industry a two sided market, on one side there are the record labels and on the other side the customers. Streaming companies must be able to create a good rapport with record labels who are more than interested in a streaming company with a large base of subscribers. On the other hand, the customers are only willing to subscribe if they are obtaining rights to a large library (Tschmuck, 2012.p.192). Even though the size of the library is a critical thing, differentiating the streaming service by instituting alternate features remains crucial in gaining market share. In the past two years, Spotify has registered tremendous growth reaching 18 million users, with 10 million of these users coming from United States. Even though this may appear a decent fit the market leader, Pandora, had 125 million users as at January 2012 despite being a service only accessed by the American market. The main difference is that Pandora’s main source of revenue is advertisements from free users who represent 98% of all users and who account for 87% of annual revenue (Tschmuck, 2012.p.193). This is unlike Spotify who rely on subscription fees, the company has three products, free, unlimited and premium. So far, Spotify’s main selling and differentiation strategy is Facebook integration and including social interaction with music via playlist sharing. This strategy is a double edged sword, on one hand it brings on board all of the benefits of social media while shutting out any interested users with no Facebook accounts. The other major difference between Spotify and other competitors such as Pandora, Deezer, and Grooveshark is that Spotify directly sells music to their subscribers, while these other competitors redirect users to iTunes or Amazon to make purchases. At the moment, Spotify strategy is centered on three key aspects, social integration, reduced switching costs, and improved library. Social integration strategy is represented by the company’s collaboration with Facebook, such that subscribers are required to have a Facebook account (Wikstro?M, 2009.p.147). This has improved social interactions and enabled playlist sharing but at the same time it has locked out individuals who do not have Facebook accounts. The other strategy is reduced switching cost, as discussed earlier, the industry is characterized by high switching cost, and to reduce this Spotify has invested in providing applications that imitate or that are compatible with those of its competitors. An example of an imitation is the Radio application which was a mimic feature of Pandora. Lastly, Spotify is intent in building a large and quality playlists (library) this explains a huge investment in discussing new deals with record labels and providing artists with lucrative contracts to avail their music on Spotify (Hartley et al 2003.p.243). Technology and Strategy Spotify seems to have anticipated and addressed the nebulous pattern of change in the world of music and telecommunications industries. It is well placed to take advantage of the convergence of media consumption habits because of its technologies and its business partnerships. All the same, the dynamic nature of technology and the complexity of the business world will always present the company with a couple of challenges (Papp .p.7). Sound means of overcoming these hurdles has to be conceived for the company to ensure steady growth and generate returns for its shareholders. To ensure this, Spotify has to develop a business strategy that fundamentally employs technology to achieve a competitive advantage in the competitive market (Benson et al 2004.p.92). In the following section, this study examines how Spotify could use information systems to support its business strategy and accord it a competitive advantage. The competitive potential perspective focuses on how emerging information technologies can influence and enable new business strategies. From these new business strategies come competitive advantage. Information technology strategy is the anchor domain in this perspective, business strategy is the pivot domain, and organizational infrastructure is impacted (Papp .p.7). The role of the top management is that of a business visionary whereby the potential of emerging information technology is realized and its strategic importance is assessed relative to the business. Top management must also be cognizant of how to leverage information technology to transform the business to achieve their vision. The information technology focus is to provide “value-add” to the business strategy and enable new opportunities for the business. The application of information technology to influence business strategy and create competitive advantage is vital. Information technology performance is assessed with respect to how the application of information technology influences clients and customers (Papp .p.7). The strategic planning method is business strategy based on information technology whereby technology scans are used to identify information technology that could be employed to the business. Going forward, Spotify’s strategy must be focused on two aspects, growth and profit generation. The current strategy suggests that Spotify is intent in versioning and bundling their product to maximize profits. This explains its evolving services, from a free product, to the current unlimited and premium products which require subscriptions. Even though revenue generation remains a fundamental strategy, Spotify must not lose sight of an immediate need to grow. This is particularly important given that the market leader has 125 million subscribers which is a difference of 100 million subscribers. One well recognized model in guiding growth is the Ansoff model, commonly referred to as the Ansoff matrix. The matrix helps focus the mind on how each opportunity fits with the business strategy in terms of products and markets. Ansoff’s matrix is simple to use and very effective in driving clear strategic thinking around growth (Bachmeier, 2009.p.2). It works on the basis that to deliver growth a company must decide how and where it needs to compete: in current or new markets and through existing products. The matrix has four boxes; extend product into new market, the other is diversify into new product for new market, aim to increase market share, and develop new product to meet need of existing market better. In regard to Spotify, the most potent approach as guided by the matrix is aim to increase market share. Market penetration is increasing sales performance by competing more effectively in existing markets with existing products. The risk is (relatively) low but to succeed one need to take market share from competitors in this case Pandora, Deezer and Grooveshark. To sustain these gains a business will need to increase real and perceived customer value at lower costs to drive market penetration (Lester .p.52). To increase real and perceived customer value at lower costs this study identifies the importance of technology. This is not only because Spotify is a technological company but because information technology plays a major role in planning (Bilton & Cummings, 2010.p.76). Information systems provide necessary data to develop a strategic plan and it becomes the heart of a strategic initiative and can be utilized to gain strategic advantage. Technology as a means of achieving competitive advantage needs to be employed appropriately. At the moment, Spotify needs to augment current successful strategies such as bundling and lowering switching costs from competitors. It also needs to venture more into the social platforms by seeking further collaborations with additional social sites such as Twitter (Ghernaouti-Helie, 2012.p.106). Beyond social sites, Spotify would be well served to expand its services in a way that potential users are not bound by regulations of other entities as is the case with Facebook. As it is, some users may shy away from the service due to privacy issues, opening up the platform might create a new opportunity which would help in bolstering the company’s competitive advantage. Through technology, Spotify can also be able to leverage its network effects, an open up its services beyond Facebook, and expand its applications beyond desktops, tablets and mobile phones. For instance, Spotify can seek partnerships with car companies to come up with a Sirius radio type that streams a user’s personalized library to their car. Conclusion and recommendations Digital streaming is a fast growing industry. It is currently laden with multiple players leading to fierce competition. Certain factors such as network effects and the two-pronged markets create an immediate need to get most users. To augment its gains, Spotify must continue to safeguard current scores such as record labels contracts, artist contracts and Facebook engagements which make it hard for competitors to catch up. However, the company must be aware of particular risks such as the threat of hacking and privacy concerns. Moving forward, the company must continue to invest in latest technology, must innovate, and must apply the proper strategy as discussed to stay and draw gains in the competitive market. Judging from its current position, Spotify is well positioned in the digital music industry and with the right leadership and technological adaptation it is poised to remain successful well into the future. Bibliography Bachmeier, K. (2009). Analysis of marketing strategies used by PepsiCo based on Ansoff's theory. Mu?nchen, GRIN Verlag GmbH. Benson, R. J., Bugnitz, T. L., & Walton, W. (2004). From business strategy to IT action right decisions for a better bottom line. Hoboken, N.J., Wiley. Bilton, C., & Cummings, S. (2010). Creative strategy: reconnecting business and innovation. Chichester, West Sussex [England], Wiley. Ghernaouti-Helie, S. (2012). Enterprise networks and telephony: from technology to business strategy. [S.l.], Springer. Hartley, J., Burgess, J., & Bruns, A. (2013). A Companion to New Media Dynamics. Chicester, Wiley. Lester, A. (2009). Growth management two hats are better than one. Houndmills, Basingstoke, Palgrave Macmillan. Mcloughlin, D., & Aaker, D. A. (2010). Strategic market management: global perspectives. Hoboken, N.J., Wiley. Papp, R. (2001). Strategic information technology: opportunities for competitive advantage [...] XA-GB. Hershey, Pa. [u.a.], Idea Group Publ. Tschmuck, P. (2012). Creativity and innovation in the music industry. Berlin, Springer. Wikstro?M, P. (2009). The music industry: music in the cloud. Cambridge, Polity. Read More