CASE STUDY – SPOTIFY: PROFITABILITY IN MUSIC STREAMING SERVICES

The case focuses on Spotify and how music streaming services pay out royalties to artists, as well as how
Spotify can turn a profit but also keep artists on their platform.

CASE STRUCTURE:

1. Nature of the challenge is highlighted.

2. Company information: the company itself is presented.
3. Action taken: the explanation of what has been done and the action taken is discussed.
4. The outcome is revealed.
5. The learning is presented.

NATURE OF THE CHALLENGE

Spotify is the world’s largest music streaming platform. However, it has struggled to attain profitability.

In 2018, Spotify managed to have EBITDA (earnings before interest, taxes, depreciation and amortization)
of more than -$300 million, -324 million USD to be exact.

This is an increase in losses compared to previous years. This shows how despite having positive growth,
over the last few years, the company has struggled to attain profitability, mainly due to the extensive cost
of music licensing.

The royalties that Spotify has to pay to musicians and artists account for 75% of its expenses. Moreover,
these agreements that are in place with artists are not without issues. For instance, multiple artists have
expressed that they feel they are not being compensated enough for their Intellectual Property.

ROOTS OF THE CHALLE NGE

They lie in the extensive operating costs of the licensing deals that Spotify has in place, coupled with
limited ability to generate additional revenue.

The majority of the company’s revenue is derived from the subscriptions users have paid, while a much
smaller percentage is received form advertisements in the free version of the service.

A factor that adds to the challenge is the increase in competition in the market with alternative streaming
platforms, such as Apple (Apple Music), Google (Google Play), Amazon (Amazon Music), and Pandora.

This means that consumers have more alternatives available to them if they feel they are being
overcharged or over advertised, or if they have any other negative feelings, they might have negative
reactions to the challenge it might generate.

Therefore, it’s important for the company to successfully transmit its value proposition to the customer.

But what is a value proposition exactly? A value proposition refers to the value a company promises to
deliver to customers so they choose to buy their product. It’s also a declaration of intent or a statement
that introduces a company’s brand to consumers by telling them: what the company stands for, how it
operates, and why it deserves their business.
ABOUT SPOTIFY

Spotify is the largest music streaming platform in the world. It was founded in 2006 in Sweden and in 2008
it was launched with over 50 million tracks available.

The revenue generated from Spotify is derived from subscription costs on the premium model, as well as
advertising on the free model with ads shown to customers.

75% of Spotify’s expenses are music royalties. The company has experienced excellent growth over the
last few years, increasing the revenue and number of paying users over the last few years. On the other
hand, Spotify, as I said before has not had a positive EBITDA since at least 2013.

Therefore, the company has to meet the challenge of attaining profitability.

ACTION TAKEN: WHAT WAS DONE, H OW AND WHY IN ORDER TO MEET THE CHALLENGE

In order for Spotify to attain profitability, the company has undertaken various actions as there were
various options available that could lead to an increase in revenue.

1. Spotify has attempted to grow with the acquisition of Gimlet Media, which produced a number
of highly rated and listened podcasts such as “Reply All”. This is an indication of a new angle that
Spotify is attempting to exploit, seeking to become a major platform for not only music but also
podcasts.
This addition value that Spotify is adding to its platform is a method to entice more customers to
switch to a premium model.
2. By introducing an all-you-can-eat utility service for a fixed monthly subscription, Spotify offered
a clear consumer value proposition that unlocked an audience of customers willing to pay for
music, and increased revenue across the music ecosystem.
As the company accumulated data from its growing user vase on music tastes and preferences,
Spotify expanded from utility to discovery, offering users data-driven personalization that drove
both discovery and engagement.
By offering unlimited music streaming, Spotify shifted a consumer behaviour from a transaction-
based model to an access-based model. The company offers listeners unlimited access to a
catalogue of over 35 million songs.
Spotify organized these millions of tracks in a systematic manner, allowing listeners to easily
search for filters for songs by genre, album, and artist on demand.

THE OUTCOME

In 2018, it was the first time when Spotify ended the year with positive operating profits, as well as 30%
growth in subscription-based revenues and 34% growth and ad-based revenues. Even though ad-based
revenues only contributed 11% to the total revenue in 2018, that was a big increase compared to the
previous year which shows that Spotify has adopted the correct approach towards increasing their ad-
based revenue.

The company has also expanded their portfolio by going into podcast production. As I said, it recently
acquired the podcast production company, Gimlet Media and together they want to diversify their
services and offer more to their users. With podcasts, the company is hoping that more users will start
listening to podcasts in the coming years and implementing advertising in podcasts to free users.
To conclude, Spotify has found it difficult to generate positive operating profit over the years. But looking
into the future their primary aim is expansion and acquisition of more firms in order to increase premium
users and to increase their podcast use to generate more overall revenue.

WHAT WAS LEARNED

What lessons are there to be learned by other companies based on Spotify’s experience?

1. Trust: if you believe and trust your business model as well as work hard you can make a success.
The biggest lesson it can be taken from the Spotify case is the fact that even though you’ll go
through a rough first couple of years in terms of revenue and growth, if you believe and have the
correct business model you can always turn it around.
2. Taking risks: more rewarding in the long-run.
Spotify also paid a lot of money out to royalties in the first couple of years, but will be receiving
more revenues over the years as more songs get played. This means if you take the risk to invest,
it will not pay off immediately, but it will be more rewarding in the long-run.
Spotify will now be earning more money as more songs get played and people use the platform.
3. Always try to keep in front of the industry: Spotify going into podcasts.
The company is also competing with the likes of Apple and Amazon, which can afford to lose
money on their music offerings as a part of a larger customer retention strategy. None of this is
to say Spotify is a bad company. Spotify’s CEO, Daniel Ek, has created a transformative new
entertainment experience enjoyed by 180 million active users and stayed in front of the industry.
But until streaming companies are able to gain the influence of the music industry, they will never
make any money, according to Fortune.
4. It’s more profitable working directly with artists: removing third-party agreements.
Lastly, with regards to music streaming services, such as Spotify, it is more profitable to work
directly with artists and to remove third-party agreements as they come with personal
agreements that make it difficult for Spotify to negotiate directly. These companies have their
own agreements with artists in regards to when music is published, which platforms and the
royalties.