How successful is Spotify in the global context?
An in-depth strategic analysis of Spotify’s global competitive positioning in the audio-streaming industry
Spotify Technology SA is a technology corporate operating in the highly competitive audio streaming industry. Even though it owns 36% of global market share (Exhibit 1), it’s facing increasing pressure from competitors, especially the large tech players Apple and Amazon. Spotify has launched several initiatives (e.g. offering highly personalised content and analytics to users) and expanded its offering (such as entering the podcast streaming market, or expanding into South Korea in H1 2021 — Citation 1) to further differentiate itself from competitors. In the following report, I will conduct a strategic analysis to better understand Spotify’s competitive position in the current global environment.
Spotify competes in the audio streaming industry, where incumbents offer a mix, or combination of, music, podcasts and live shows. If we look at the wider audio consumption industry and break it down into segments (Exhibit 2), we can see that different segments are in different stages of the product lifecycle. Vinyls for example have seen a revival in recent years, with sales increasing between 11% and 15% annually (Citation 3). Video streaming on the other hand is in a more mature state, with services like YouTube leading the segment for many years. Video streaming accounts for 66% of global streaming shares, music accounting for 33% — video is the preferred consumption platform for international music genres (e.g. K-pop in South Korea, Bollywood in India) due to its free model (Citation 3).
Some of the mature industry segments like radio, CDs, and even video streaming got disrupted by on-demand music streaming services such as Spotify in the early 2010s. The rise of music streaming has led to a drop in piracy, with a YouGov survey finding that only 10% of people surveyed in the UK downloaded music illegally, down from 18% 5 years prior (Citation 4).
When looking at the industries Spotify Technologies SA competes in, the music streaming industry has been in the mature phase for the past 3–5 years, and the podcast streaming industry in the growth phase for the past 2–3 years (Exhibit 3).
For the music streaming segment:
- The industry is past the annealing phase. When we plot a strategy map (Exhibit 4), most incumbents are concentrated in the same area. The industry is past experimenting with different business models and ideas and has settled along similar lines. This typically entails the service paying royalties for every stream whilst providing access to a huge library of content to its users
- Margins in the industry are low, and very few firms are profitable yet (Citation 5, Citation 6). If we take Spotify as an example, they reported a net loss of €73m in 2019 (Citation 5). However, margins are increasing — Spotify’s cost of revenue is increasing by 25.2% YoY on average, which is slower than the average YoY revenue growth of 31.9%, which suggests that they will break even in the next 1–3 years (Citation 5) due to its cost structure getting more efficient
- Many firms have exited the industry already (Citation 7). Even though fewer firms are exiting the industry, the risk is still there. Pandora’s revenue and organic growth have been decreasing, by -6% and -8% respectively between 2018–2019
- Revenues are increasing quite rapidly — Spotify’s top line is growing by 31.9% YoY on average (Citation 5)
The podcast segment is in its early phases of growth:
- +333% growth in shows, from approximately 525k in June 2018 to 1.75 million in January 2021 (Citation 9)
- +230% growth in episodes, from approximately 18.5 million in April 2018 to 43 million in January 2021 (Citation 9)
- The industry is starting to coalesce around a business model similar to the music streaming one. Due to the overall infancy of the industry, firms are starting to realise that acquiring podcast-making firms can improve their competitive positioning as no royalties will be paid. Spotify, for example, acquired Anchor Media and Gimlet in 2019 for $340m (Citation 10) and Megaphone in 2020 for $235m (Citation 11)
- Margins and cumulative revenues are increasing due to the infancy of the business model, and due to firms like Spotify paying a fixed cost for podcasts due to vertical integration
Audio streaming is an international industry. There are high levels of international trading, as content is often, but not always transferrable between markets e.g. English songs can be enjoyed by people in non-English speaking countries, but local markets will have different local music needs. Foreign direct investment tends to be low — operations do not necessarily need to be established in local markets as services typically run entirely on a digital platform.
Most incumbents in the industry are concentrated on their approach to internationalisation (Exhibit 5), with medium levels of global integration due to the lack of need of foreign direct investment, and somewhat high levels of local responsiveness. Content typically has geographical limitations due to artist rights in different countries. Only Pandora and Tencent sit outside of the concentration as they cater to very specific markets.
Spotify has entered foreign markets via 2 strategies: exporting and foreign direct investment:
- Exporting Spotify has been able to rapidly expand into international markets by simply making its product available in other countries. Given that the service is entirely digital, there’s no direct need to establish operations in other countries, and transportation and tariff costs are non-existent. Spotify currently operates in 92 markets globally, having expanded into Russia and 12 other countries in eastern Europe in 2020 (Citation 12), and is planning to expand into South Korea in H1 2021 (Citation 13). This is undoubtedly leading to a more cost-efficient structure, and it is expected that Spotify will break even in the next 1–3 years (Citation 5)
- Foreign Direct Investment It has acquired a 21.1% stake in Tencent Music (Citation 13) which dominates the Chinese music streaming market, reporting a 78% market share in Q1 2020 (Citation 14). This has allowed it to gain access to the hard-to-enter Chinese market at the cost of high capital investment and increased bureaucracy
Spotify currently operates in very few African countries, with the continent currently dominated by Boomplay, which has around 75m users as of 2020 (Citation 15). Boomplay is controlled by NetEase, a Chinese music streaming company that operates exclusively in China. Additionally, Tencent is also planning an expansion into Africa through Joox, which currently only operates in South Africa (Citation 16). Spotify has the option to maintain its 21.1% stake in Tencent Music to benefit from Joox’s expansion into Africa, or alternatively, it can launch its service throughout the continent. Needless to say, it is expected that Africa will see intense head-to-head competition in the industry in the coming years.
Spotify’s diversification type is quite low despite having acquired multiple companies in the past 1–3 years. Almost 100% of its revenue comes from its main music streaming service (Exhibit 6). Only 9% of revenue comes from outside the platform — through its 21.1% stake in Tencent Music (Citation 18).
It’s reason to acquire multiple firms in the podcast industry were the following:
- Financial reasons, including risk reduction and capitalising on a related market
- Operational reasons — leverage its rent-generating asset — the Spotify platform
- Strategic reasons, including raising rival’s costs and reducing rivalry through mutual forbearance
If we plot Spotify’s firms on a diversification matrix (Exhibit 7), all of them fall in the high competitiveness, high attractiveness segment. If we carry out a 5 forces analysis, we can see that music and podcast streaming are highly attractive industries (Exhibit 8), and business units have a competitive advantage as they have access to all of Spotify’s 320m monthly average users (Citation 25) and can benefit from economies of scale. Spotify should therefore hold onto, and build these businesses to prepare them for future profitability.
There are a number of key issues that impact Spotify’s primary and secondary stakeholders (Exhibit 9). They have taken various measures throughout the years to create value for all of its stakeholders (Exhibit 10):
- They launched Artists for Spotify in order to increase transparency and create more value for artists (Citation 26). This feature helps artists gain rich insight into their audience, and understand royalties work and how much they are expected to get paid
- They will start experimenting with giving additional exposure to content creators in exchange for lower royalties, for artists that want to give special attention to certain content. This, however, has created a huge backlash amongst artists (Citation 27)
- Expansion and diversification are leading to a more efficient cost structure (Citation 5), with vertical integration into podcast streaming potentially paying off huge dividends in the form of economies of scale in the future
- Adding 40,000 new tracks every day (Citation 28) creates value for customers as they have a larger library to access
- Signing exclusive contracts with content creators, like the $100m contract signed with Joe Rogan in 2020 (Citation 29), create value for customers as it creates a unique differentiation point and provides access to exclusive content. It also creates value for content creators as it firstly, increases the outreach of their content due to Spotify’s large user base, and secondly, they are offered an alternative payment method (upfront VS royalty fees) which is more beneficial for them in the short-term
- Finally, Spotify has created an agile working environment which can lead to better employee engagement and productivity (Citation 30)
Most of Spotify’s initiatives have created a positive impact. However, royalty fees are still quite a sensitive issue. Recently, the Union of Musicians and Allied Workers launched the Justice at Spotify campaign, aimed at increasing royalty fees for artists that are relying solely on the platform to generate income during the Covid19 pandemic (Citation 31). Other advocacy groups such as #brokenrecord in the UK have also started generating buzz as they seek to protect artists during the pandemic (Citation 32). In order for Spotify to keep creating value for its key primary stakeholders, it will need to think about aligning the problem with its values, rather than making it a prioritisation problem where one party wins and the other one loses.
SYNTHESIS OF FINDINGS
Spotify has quite a strong global competitive position as discussed in this essay. The music and podcast industries are still growing, and quite quickly. Spotify is in a great position to take advantage of this trend given its position in the market, and its recent podcast-creating acquisitions. Additionally, its internationalisation strategy so far has gone quite well — it currently operates in 92 countries and is planning further international expansion in the short term, as well as having stakes in competitors. These stakes can be quite beneficial when competitors expand into the largely untapped African market. Moreover, it’s starting to diversify its service offering and portfolio, by acquiring multiple podcast-making firms and investing in other businesses in the industry. Finally, huge value is created for primary and secondary stakeholders, however, Spotify needs to consider alternative measures to increase the fairness and transparency of royalties paid to artists as a number of stakeholders are not satisfied with its current measures.
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