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August 2016
Spotify: Face the Music (update 2016)
Facing Increased Competition
After sampling some of the new music releases of early 2016, Daniel Ek ended his Spotify
session. Soon, millions of Spotify users would learn he had just listened to Andrew Gold’s
cover of The Beatles’ “Norwegian Wood,” as the profile of Spotify’s CEO was one that every
new Spotify account followed by default. Some users might be curious enough to click and
listen to the album, share it on Facebook, or include one of its songs in a virtual mixtape that
could be posted online. The company was proud of the social features of Spotify’s client
software, which had probably played an important role in the tremendous growth the service
had enjoyed since its launch back in 2008.
But Spotify was making lots of other noise. The company had just raised $1 billion in
convertible debt and the media were full of speculation that the company was preparing
to fight off the threat of the technology giant Apple’s new streaming service, Apple Music.1
Did Spotify have something to fear? After all, it was the world’s leading on-demand music
streaming service. In early 2016, it reportedly had more than 100 million users, 30 million of whom
paid a monthly fee for Spotify’s premium services.2 It had entered the difficult U.S. market with
great success, and it already had a presence in more than 50 countries. Spotify’s catalog contained
more than 30 million songs, including the libraries of all the major recording labels.
Yet not everything was so favorable. While Spotify had been able to fend off other competitive
threats, Apple’s streaming service, Apple Music, was gaining users at a frantic pace. In just six
months, it had attained 10 million paid users, a milestone that took Spotify many years to
achieve.3 And this happened while Spotify had still been unable to achieve profitability – net
losses in 2015 had gone up to ¤184.5 million,4 and the company had yet to post a profit since
the service’s debut in 2008. Some analysts pointed to how other companies offering streaming
music, such as Rhapsody, had been unsuccessful in the past.
Spotify was going to face the biggest challenge in its short existence, and Ek was probably
aware that the company could not afford any misstep. Despite its impressive success up to that
point, some believed it still could go on to become yet another casualty in the troubled history
of digital music.
This case was prepared by Professor Govert Vroom, and Isaac Sastre, case writer, as the basis for class discussion rather
than to illustrate either effective or ineffective handling of an administrative situation. August 2016.
Copyright © 2016 IESE. To order copies contact IESE Publishing via www.iesep.com. Alternatively, write to iesep@iesep.com
or call +34 932 536 558.
No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form
or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of IESE.
Last edited: 2/9/18
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The History of the Music Industry
The Music Industry Before the Digital Era
In 1999, the recorded music industry was at its peak. With $38 billion in global revenues,5 it
was riding a wave of growth as more convenient playback media such as the CD had replaced
vinyl records and cassettes. CDs combined the accessibility of a small and cheap cassette player
with much higher sound quality and fidelity.
Recorded music came into existence with the invention of the phonograph by Thomas Edison
in 1877, which enabled sound to be reproduced using an engraved cylinder, the “record.”
Recorded music would become popular throughout the 20th century with the emergence of
mass media such as the radio, which brought music to millions of homes. Music enthusiasts
wanted a way of listening to their favorite songs without having to wait for them to be
broadcast again on the radio or television, and sales of recorded music exploded.
Soon, a new business model emerged where recording companies, called “music labels,”
contracted artists to produce music for them. These labels acted as both producers and
publishers, coordinating and handling the recording, manufacturing, promotion, marketing
and distribution of music. The finished records were sent to final distributors (from small music
stores to nationwide chains or department stores, or eventually even online retailers such as
Amazon), which sold them to the final customer.
Recorded music was published in albums of several tracks (usually around 10). Some hit songs
were released as singles, which could be sold for a lower price and were also used for
promotional purposes, but the transition to compact disc (which had very similar production
costs regardless of the length of the recording) had reduced the sales importance of the single.
In 1999, this business model had remained undisturbed for decades. Eventually, the market
had become concentrated in the so-called “big five” major labels: EMI, Sony Music, Universal
Music Group, BMG, and Warner Music Group. These larger companies often also acted as the
publishers of smaller independent companies, which lacked the capacity to develop effective
distribution and marketing arms. This increased the major labels’ market share even further.
However, in June that year, 1999, while the recording industry was enjoying its best year ever,
a group of entrepreneurs launched the file-sharing service Napster. The service allowed users
to share files easily through the Internet, and became the first step that would unravel the
entire industry as it had been understood up to that point.
The Digital Medium and the Rise of Music Piracy
Two years later, in 2001, Judge Marilyn Hal Patel ordered an injunction against Napster, after
the Recording Industry Association of America (RIAA) brought a suit against the company.6
Napster users had been using the service to share music in digital format illegally. In just two
years Napster had amassed 60 million users, who were swapping more than 165 million songs
a day without paying artists or labels.7
Music sales had been falling dramatically, which had prompted the RIAA to start an intense
campaign against music piracy. Yet, despite its efforts, sales would continue in free fall for
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years to come, reaching an all-time low of less than $16 billion in 2011.8 In a little more than
a decade, the music industry had been cut in half. Figure 1 shows the dramatic drop in music
spending per capita throughout the first decade of the 21st century, compared with the previous
state of the industry.
Figure 1
U.S. recorded music revenue – 2011 dollars per capita
Source: Michael DeGusta, “The REAL Death of the Music Industry,” Business Insider, February 18, 2011,
http://www.businessinsider.com/these-charts-explain-the-real-death-of-the-music-industry-2011-2.
The industry, in general, blamed piracy for these lost sales,9 but Ek had his own opinion of
what had happened:
“I realized convenience quite often wins… It’s not that people don’t want to pay for music…
It was the only point in time when the stolen product has been much, much better than the
one you legally acquired… For me it was a pretty big given why we ended up where we
ended up in the music industry.”10
What had happened? Three key developments had brought about the age of digital music:
- MP3 compression technology. In 1993 the Moving Picture Experts Group – the group
tasked with setting the standards for digital audio and video formats – published the
MPEG-1 Layer III standard for digital audio, commonly known as “MP3.” The MP3
standard reduced the size of a music file by an order of 10, while keeping a quality that
was nearly undistinguishable from larger, lossless formats on all but high-end playing
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devices.11 The result was that users could rip their audio CDs, store their entire record
collection on their computers, and easily share it with friends.
- The rise of the Internet. The Internet was opened to commercial operators in the early
1990s. In 2000, 43% of the U.S. population already had access to it, a percentage that
rose throughout the years and reached 84.2% in 2013. 12 At first, most Internet
connections were slow, and it took several minutes to download a single music track.
However, soon faster connections were developed and offered by Internet service
providers. These so-called broadband connections would eventually allow music tracks
and videos to be played instantly. In 2015, it was estimated that there were over 147
broadband connections per 100 inhabitants in the United States, of which the vast
majority (116) were mobile connections.13
- New devices. These new digital formats spurred the development of a wide range of
software and devices capable of creating and playing digital music files. These devices
had greater capabilities than the older analog or CD player technologies. For example,
eventually a typical portable digital music player was able to contain the user’s entire
music collection, rather than just the 60 to 90 minutes of a typical CD or tape. Users could
browse and play any song easily and they could store and display information such as
song title, band name or genre. They could then create playlists of their favorite tracks
and easily move music between the player and their computers. All in all, these players
possessed features and usability that were unheard of in older technologies. Portable
digital players quickly became very popular. Later, the massive adoption of smartphones
would further increase the user base and capabilities of devices able to play digital music.
Despite the music industry’s efforts to stop them, file-sharing networks similar to Napster
would emerge: Gnutella, Kazaa, Torrent, and eMule, among others. Trying to shut them all
down became a never-ending game of whack-a-mole. The genie was out of the bottle, and the
industry would have to figure out what to do with it.
The First Steps to a Digital Industry
The first companies that marketed digital music usually lacked support from the recording
industry. For example, in 2000 eMusic launched a service offering unlimited track downloads
from a library of 125,000 tracks to those who paid a monthly subscription.14 However, only
artists from independent labels were available. By way of comparison, in 2016 most leading
digital music services had libraries of 20 million to 30 million tracks. Likewise, in 2001
MP3.com was offering unsigned artists the chance to distribute their music through its website,
paying them according to the number of downloads accrued.15 Both companies would change
ownership and business models in the following years. MP3.com eventually shut down and
sold some of its assets – including its coveted domain name – to CNET Networks in 2003.16 On
the other hand, eMusic was still operating in 2016, allowing customers to download a fixed
number of tracks for a set monthly fee.
The initial reaction of the major labels to the new technology was litigious. As well as suing
the makers and users of music-sharing networks similar to Napster, they also tried – but failed
– to obtain an injunction to prevent the sale of the Rio PMP300, the first commercially
successful portable MP3 player.17
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Indeed, the major labels’ first attempts to enter the digital market demonstrated the industry’s
wariness of the new technology. In the early 2000s, two joint ventures backed by the major
recording labels were launched: MusicNet – supported by EMI, Warner, and BMG – and
Pressplay, backed by Sony and Universal. Both services had several limitations that made them
unpopular with users (such as the limited number of tracks playable per month, and the limited
number of tracks from the same artist playable per month). Furthermore, MusicNet and
Pressplay only had the music of the labels that backed them, so users needed to purchase two
separate subscriptions if they wanted to listen to all the major artists. Soon the labels
abandoned these services: MusicNet was sold in 2005 18 and Pressplay was sold in 2003,
merging with the Napster brand for the latter’s relaunch as a legal service.19 Both MusicNet
and Pressplay came joint ninth on PCWorld’s list of the “worst tech products of all time.”20
The Success of the iTunes Model
The industry, however, did not have to wait long for its first massively popular digital music
service. In February 2003, Steve Jobs unveiled the iTunes Store during his keynote speech at a
special Apple event. At launch, iTunes offered a catalog of 200,000 songs, with backing from
major and independent labels, which sold for 99 cents a track.21 Initially, iTunes was available
for only Mac computers, but support for Windows was added a few months later, greatly
expanding the potential customer base.22 By the end of the year, the store had already sold 25
million tracks. 23 The service would grow exponentially, and by 2013 its customers had
downloaded 25 billion tracks, and the catalog had expanded to 26 million tracks.24 Despite
these numbers, Apple long claimed that iTunes’ music sales did not provide the company with
significant profits.25 However, the iTunes sales drove sales of iPods, which had big margins for
the company.26
On the heels of iTunes’ success, several companies replicated its model for selling digital music.
For example, Sony launched the Sony Connect Music Store in June 2004, selling tracks and
albums at the same price as iTunes.27 Likewise, Apple’s longstanding rival Microsoft launched
Zune Marketplace in 2006.28 These stores were not as successful as iTunes: Sony Connect
closed in 2008,29 while Microsoft discontinued the Zune brand and launched Xbox Music in
2012.30 Major labels fully backed these and other offerings, as they had done with iTunes.
Nevertheless, iTunes and other similar stores still came with a significant restriction. Digital
rights management (DRM) technologies were embedded in the tracks purchased. These limited
the number and type of devices on which these tracks could be used, ensuring that the customer
could not distribute the files freely after purchasing them. Moreover, they also allowed the
stores to control how tracks could be used.
For example, tracks purchased from iTunes could be played on no more than five devices.
Moreover, besides a computer, only Apple devices such as the iPhone, iPod or iPad could play
iTunes tracks. As a consequence, iPod sales skyrocketed in parallel with iTunes’ success,
reaching 22 million in 2009.31 Likewise, Sony Connect tracks could be transferred only to
compatible devices that supported Sony’s ATRAC3 format, such as the Walkman or the PSP
(PlayStation Portable) gaming console. Meanwhile, Zune customers had to procure a Microsoftcertified device, such as one of Microsoft’s own Zune-branded line of players.
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However, this changed in late 2007 when a new entrant, the online retailing giant Amazon,
launched its own digital music store. Labels allowed Amazon, unlike its competitors, to sell
tracks without DRM.32 Users could buy from Amazon and play the songs on any number of
devices that supported the MP3 format, including iPods, Zune players and Walkmans. Unlike
Sony and Microsoft, Amazon was successful and quickly became the second largest digital
music store in the United States.33 The competition soon followed its path: iTunes, the market
leader, abandoned DRM in 2009.34
Artists too began to experiment with the opportunities that the digital format presented. For
example, in 2007, the high-profile British band Radiohead skipped music labels and released
their album In Rainbows directly to their fans as a digital download on the band’s website,
letting customers choose the price they wanted to pay. 35 No sales figures were released.
Attempts like Radiohead’s to upset the usual release process were, however, piecemeal.
Streaming and the Smartphone Era
RealNetworks was a company that had thrived in the 1990s developing video and audio
streaming technologies for the fledging Internet. RealNetworks’ protocols allowed users to
watch videos and listen to audio without downloading the files to their computer. In April
2003, RealNetworks launched a new service: RealOne Rhapsody (later shortened to Rhapsody).
This became the first major label-backed music streaming service.
Rhapsody offered a subscription model where users paid a monthly fee of $9.95 for the ability
to stream an unlimited number of songs from a library of 330,000 tracks. Users could not
download the tracks directly to their computers. Rhapsody was a moderate success, reaching
800,000 subscribers in 2009. However, its growth rate slowed and ultimately declined. In 2010
it had lost 100,000 subscribers, and analysts at the time doubted its ability to compete with
other music services that were not using a streaming model. Rhapsody was spun off from
RealNetworks in February 2010, in order to help the parent company achieve profitability.36
In 2013 the now independent Rhapsody acquired Napster, and started using that brand name
for most of its business outside North America.37
Rhapsody’s failure to gain traction seemed to indicate that the market preferred stores with the
iTunes model, where users could buy and own digital music. However, other streaming services
soon appeared. Pandora launched in 2005 and was followed by similar services such as Slacker
Radio and MOG.38 Pandora allowed users to listen to customized “radio stations” for free, while
it got revenue through advertising. Its “Music Genome Project” analyzed and broke down songs
according to multiple traits. Users could then “like” or “dislike” songs that were being played,
and the service would attempt to learn their music tastes and play only music that would
interest them.
During the second half of the 2000s, smartphones became popular. They fused the functionality
of a portable media player with a computer with an Internet connection, allowing users to
access Internet music services while on the go. In 2010, nearly 300 million smartphones were
sold worldwide.39 This greatly benefited streaming services, which could not be used on regular
portable music players as an active Internet connection was required. According to Pandora,
the introduction of a smartphone app in 2008 practically doubled its growth overnight. 40
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In 2013 Pandora claimed 70 million monthly users in the United States and Canada, dwarfing
other subscription-based streaming services.41
One of these streaming services was Spotify, which was rapidly expanding in the U.S. market.
Spotify
Daniel Ek and Martin Lorentzon founded Spotify in Sweden in 2006 after having both worked
for several Scandinavian-based online start-ups. Ironically, Sweden was infamous for hosting
The Pirate Bay, the largest search engine for downloading illegal music and video content on
the Internet. Spotify finally launched in October 2008 in Sweden and other Western European
markets after announcing deals with all major labels plus several independent companies that
allowed Spotify to stream their catalogs.42
Initially, Spotify allowed only a limited number of users to join its unpaid service. The company
periodically sent out “invites” to its existing users, which they could use to invite their friends.
Paid subscription users were not subjected to this and could join at any time. Spotify lifted the
limitation in 2009 in the United Kingdom and proceeded to do the same in most of its markets
in the following months.43
Spotify launched in the United States in 2011, when it already had 10 million users throughout
Europe. This time, Spotify used a different approach. Instead of throttling free users, it offered
six months of free premium use to all U.S. customers. Afterwards, they could pay for a
subscription or start using the free, ad-supported version of the service. Spotify grew quickly in
the United States, and in March 2013 it claimed one million paid U.S. subscribers – and six
million worldwide.44 The growth did not slow down, and in March 2016 Ek announced on Twitter
that Spotify had reached 30 million paid subscribers. In June that year, Spotify reported its total
user base (paid+free) had reached 100 million active users45.
Spotify kept expanding its presence over the world: Germany, Australia and New Zealand were
added in 2012, and in 2013 the service became available in Italy, Poland, Portugal, Mexico, Hong
Kong, Malaysia, Singapore, Estonia, Latvia, Lithuania and Iceland. In 2016, Spotify was available
in more than 50 countries, spanning the Americas, Europe, Asia and Oceania.
The Spotify Business Model
In 2016, Spotify was offering two service tiers in most of its markets: free and premium. Both
tiers allowed on-demand unlimited listening of every song in the Spotify catalog, an unlimited
number of times, from any desktop computer or tablet. Users of the free service had their
playback interrupted every few songs by short audio adverts. During the previous years, Spotify
had slowly been increasing the number and frequency of the commercials, and also had added
visual adverts to the user interface of free customers. However, premium users could listen to
music without being interrupted by adverts, had access to higher-quality audio, and enjoyed
other features.
Spotify also provided a mobile app that could be installed on Android or iOS smartphones.
Notably, only premium users could play music on demand with the Spotify mobile application.
Free users were not able to select a particular song but could create a “station” that would play
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random music that followed certain user-provided guidelines (e.g., genre, era or artist). Table 1
shows the differences between the two service tiers and compares them with Pandora, the
largest streaming service in the United States in terms of number of users.
Table 1
Spotify service tiers in the United States compared with Pandora (2016)
SPOTIFY
Free
PANDORA
Premium
Free
Pandora One
Mobile
Desktop
and tablet
All devices
All devices
All devices
Full catalog access
Yes
Yes
Yes
Yes
Yes
Playlists
Yes
Yes
Yes
No
No
Play tracks on demand
No*
Yes
Yes
No*
No*
Ad-free listening
No
No
Yes
No
Yes
Sound quality (kb/s)
128
128
320
64
192
Offline mode
No
No
Yes
No
No
$9.99
$0
$4.99
Monthly fee
$0
* Maximum of six track skips per hour.
Source: Prepared by the authors.
Spotify often ran promotions to try to sign up more customers to its subscription services.
In early 2016, it was offering a free month of premium service to all new users in several
countries. It also entered frequent deals with carriers in order to offer bundles and discounts
to Spotify customers. Spotify did little advertising of its own.
Spotify’s functionality was simple. When the user launched the application, music started to play
automatically, resuming the last active playlist. Users could search for any song straight from the
home screen, access their list of favorite songs and artists, access their playlists, and browse the
most popular tracks and artists of the moment. The radio feature brought several preset thematic
radio stations and allowed users to create new ones using a variety of guidelines. Spotify also had
a “discover” feature that suggested new artists based on the user’s listening habits. (See Exhibit 1
for several screenshots of the mobile and desktop Spotify clients in 2014.)
Spotify had several social features. Inside the app, users could “follow” their friends to see what
music they were listening to. Users could also follow artists, bands and other personalities in order
to get news about them and be alerted if they released new songs on Spotify. Integration with
Facebook and Twitter allowed users to see their friends’ activities and favorite music and artists and
generated items about their listening habits on these social networks. Users could also share songs
on Facebook, so their friends could listen to them even if they were not Spotify customers.
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Spotify tried to develop even closer integration with Facebooki and at one point forced users
to log onto Spotify using a Facebook account. This was badly received and Spotify soon
reversed its plans.
All users were also able to save and share their playlists through e-mail, messaging applications
and social networks. A noncustomer could click and listen to the playlist but would be asked
to register an account with Spotify. Playlists were a popular feature, and third-party websites,
such as Playlists.net or Shareplaylist.net, had been set up where users could share, discuss and
rate them.
Spotify promoted autonomy within its structure, with the aim of fostering innovation and
quick decision making and the speedy implementation of improvements, design changes or
features. There were little formal dependencies between working groups (called “squads”), but
cross-pollination and informal interaction between squads and particular members were
strongly encouraged. The company even allocated 10% of its employees’ working hours to
“hack time,” during which they were asked to come up with and test new ideas or features,
in an unrestricted environment. This culture enabled Spotify to be agile and react quickly to
changes in the environment, while pushing innovations quickly. As Ek put it, “we aim to make
mistakes faster than anyone else.”46
Financial Performance
When Spotify launched in 2008, it did so with major music labels taking 18% of its shares, for
a contribution of 100,000 Swedish kronor ($13,500). 47 Spotify’s rapid expansion required
significant investment but the company had no trouble raising capital. Between 2007 and 2015
it successfully completed seven funding rounds, reportedly raising a cumulative total of
$1.06 billion with a 2015 valuation of $8.53 billion. It also raised an additional $1.5 billion in
convertible notes and convertible debt in the first half of 2016.48
On the face of it, Spotify’s performance during its short life had been nothing less than
impressive. In 2014 it surpassed ¤1 billion in revenue for the first time, and the number of
users kept growing at a frantic pace. However, there was an obvious downside. Since its launch
in 2008, Spotify had yet to post a profit. The explosive growth of the company had been
accompanied by growing losses, as Spotify expanded into several markets in a very short time.
Spotify’s financial situation was thought to be secure, given the amount of financing it had
been able to secure. See Table 2 for Spotify’s financial data.
The single largest expense was the cost of goods sold. This consisted mainly of the royalties
Spotify paid to rights holders in order to get access to their catalog to offer to Spotify
customers. Spotify signed several agreements with these rights holders, usually the publishing
label. The agreements were valid only for a particular country, since laws and contracts could
vary wildly between different countries. To launch in the United States, Spotify signed deals
with all the major labels in 2011.49
i Sean Parker, founder of Napster and former Facebook president, served on Spotify’s Board.
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Spotify did not pay a fixed amount per stream. Rather, it allocated a fixed percentage of its
monthly revenue to royalty payments. Specifically, in 2013 Spotify claimed that 70% of
its revenue was being allocated to royalties.50 Tracks received an amount depending on how
many times they had been streamed compared with the total amount of streams in Spotify.
Royalties were allocated on a country-by-country basis, taking into account the revenues and
plays of that country.
Table 2
Spotify financial data 2009–2015, in millions of euros
2009
2010
2011
2012
2013
2014
2015
13.3
73.9
188.1
430.3
746.9
1,081.7
1,945.3
• Subscriptions
N/A
52.6
156.9
374.8
678.7
982.9
1,744.4
• Advertising
N/A
21.1
27.6
55.0
68.2
98.8
195.8
• Other
N/A
0.1
3.6
0
0
0
5.1
N/A
76.8
183.8
386.5
614.5
876.1
1623.6
N/A
104
98
90
82
81
83
Gross profit
N/A
−2.9
4.3
43.8
132.3
205.6
321.7
Operating expenses
N/A
19.0
51.2
120.7
223.5
370.7
506.2
• Research and development
N/A
N/A
N/A
37,9
72.7
121.0
143.3
• Sales and marketing
N/A
N/A
N/A
54.1
110.8
173.0
246.5
• General and administrative
N/A
N/A
N/A
28.6
40.0
76.7
116.4
−18.5
−21.9
−46.8
−76.9
−91.2
−165.1
−184.5
−139
−30
−25
−18
−12
−15
−9
Active users at end of year (millions)
2.5
5
10
20
36
60
89
Paid subscribers at end of year (millions)
N/A
N/A
N/A
5
8
15
28
Percentage of paid users
N/A
N/A
N/A
25
22
25
31
Headcount
N/A
N/A
N/A
N/A
953
1,354
1,610
Revenues
Cost of sales
as % of revenue
Operating income
as % of revenues
Source: Enders Analysis and case writers’ estimations based on public sources.51
Royalty payments were made to publishers and master rights holders depending on the
particular agreements that Spotify had in place and any applicable laws of the particular
country in question. Artists were then paid by the label or publisher according to their
contractual royalty rates. Thus, different artists with the same amount of plays could receive
very different royalty payments. See Figure 2 for examples of actual monthly royalty rates.
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Yet, despite the large share of revenue destined to royalty payments, Spotify faced increased
criticism from artists for the low amounts they received. The Musicians’ Union in the United
Kingdom, for example, formally asked in 2013 that a minimum pay rate be set – something
that would greatly increase Spotify’s costs if implemented.52 Spotify defended itself by pointing
out that actual royalties received by artists depended on their deals with the labels that
published them, but this did not stop some high-profile artists from publicly speaking out
against the company, with some even pulling their songs from the service.
Figure 2
Monthly royalty rates for five anonymized albums
Niche Indie Album
Classic Rock Album
$3,300
Actual Monthly Royalties for July 2013
$17,000
Breakthrough Indie Album
Spotify Top 10 Album
$76,000
$145,000
Global Hit Album
$425,000
Source: “Spotify Explained,” Spotify, December 2013, http://www.spotifyartists.com/spotify-explained/.
Yet something was clear – consumers were massively embracing Spotify and music streaming.
When Adele released her bestselling album 25 in November 2015, in just six weeks it sold 7.5
million copies in the United States alone. Yet in the same period, the hit song “Hello” from the
same album was streamed 129 million times.53
The Music Industry in 2016
Significantly the music industry, which was once built exclusively on the sales of physical
records through mainly brick-and-mortar stores, was seeing digital taking over as the biggest
source of revenue. Renowned music store chains such as Tower Records were closing down,
while music was increasingly being consumed in digital form. (See Exhibits 2 and 3 for data
on the music industry in 2016.)
In particular, in the United States – the largest market for recorded music in the world – the
watershed moment had been reached in 2011. In that year, digital sales outperformed physical
revenue for the very first time. In the U.S. market in 2015, CDs, vinyl records and cassettes
accounted for less than one-third of industry sales ($7 billion according to the RIAA, a small
0.9% increase from 2014). See Figure 3 for revenue source distribution in 2015.
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Figure 3
Revenues of U.S. music industry by source (2015)
Synch:* $204m
(2.9%)
Download: $2,382m
(34%)
Physical: $1,898m
(28.8%)
Streaming: $2,406m
(34.3%)
* Synchronization rights were royalties paid for permission to synchronize music with other media (i.e., films, TV shows or videogames).
Source: Joshua P. Friedlander, “News and Notes on 2015 Music Industry Shipment and Revenue Statistics,” RIAA, March 2016,
https://www.riaa.com/wp-content/uploads/2016/03/RIAA-2015-Year-End-shipments-memo.pdf.
Regarding the labels, compared with the situation in 1999 the market had witnessed further
concentration. The “big five” major labels had been reduced to three – BMG was sold to Sony
in 2008, and EMI merged with Universal in 2011. In 2013 the three major labels accounted for
nearly 90% of the distribution market of recorded music.
Table 3
Recording industry U.S. market share in 2013
Company name
Distribution market share of album sales
and track equivalent
(10 tracks = 1 album)
Universal Music Group
37.7%
Sony Music Entertainment
30.4%
Warner Music Group
20.8%
Others
11.4%
Figures may not add up to 100% due to rounding.
Distribution market share includes sales of music owned by the label and music owned by third parties (generally artists or smaller labels)
but distributed through the label.
Source: Adapted from “Nielsen Entertainment and Billboard’s 2013 Mid-Year Music Industry Report,”
http://www.nielsen.com/content/dam/corporate/us/en/reports-downloads/2013%20Reports/Nielsen-Music-2013-Mid-Year-US-Release.pdf.
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These major labels thus still controlled most of the distribution of music, which was now being
delivered to customers through two main types of digital retailer:
- Download operations sold single tracks or albums digitally. Users could select an album
or a track, listen to a sample, and then pay an amount (typically around $1 for a song
and $10 for an album) to download it to their computer or portable device. The market
was dominated by Apple’s iTunes. Other relevant players were Amazon.com and Google
Play Music.
- Streaming allowed customers to listen to music without downloading it to their device.
Thus, unlike with downloads, users never “owned” the tracks. Streaming services usually
obtained revenue via paid subscriptions or advertising. Pandora was the market leader
in terms of users, but Spotify had the most revenue. Other important players were Tidal,
SoundCloud, and Apple Music.
Interestingly, digital and physical customers seemed to display distinct consumer behavior. For
example, the vast majority of digital unit sales were single tracks, but physical sales were
dominated by albums, with singles not even attaining 1% of unit sales.
The Competition
In June 2015, Apple’s CEO Tim Cook uttered the famous words “and one more thing…” to
unveil the company’s main new product during his keynote address at the Worldwide
Developers Conference in San Francisco. The product, which Apple was going to push with all
its considerable might, was the new streaming service Apple Music.54
In May 2014, Apple acquired Beats – a manufacturer of audio accessories and components –
for $3 billion. 55 Beats also owned a streaming service called Beats Music, which Apple
integrated into its product ecosystem and relaunched as the new Apple Music. The new service
boasted of radio stations curated by famous DJs, social features that allowed artists to interact
with fans, exclusive deals with artists, and integration with the Siri voice commands feature
that most Apple products had. All this was at the same price point as Spotify’s premium service:
$9.99 a month. As a promotional offer, new customers had three free months of the service.
Apple, however, was not offering a free version of the service. (See Exhibit 4 for a comparison
between Spotify, Apple Music and several other streaming music services operating in 2016.)
Apple Music became an overnight success. In February 2016, Eddy Cue, Apple’s senior vice
president of Internet services, announced that it had achieved 11 million subscribers in just six
months.56 Spotify had taken five years to reach that figure.
However, Apple Music was only one of several music streaming services that had been
launched since Spotify had entered the U.S. market. Other big digital companies were trying
to get a piece of the growing streaming market. In 2013, the tech giant Google launched its
own subscription service, Google Play Music All Access, which came preloaded in all Android
smartphones. The online retail leader Amazon.com included streaming music in its Amazon
Prime membership plan in June 2014.57
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And the streaming market was already crowded to begin with. Besides these new entrants,
Spotify also faced competition from several other streaming music services. These could be
divided into two kinds:
- On-demand: The most similar competitors were other on-demand streaming services.
Besides the aforementioned Apple Music, Amazon Prime Music, and Google Play Music
All Access, other noteworthy services were Rhapsody, SoundCloud Go, and Deezer.
These worked in a similar way to Spotify, allowing users to play any track they wanted
from each service’s catalog.
- Internet radio: These companies did not offer tracks on demand. Instead, users could
listen to preset radio stations or create customized ones. This model allowed companies
to pay reduced royalty rates compared with on-demand streaming services such as
Spotify, and therefore they were able to offer lower pricing. Pandora was the most
successful of those services.
Competitors did not stand still as Spotify grew. For example, Rhapsody acquired Napster in
late 2011.58 Deezer, while still not available in the United States, far surpassed Spotify in its
international footprint: by 2016, it was available in 186 countries or territories.59 Moreover,
there were strong rumors that Pandora, which had more than 70 million users, was preparing
to launch an on-demand streaming service by the end of 2016.60
This intense competition had already claimed its first casualties. Last.fm, an Internet radio
service owned by CBS Corporation, discontinued its music streaming service in 2014. In
November 2016, Rdio – a streaming service launched by Skype founders Janus Friis and Niklas
Zennström – filed for bankruptcy and was purchased by Pandora.61
However, the existing competition was not the only thing to which Spotify had to pay
attention. There were several new trends that could signal new disruptions of a market that
was barely settling down. Spotify had been the standard bearer of the streaming revolution,
but it risked being left behind if it rested on its laurels while the market changed again.
New Trends
Artists
Artists generally complained about the reduced royalty rates that streaming music paid in
comparison to other distribution methods, and they were seen as trying to reassert their
position in the music business.
For example, in November 2014, Taylor Swift – one of the top-selling artists of the 2010s –
removed her entire catalog from Spotify and other streaming services, complaining that the
free service undermined the royalty payments artists received.62 She similarly threatened to
pull her catalog from Apple Music when the company announced that it would not pay
royalties for users who were in Apple Music’s free three-month trial period. Apple ultimately
relented.63 Swift was one of the highest-profile artists – but not the only one – who was trying
to influence the changing landscape brought about by digital music and streaming.
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In March 2015, the rapper Jay Z relaunched the streaming service Tidal as an artist-owned
streaming service. Among its stakeholders were high-profile artists such as Rihanna, Madonna,
Kanye West, Beyoncé, and Daft Punk. The service claimed to pay the highest percentage of its
revenue as royalties of any existing streaming service, while offering the same basic price point
as Spotify.64
Others were using the competition between several digital platforms to sign exclusive or
promotional deals in exchange for financial advantages. For example, in April 2016 the charttopping rapper Drake released his new album Views exclusively through Apple Music,65 while
Beyoncé’s new album Lemonade could be streamed only via Tidal.66 This sort of practice was
not limited to high-profile musicians, as independent or regional artists were also entering
exclusive deals. So far Spotify had refused to compete for these exclusive deals and had even
spoken openly against them.67
Bundling of Services
Companies such as Amazon and Google were trying to leverage their bargaining power and
presence in other markets to bundle music streaming services with other services, in particular
video streaming. For example, Amazon’s Prime service offered access to not only music but
also movies and television shows, all for a monthly fee ($10.99) that was just $1 more than
Spotify’s premium service cost. Not only that, but Amazon Prime also included several other
services such as an extensive e-book library and cloud storage. Amazon Prime’s streaming
music library, however, was much smaller than Spotify’s.68
In October 2015, Google launched YouTube Red, which was bundled with its existing Google Music
All Access streaming service.69 YouTube Red allowed access to all YouTube videos – including
music videos from several participating labels – without ads. It also featured exclusive content
from popular YouTube video creators such as PewDiePie, who had millions of followers.
Vertical Integration
Lastly, another trend in streaming was vertical integration. Netflix, a video streaming service
that offered films and television shows from major studios, had started a policy of investing a
sizable part of its revenue in producing its own content, spending lavishly on shows with highprofile actors and directors. In the same way, it de-emphasized the catalog belonging to major
film and television studios. In the first quarter of 2016, it attained 81 million subscribers
globally,70 making it one of the most popular paid streaming services in the world. Other video
streaming services were following this path, with Amazon Prime, Hulu, Crackle and Yahoo!
Screen producing their own shows. Could this trend also be translated to music streaming, with
companies such as Spotify producing their own music?
Thus, as Ek left Spotify’s U.S. headquarters in New York, several questions might have crossed
his mind. Could Spotify see off the new competitive threats? Could it become a profitable
business? Moreover, could it really live up to its own hype and help the music industry grow
again after more than a decade of continuous decline? Industry observers, and Ek himself, often
pointed to how Sweden’s music industry grew by 27% between 2008 and 2013, far ahead of the
industry in other developed countries, with Spotify leading the charge as streaming made up
70% of Sweden’s total music revenue.71 But could this be replicated elsewhere?
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Exhibit 1
Screenshots of Spotify’s User Interface in 2016
Free users:
Subscribers:
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Exhibit 2
Streaming Growth
Total paid streaming subscriptions in the United States (in millions of dollars)
12
10.8
10
7.7
8
6.2
6
4
3.4
2
0
2012
2013
2014
2015
Proportion of total U.S. music industry: revenues from streaming
40%
34%
35%
30%
27%
25%
21%
20%
15%
15%
10%
9%
7%
5%
0%
2010
2011
2012
2013
2014
2015
Source: Joshua P. Friedlander, “News and Notes on 2015 Music Industry Shipment and Revenue Statistics,” RIAA, March 2016,
https://www.riaa.com/wp-content/uploads/2016/03/RIAA-2015-Year-End-shipments-memo.pdf.
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Exhibit 3
2015 Year-End Recording Industry Revenue Statistics
United States unit shipments and estimated retail dollar value (in millions, net after returns)
Digital permanent download
2014
2015
% change
2014-15
1,199.1
$1,407.8
117.6
$1,150.9
1.6
$2.6
6.8
$13.6
26.6
$66.3
1,021.0
$1,226.9
109.4
$1,090.7
2.2
$3.7
3.2
$6.4
21.9
$54.6
−14.9
−12.8
−7.0
−5.2
38.4
43.2
−52.8
−52.8
−17.7
−17.7
SoundExchange distributions2
$773.4
$802.6
3.8
Paid subscription3
7.7
$800.1
10.8
$1,218.9
40.2
52.3
On-demand streaming (ad-supported)4
$294.8
$385.1
30.6
(Units shipped)
(Dollar value)
Download single
Download album
Kiosk1
Music video
Ringtones and ringbacks
Digital subscription and streaming
TOTAL DIGITAL VALUE
Physical
(Units shipped)
(Dollar value)
$4,509.5
$4,789.0
6.2
Synchronization royalties5
$189.7
$202.9
7.0
CD
142.8
$1,832.6
122.9
$1,520.8
−13.9
−17.0
CD single
1.0
$3.8
0.4
$1.2
−59.5
−67.5
LP/EP
Total physical units
Total physical value
13.2
$314.9
0.5
$5.9
4.1
$91.2
0.1
$2.1
0.0
$0.8
161.7
$2,251.3
16.9
$416.2
0.5
$6.1
3.3
$73.2
0.2
$5.4
0.0
$1.1
144.2
$2,024.0
28.3
32.2
4.1
2.6
−20.4
−19.8
169.7
153.2
39.8
40.5
−10.8
−10.1
Total retail units
Total retail value
141.3
$2,112.0
124.5
$1,898.0
−11.9
−10.1
Total units6
Total value
1,513.4
$6,950.5
1,302.0
$7,015.9
−14.0
0.9
% of shipments7
Physical
Digital
2014
33%
67%
Vinyl single
Music video
DVD audio
SACD
TOTAL DIGITAL AND PHYSICAL
2015
30%
70%
Retail value is the value of shipments at the recommended or estimated list price.
1
Includes singles and albums.
2
Estimated payments in dollars to performers and copyright holders for digital radio services under statutory licenses.
3
Streaming, tethered, and other paid subscription services not operating under statutory licenses.
Subscription volume is annual average number of subscriptions.
4
Ad-supported audio and music video services not operating under statutory licenses.
5
Includes fees and royalties from synchronization of sound recordings with other media.
6
Units total includes both albums and singles, and does not include subscriptions or royalties.
7
Synchronization royalties excluded from calculation.
Source: Joshua P. Friedlander, “News and Notes on 2013 Music Industry Shipment and Revenue Statistics,” RIAA, March 2014.
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2005
(U.S.)
2014
(U.S.)
2001
(U.S.)
Pandora
Amazon Prime Music
Rhapsody
30 million
1 million
1 million
30 million
30 million
30 million
30 million
30 million
Claimed
library size
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Major label
support
Yes
Yes
No
Yes
Yes
Premium only
Yes
Yes
Play tracks
on demand
Not available
Not available
Ad-supported
Six track skips per hour
(24 per day maximum)
Not available
Not available
Ad-supported
Shuffle mode on mobile
Not available
Ad-supported
Shuffle mode on mobile
Free service
Deezer was not available in the U.S. market as of January 2016. The price given is for the French market.
Also included access to other Amazon Prime services such as Amazon Video, a free e-book library, free delivery of Amazon purchases, and cloud storage.
2014
(U.S.)
Tidal
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Source: Prepared by the authors.
2
1
2013
(U.S.)
2007
(France)
2015
(U.S.)
2008
(Sweden)
Google Play Music All
Access
Deezer
Apple Music
Spotify
Launch
date
Comparison of Selected Music Streaming Services Operating in 2016
Exhibit 4
Spotify in 2016: Facing Increased Competition
Sp
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Mobile app
$9.95
$10.992
$4.99
$9.99
$9.99
€9.991
$9.99
$9.99
Monthly
premium fee
(U.S. market)
For the exclusive use of S. Alhagbani, 2019.
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29 Jack Schofield, “Sony Disconnects Connect and Adopts Microsoft’s DRM for Portable Players,” Guardian, September 1, 2007,
http://www.theguardian.com/technology/blog/2007/sep/01/sonydisconnect, accessed May 10, 2014.
30 Nick Wingfield, “R.I.P. Zune,” New York Times, June 4, 2012, http://bits.blogs.nytimes.com/2012/06/04/r-i-pzune/?_php=true&_type=blogs&_r=0, accessed May 10, 2014.
31 “Apple Reports First Quarter Results,” Apple Inc., January 21, 2009, http://www.apple.com/pr/library/2009/01/21AppleReports-First-Quarter-Results.html, accessed May 8, 2014.
32 “Amazon MP3 Adds Music Audio Downloads From Warner Music Group,” Amazon.com, December 27, 2007,
http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=1089999&highlight=, accessed May 8, 2014.
33 “The NPD Group: Amazon Ties Walmart as Second-Ranked U.S. Music Retailer, Behind Industry-Leader iTunes,” NPD Group,
May 26, 2010, https://www.npd.com/wps/portal/npd/us/news/press-releases/pr_100526/, accessed June 8, 2014.
34 “Changes Coming to iTunes Store,” Apple Inc., January 6, 2009, http://www.apple.com/pr/library/2009/01/06Changes-Comingto-the-iTunes-Store.html, accessed May 8, 2014.
35 Josh Tyrangiel, “Radiohead Says: Pay What You Want,” Time, October 1, 2007,
http://content.time.com/time/arts/article/0,8599,1666973,00.html, accessed May 11, 2014.
36 Kathy Shwiff, “RealNetworks, Viacom to Spin Off Rhapsody,” Wall Street Journal, February 10, 2010,
http://online.wsj.com/news/articles/SB10001424052748704182004575055742931769102?mg=reno64wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052748704182004575055742931769102.html, accessed
October 23, 2014.
37 Julianne Pepitone, “Today Is Napster’s Last Day of Existence,” CNN, November 30 2011,
http://money.cnn.com/2011/11/30/technology/napster_rhapsody/, accessed May 5, 2014.
38 “Pandora for Everyone,” Pandora Media, August 29, 2005, http://blog.pandora.com/2005/08/29/pandora_for_eve/, accessed
May 10, 2014.
39 “Gartner Says Worldwide Mobile Device Sales to End Users Reached 1.6 Billion Units in 2010; Smartphone Sales Grew
72 Percent in 2010,” Gartner, February 9, 2011, http://www.gartner.com/newsroom/id/1543014, accessed May 10, 2014.
40 Tom Conrad, “Happy Birthday to the Pandora App,” Pandora Media, July 10, 2013, http://blog.pandora.com/2013/07/10/happybirthday-to-the-pandora-app/, accessed May 10, 2014.
41 Tim Westergren, “Pandora and Royalties,” Pandora Media, June 26, 2013, http://blog.pandora.com/2013/06/26/pandora-androyalties/#more-5604, accessed May 10, 2014.
42 “We’ve Only Just Begun!” Spotify, October 7, 2008, http://news.spotify.com/us/2008/10/07/weve-only-just-begun/, accessed
May 11, 2014.
43 “Spotify Now Available to Everyone in the UK,” Spotify, http://news.spotify.com/us/2009/02/10/spotify-now-available-toeveryone-in-the-uk/, accessed May 11, 2014.
44 Paul Sloan, “Spotify: Growing Like Mad, Yet Still Far to Go,” CNET, March 12, 2013, http://www.cnet.com/news/spotifygrowing-like-mad-yet-so-far-to-go/, accessed May 11, 2014.
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21
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For the exclusive use of S. Alhagbani, 2019.
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Spotify: Face the Music (update 2016)
Sp
45 “Spotify monthly active user base reaches 100 million,” Reuters, June 20 2016, http://www.reuters.com/article/us-spotifyusers-idUSKCN0Z61FM, accessed August 2016.
46 Spotify Training
November 2014.
&
Development, “Spotify Engineering Culture,” Vimeo, February 2014, http://vimeo.com/85490944, accessed
47 Marcus Jerräng, “Documents Reveal Major Labels Own Part of Spotify,” ComputerSweden, August 7, 2009,
http://computersweden.idg.se/2.2683/1.240046/documents-reveal-major-labels-own-part-of-spotify, accessed August 29, 2016.
48 Data from Spotify’s entry in the CrunchBase start-up database, http://www.crunchbase.com/organization/spotify, accessed
April 25, 2016.
49 Alex Pham, “Spotify Buttons Up Deals With Warner Music, Launches Music Service in the U.S.,” Los Angeles Times, July 13,
2014, http://latimesblogs.latimes.com/entertainmentnewsbuzz/2011/07/spotify-buttons-up-deals-with-warner-launches-musicservice-in-the-us-.html, accessed May 11, 2014.
50 “Spotify Explained,” Spotify, December 2013, http://www.spotifyartists.com/spotify-explained/, accessed June 8, 2014.
51 The full list of sources used in the preparation of Table 2 is as follows:
Enders Analysis.
Maija Palmer, “Licensing Costs Fuel Losses at Spotify,” Financial Times, October 10, 2011,
https://next.ft.com/content/b89d97ea-f365-11e0-b98c-00144feab49a, accessed July 20, 2016.
Ben Sisario, “Spotify Loss Widens despite Higher Revenue,” The New York Times, October 10, 2011,
http://mediadecoder.blogs.nytimes.com/2011/10/10/spotify-loss-widens-despite-higherrevenue/?_php=true&_type=blogs&_r=1, accessed July 20, 2016.
Glenn Peoples, “Spotify Grew Fast, Lost Money in 2011 -- No Surprises,” Billboard.com, August 23, 2012,
http://www.billboard.com/biz/articles/news/1084054/spotify-grew-fast-lost-money-in-2011-no-surprises, accessed July 20, 2016.
Robert Cookson, “Spotify Burns through Cash in Push for Paying Subscribers,” Financial Times, July 31 2013,
http://www.ft.com/intl/cms/s/0/2575960c-f9da-11e2-98e0-00144feabdc0.html?siteedition=intl#axzz2adZpsYol, accessed July 20, 2016.
“Music Streamer Spotify Doubles 2012 Revenues after Expansion,” Reuters, July 31, 2013, http://www.reuters.com/article/usspotify-results-idUSBRE96U0QZ20130731, accessed July 20, 2016.
Robert Cookson, “Spotify Pays more than 80% of its Turnover to Rights Holders,” Financial Times, November 25 2014,
https://next.ft.com/content/e913f2d8-74b9-11e4-b30b-00144feabdc0, accessed July 20, 2016.
Stuart Dredge, “Spotify in 2013: Revenues of ¤746.9M and a ¤93.1M Operating Loss”, Musically, November 25, 2014,
http://musically.com/2014/11/25/spotify-2013-revenues-operating-loss/, accessed July 20, 2016.
David Gauthier-Villards, “Spotify Revenue Rises in 2014 but Still in Red on Heavy Investments,” The Wall Street Journal, May 8, 2015,
http://www.wsj.com/articles/spotify-revenue-rises-in-2014-but-still-in-red-on-heavy-investments-1431102236, accessed July 20, 2016.
Matthias Verbergt, “Spotify Revenue Rose in 2015 but Losses Grew on Expansion Investment,” The Wall Street Journal, May 23 2016,
http://www.wsj.com/articles/spotify-revenue-rises-in-2015-but-losses-grow-on-expansion-investment1464024455, accessed July 20, 2016.
Stuart Dredge, “Spotify Financials Raise Questions about Streaming Economics”, Musically, May 24 2016,
http://musically.com/2016/05/24/spotify-financials-raise-questions-about-streaming-economics/, accessed July 20, 2016.
Joon Ian Wong, “Spotify’s average salary keeps rising—even as its losses mount,” Quartz.com, May 24 2016,
http://qz.com/691188/spotifys-average-salary-keeps-rising-even-as-its-losses-mount/, accessed July 20, 2016.
52 Mark Townsend, “Musicians’ Union Demands New Pay Deal From Spotify,” Observer, July 20, 2013,
http://www.theguardian.com/technology/2013/jul/20/spotify-radiohead-musicians-union-rights, accessed June 8, 2014.
53 The Nielsen Company, 2015 Nielsen Music U.S. Report, January 6, 2016.
54 “Introducing Apple Music – All the Ways You Love Music. All in One Place,” Apple.com, June 8, 2015,
http://www.apple.com/pr/library/2015/06/08Introducing-Apple-Music-All-The-Ways-You-Love-Music-All-in-One-Place.html?sr=hotnews.rss, accessed April 25, 2016.
55 “Apple to Acquire Beats Music & Beats Electronics,” Apple.com, May 28, 2014,
https://www.apple.com/pr/library/2014/05/28Apple-to-Acquire-Beats-Music-Beats-Electronics.html, accessed June 8, 2014.
56 John Gruber, “The Talk Show,” episode 146, February 12, 2016, podcast, http://daringfireball.net/thetalkshow/2016/02/12/ep-146,
accessed April 25, 2016.
This document is authorized for use only by Salman Alhagbani in 2019-Summer-Strategic Management_1 taught by TSUHSIANG HSU, Niagara University from Jun 2019 to Aug 2019.
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22
For the exclusive use of S. Alhagbani, 2019.
Spotify: Face the Music (update 2016)
SM-1642-E
57 “Your Music Collection Just Got a Lot Bigger,” Amazon.com, June 12, 2014,
http://www.amazon.com/gp/feature.html/ref=dmm_prm_st_bb_cp_lm?ie=UTF8&docId=1002557791&pf_rd_m=ATVPDKIKX0DER
&pf_rd_s=merchandised-search-left2&pf_rd_r=0AAHSSGNXJ382NKFCRKS&pf_rd_t=101&pf_rd_p=1869061022&pf_rd_i=8335758011, accessed April 25, 2016.
58 “Rhapsody to Acquire Napster,” Rhapsody International Inc., October 3, 2011, http://news.rhapsody.com/2011/10/03/rhapsodyto-acquire-napster/, accessed May 11, 2014.
59 As listed on Deezer’s website on April 25, 2016, http://developers.deezer.com/guidelines/countries.
60 David Z. Morris, “Pandora to launch new streaming site”, Fortune.com, August 20 2016,
http://fortune.com/2016/08/20/pandora-on-demand-streaming/, last accessed August 29 2016.
61 Nathan Ingraham, “As Rdio Files for Bankruptcy, Pandora Picks It Up for $75 Million,” Engadget.com, November 16, 2015,
http://www.engadget.com/2015/11/16/pandora-buying-rdio/, accessed April 25, 2016.
62 Alex Hern and Stuart Dredge, “Taylor Swift v Spotify: Back Catalogue Removed From Streaming Services,” Guardian,
November 3 2014, http://www.theguardian.com/technology/2014/nov/03/taylor-swift-spotify-artists-discography-streamingservices, accessed November 5, 2014.
63 Shirley Halperin, “Apple Changes Course After Taylor Swift Open Letter: Will Pay Labels During Free Trial,” Billboard.com,
June 21, 2015, http://www.billboard.com/articles/news/6605568/apple-changes-course-after-taylor-swift-open-letter-will-paylabels-during, accessed May 3, 2016.
64 Andrew Flanagan and Andrew Hampp, “It’s Official: Jay Z’s Historic Tidal Launches With 16 Artist Stakeholders,” Billboard,
March 30, 2015, http://www.billboard.com/articles/news/6509498/jay-z-tidal-launch-artist-stakeholders, accessed May 3, 2016.
65 Tim Ingham, “Drake’s Spotify Gamble Is Paying Off: Views Just Made 8m in a Day,” Music Business Worldwide, May 2, 2016,
http://www.musicbusinessworldwide.com/drakes-spotify-gamble-is-paying-off-views-just-made-8m-in-a-day/, accessed May 3, 2016.
66 Dan Rys, “Beyonce's ‘Lemonade' Release: Tidal Has Streaming Exclusive ‘in Perpetuity,' Purchase Exclusive Ends at 10 P.M.,”
Billboard, April 24, 2016, http://www.billboard.com/articles/news/7341800/how-long-beyonce-lemonade-tidal-streamingexclusive, accessed May 3, 2016.
67 Micah Singleton, “Does Spotify Need to Go After Exclusive Content?” The Verge, February 18, 2016,
http://www.theverge.com/2016/2/18/11054460/spotify-exclusive-content-apple-tidal, accessed May 3, 2016.
68 “Amazon Prime,” Amazon.com, https://www.amazon.com/Amazon-Prime-One-Year-Membership/dp/B00DBYBNEE, accessed
May 3, 2016.
69 “Meet YouTube Red, the Ultimate YouTube Experience,” YouTube Official Blog, October 21, 2015,
https://youtube.googleblog.com/2015/10/red.html, accessed May 3, 2016.
70 Everett Rosenfeld, “Netflix Beats On Earnings, But Plunges After Weak Guidance,” CNBC, April 18, 2016,
http://www.cnbc.com/2016/04/18/netflix-reports-first-quarter-2016-results.html, accessed May 3, 2016.
71 “Music in Sweden: I Have a Stream,” The Economist, March 22, 2014, http://www.economist.com/news/business/21599353land-abba-takes-streaming-i-have-stream, accessed June 8, 2014.
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Case Preparation Questions
Disney
1. Why has Disney been successful for so long? What is its competitive advantage
(CA)? Where does it’s CA come from? Be careful about how you define
competitive advantage
2. What did Michael Eisner do to rejuvenate Disney? Specifically, how did he
increase net income in his first four years?
3. Has Disney diversified too far in the late 1990s?
Cola War Continue: Coke and Pepsi
1. Why, historically, has the soft drink industry been so profitable?
2. Compare the economics of the concentrate business to that of the bottling
business: Why is the profitability so different?
3. How has the competition between Coke and Pepsi affected the industry’s profits?
4. How can Coke and Pepsi sustain their profits in the wake of flattening demand
and the growing popularity of non-CSDs
Trader Joe’s
1. How do firms in the supermarket industry make money?
2. What are the key sources of Trader’s competitive advantage?
3. How would you modify Trader’s strategy moving forward?
Tesla
1. What do you think of Tesla’s entry strategy? What barriers did it have to
overcome? Will other firms follow in Tesla’s footsteps?
2. Do you think Tesla’s secret plan was really a plan or just an ex-post
rationalization (hindsight)? Would it matter?
3. How do you expect the industry to evolve?
Spotify
1. How is Spotify a platform? What participants are part of it? In what way
Spotify grows and become successful through its platform and the
participants?
2. How do you view the future of Spotify? Can it become profitable? How could
it do to become profitable?
3. Will music streaming be a winner-take-all industry?
Lululemon
1. What is Lululemon’s business model? What did Advent International and
Highland Capital see in it?
2. As an incoming CEO, how should him/her assert strategic leadership at an
organization in transition?
3. What is Lululemon’s (LLL) culture? Where does it come from? How important is
LLL’s culture?
4. What should Day do? What to do first? What must change? What must not
change? How fast can LLL grow a business while still maintaining its distinctive
culture?
WorldCom
1. What are the pressures that lead executives and managers to “cook the books”?
2. Why were the actions taken by WorldCom managers not detected earlier? What
processes or system should be in place to prevent or detect quickly the types of
actions that occurred in WorldCom?
3. Were the external auditors and board of directors blameworthy in this case? Why?
4. How should employees react when ordered by their employer to do something
they do not believe in or feel uncomfortable doing?
Analyzing
Strategic
Management
Cases
chapter 13
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education
.
Learning Objectives
13-2
After reading this chapter, you should have a
good understanding of:
LO13.1 How strategic case analysis is used to
simulate real-world experiences.
LO13.2 How analyzing strategic management cases
can help develop the ability to differentiate,
speculate, and integrate when evaluating complex
business problems.
LO13.3 The steps involved in conducting a strategic
management case analysis.
Learning Objectives
13-3
LO13.4 How to get the most out of case analysis.
LO13.5 How integrative thinking and conflict-
inducing discussion techniques can lead to better
decisions.
LO13.6 How to use the strategic insights and
material from each of the 12 previous chapters in the
text to analyze issues posed by strategic
management cases.
Strategic Case Analysis
13-4
Consider…
To remain competitive, established firms
must continually refine their ability to solve
business problems. This requires making
good decisions.
Making a good decision requires choosing
among various alternatives, and research is
required in order to identify alternatives.
Good research requires asking and
answering the right questions.
Strategic Case Analysis
13-5
Case
analysis helps us learn how to ask
good questions & make good decisions
Why
do some firms succeed and others fail?
Why are some companies higher performers
than others?
What information is needed in the strategic
planning process?
How do competing values and beliefs affect
strategic decision-making?
What skills and capabilities are needed to
implement a strategy effectively?
Question?
13-6
The strategic management process entails three
ongoing processes:
A.
B.
C.
D.
analysis,
analysis,
analysis,
analysis,
actions, and synthesis.
decisions, and actions.
evaluation, and critique.
synthesis, and antithesis.
Strategic Case Analysis
13-7
Strategic
management cases include
A
detailed description of the challenging
situation faced by an organization
Usually includes a chronology of events
Can include financial statements, product
lists, interviews with employees
Strategic
An
case analysis requires
ability to evaluate business situations
Go beyond the textbook & root out essential
issues and causes of a company’s problems
Strategic Case Analysis: Skills
13-8
Strategic
skills needed include the ability
to differentiate:
Evaluate
many different elements of the
situation at once
Differentiate between the factors that are
influencing the situation
Understand that problems are often complex
& multilayered
◼ Need
to dig deep
◼ Don’t be too quick to accept an easy solution
Strategic Case Analysis: Skills
13-9
Strategic
skills also include the ability to
speculate:
Envision
an explanation that might not
readily be apparent
Imagine different scenarios
Contemplate the outcome of the decision
Deal with uncertainty & incomplete
knowledge
◼ Data
may be missing
◼ Information may be contradictory
◼ Details & consequences may be unknown
Strategic Case Analysis: Skills
13-10
Strategic
skills also include the ability to
integrate:
Consider
the impact of various decisions &
environmental influences on all parts of the
organization
Create one set of recommendations that
affect the whole company
◼ Realize
that changes made in one part of the
company will affect other parts
◼ Need to adopt a holistic perspective
Conducting a Case Analysis
13-11
Preparation:
Investigate
the situation
Analyze and research possible solutions
Gather the advice of others
Put yourself in the shoes of an actual
participant
◼ Are
❑
you a strategic decision-maker?
Are you the business founder or owner?
◼ Are
you a member of the board of directors?
◼ Are you an outside consultant?
Example:
Preparing a Business Plan
13-12
Preparing
a case analysis is like crafting a
business plan. Here are some questions
you should be able to answer:
What
is the competitive advantage?
Is it in a growth market?
What will customers pay for it?
(How will the business make money?)
How will the business be staffed?
Is the product innovative?
Are the plans and goals realistic?
Conducting a Case Analysis
13-13
Step
1: Become familiar with the material
Read
quickly through the case one time
Assess possible links to strategic concepts
Read the case again, making notes
Evaluate application of strategic concepts
Formulate an initial recommendation
Go through the case again to assess the
consequences of actions you propose
Conducting a Case Analysis
13-14
Step
2: Identify problems
Some
cases have more than one problem to
solve
Avoid getting hung up on the case symptoms
Try to articulate the case problems
◼ Sometimes
writing down a problem statement
gives you a reference point
Some
problems will not be apparent until
after you do the case analysis
Conducting a Case Analysis
13-15
Step
3: Conduct strategic analyses
Determine
which strategic issues are
involved
Use strategic tools to conduct the analysis
◼ Five
Forces analysis
◼ Value chain analysis
◼ Contingency frameworks
◼ Financial analysis – Financial Ratio Analysis
Test
your own assumptions about the case
Strategic Case Analysis Tools
13-16
Exhibit 13.1
Summary of
Financial Ratio
Analysis Techniques
Conducting a Case Analysis
13-17
Step
4: Propose alternative solutions
Develop
a list of options
Evaluate the alternatives
◼ Can
the company afford it?
◼ How will competitors respond?
◼ Will employees accept the change?
◼ How will it affect other stakeholders?
◼ How does it fit with the vision, mission &
objectives?
◼ Will the culture or values of the company change?
Conducting a Case Analysis
13-18
Step
4: Make recommendations
Make
a set of recommendations supported by
your analysis
Describe exactly what needs to be done
Explain why this course of action will solve the
problem
Indicate how best to implement the proposed
solution
Note: the solution you propose must solve the
problem you identified
Conducting a Case Analysis
13-19
Preparing
an oral presentation
Organize
your thoughts
Emphasize strategic analysis
◼ Background/problem
statement = 10-20%
◼ Strategic analysis/options = 60-75%
◼ Recommendations/action plan = 10-20%
Be
logical and consistent
Defend your position
Share presentation responsibilities
Conducting a Case Analysis
13-20
Preparing
Be
a written presentation
thorough
◼ Provide
support for your arguments
◼ Reference specific case materials or other facts
Coordinate
team efforts
Avoid restating the obvious
Present information graphically
Exercise quality control, be professional
◼ Good
grammar, spelling, consistent style
throughout
Getting the Most from
Case Analysis
13-21
Keep an open mind
Take a stand for what you believe
Draw on your personal experience
Participate and persuade
Be concise and to the point
Think out-of-the-box
Learn from the insights of others
Apply insights from other case analyses
Critically analyze your own performance
Conduct outside research
Case Analysis
Decision-Making Techniques
13-22
Integrative
thinking involves making
choices by reconciling opposing thoughts
Proposing
more options & new alternatives
Identifying creative solutions
Integrative
What
thinking is done in four stages
features of the decision are salient?
What are the causal relationships between the
features?
What might a sequence of decisions look like?
What might be the most creative resolution?
Case Analysis
Decision-Making Techniques
13-23
Exhibit 13.4 Integrative Thinking: The Process of Thinking and Deciding
Source: Reprinted by permission of Harvard Business School Press from R. L. Martin. The Opposable Mind,
2007. Copyright 2007 by the Harvard Business School Publishing Corporation; all rights reserved.
Case Analysis
Decision-Making Techniques
13-24
Conflict
inducing techniques can be very
helpful in arriving at better solutions
Conflict
◼ Failure
can help avoid groupthink
to critically evaluate alternatives
The
devil’s advocacy approach assigns
someone the role of official critic
◼ Ensures
the group will take a hard look at its
original proposal
Dialectical
inquiry approaches a problem
from two alternative points of view
◼ Formal
debate using a thesis & an antithesis
Case Analysis
Decision-Making Techniques
13-25
Exhibit 13.5 Two Conflict-Inducing Decision-Making Processes
Strategic Case Analysis Process
13-26
Analyzing
Has
organizational goals & objectives
the company developed short-term
objectives that are inconsistent with its longterm mission?
Has the company considered all of its
stakeholders equally in making critical
decisions?
Is the company being faced with an issue that
conflicts with one of its long-standing
policies?
Strategic Case Analysis Process
13-27
Analyzing
Does
the external environment
the company follow trends and events
in the general environment?
Is the company effectively scanning and
monitoring the competitive environment?
Has the company correctly analyzed the
impact of the competitive forces in its
industry on profitability?
Strategic Case Analysis Process
13-28
Analyzing
Does
the internal environment
the company know how the various
components of its value chain are adding
value to the firm?
Has the company accurately analyzed the
source and vitality of its resources?
Is the company’s financial performance as
good as or better than that of its close
competitors?
Strategic Case Analysis Process
13-29
Assessing
Does
a firm’s intellectual assets
the company have underutilized
human capital?
Is the company missing opportunities to
forge strategic alliances?
Has the company developed knowledgemanagement systems to capture what it
learns?
Strategic Case Analysis Process
13-30
Formulating
Has
business-level strategies
the company chosen the correct
competitive strategy given its industry
environment and competitive situation?
Does the company use combination
strategies effectively?
Is the company using a strategy that is
appropriate for the industry life cycle in
which it is competing?
Strategic Case Analysis Process
13-31
Formulating
Is
corporate-level strategies
the company competing in the right
businesses given the opportunities and
threats that are present in the environment?
Is the corporation managing its portfolio of
businesses in a way that creates synergies
among the businesses?
Are the motives of the top corporate
executives who are pushing diversification
strategies appropriate?
Strategic Case Analysis Process
13-32
Formulating
Is
international-level strategies
the company’s entry into an international
marketplace threatened by the actions of
local competitors?
Has the company made the appropriate
choices between cost reduction and local
adaption to foreign markets?
Can the company improve its effectiveness
by embracing one international strategy
over another?
Strategic Case Analysis Process
13-33
Formulating
Is
entrepreneurial strategies
the company engaged in an ongoing
process of opportunity recognition?
Do the entrepreneurs who are launching
new ventures have vision, dedication &
drive, and a commitment to excellence?
Have strategic principles and tools such as
five-forces analysis & value-chain analysis
been used in the process of developing
strategies to pursue the entrepreneurial
opportunity?
Strategic Case Analysis Process
13-34
Achieving
Is
effective strategic control
the company employing the appropriate
informational control systems?
Does the company have a strong and
effective culture that aligns its values &
rewards system with its goals & objectives?
Has the company implemented control
systems that match its strategies?
Strategic Case Analysis Process
13-35
Creating
Has
effective organizational designs
the company implemented
organizational structures that are suited to
the type of business it is in?
Has the company employed boundaryless
organizational designs where appropriate, &
do senior managers maintain appropriate
control of lower-level employees?
Does the company use outsourcing to
achieve the best possible results?
Strategic Case Analysis Process
13-36
Creating
a learning organization and an
ethical organization
Do
company leaders promote excellence as
part of the overall culture?
Is the company committed to being a
learning organization and does it capitalize
on the individual & collective talents of
organizational members?
Have company leaders exhibited an ethical
attitude in their own behavior?
Strategic Case Analysis Process
13-37
Fostering
Has
corporate entrepreneurship
the company resolved the dilemmas
associated with managing innovation, and
is it effectively defining and pacing its
innovation efforts?
Has the company developed autonomous
work units that have the freedom to bring
forth new product ideas & has it used
product champions to implement new
venture initiatives?
Does the company have an entrepreneurial
orientation?
Example:
Why Learn to do a Case Analysis?
13-38
Learning to do case analysis will help:
Increase your understanding of what managers should and
should not do in guiding a business to success.
Build your skills in sizing up company resource strengths &
weaknesses and in conducting strategic analysis in a variety of
industries & competitive situations.
Get valuable practice in identifying strategic issues that need to
be addressed, evaluating strategic alternatives, & formulating
workable plans of action.
Enhance your sense of business judgment, as opposed to
uncritically accepting the authoritative crutch of the professor or
“back-of-the-book” answers.
Gain in-depth exposure to different industries & companies, so
help you acquire something close to actual business experience.
Case Study Guide
Purpose: Some tips of how to analyze cases to prepare for class discussions.
Here are two common failings in case preparation that often go hand in hand.1 First, students often do no apply
conceptual frameworks, or apply frameworks but in a non-rigorous and non-systematic manner. Some students
simply examine cases based on their own past experience without incorporating theories. Second, many students
do not devote sufficient time to reading, analyzing, and discussing a case before class. This is because many
students succumb to the temptation to quickly read a case and latch on to the most visible issues that present
themselves. Thus, they come to class prepared to make only a few superficial observations about a case.
Applying the frameworks systematically may take more time and effort in the beginning but it will generally
lead to deeper insights about the cases and a more profound understanding of the concepts in lecture materials.
As you gain experience in this systematic approach to analyzing cases, you will find that your preparation time
will decrease. Below are some tips that will assist you in analyzing cases. But keep in mind that no tips can
substitute for hard work.
1. Skim through the case very quickly. Pay particular attention to the exhibits. The objective is to gain
familiarity with the broad facts of the case. You may find it especially useful to focus on the first and
last few paragraphs of the case in this step
2. Read the case more carefully and make notes, underline, etc. Identify what appear to be important
facts. The assigned case questions that I posted online are also helpful.
3. Define the basic issues. This is perhaps the most important step and the stage that requires the most
wisdom and critical thinking. Cases are rarely tidy problem sets where the issues or problems are
explicitly stated and the tools needed to address those issues are prescribed. You need to ask: What are
fundamental issues in the case? Many students tend to do what decision-making scholars label
“plunging-in” which is drawing conclusions without first thinking about the crux of the issues involved
in a decision. They typically seize the first issues that are prominently mentioned in a case. You should
avoid this trap.
4. Develop and elaborate your analysis of the key issues. This is the step for elaborating Step 2. Look
for quantitative evidence that can support the fact you identify. Opinion unsupported by factual
evidence and analysis are generally not persuasive. Find the real rootcauses, not superficial symptoms.
For example, having a low blood pressure only tells you that you are sick but does not let you the causes
of a sickness. This stage also involves organizing the acts in the case. Often you will find it very helpful
to draw diagrams to enhance your thinking clarity.
5. Draw conclusions and formulate a set of recommendations. You may be uncomfortable drawing
conclusions and making recommendations because you do not have complete information. This is an
external dilemma for managers. For those who want to wait for complete information to do something
may act too late. You should strive to do the most complete analysis under reasonable time constraints.
In formulating recommendations, you should be clear about priorities and the sequence of actions you
recommend.
6. Prepare for class discussion. We have observed that many of students who are low contributors to
class discussions bring few or no notes to class. Preparing organized notes will help you to absorb,
learn, and contribute to the insights that emerge from class discussion.
1
The guidelines are adapted from Barney and Hesterly’s (2009) recommendation.
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