DUE TONIGHT Business Policy & Strategy - Company: Spotify
alisong
GuallpaPaper1External1.docx2
Alison Guallpa
September 25, 2021
Professor Kevin Johns
Business Policy & Strategy
Paper #1 External: Spotify
Introduction
Spotify is one of the most innovative Swedish firms in the world. The company majors in streaming videos, podcasts, and music through licensed agreements liaising with various record labels and other media companies as well as providing exclusive content. The company has established itself in Western Europe, Australia, the Americas, and Asia. Daniel Ek and Lorentzon Martin are the founding chief executive officers of the company in the year 2006. Interestingly, the company is well known for its support for freemium models. This is the tiered strategy for pricing in which music and other basic services are offered freely.
Over time, the company has gradually built its reputation and brand through outdoor advertisements that aim at the local users. The company has come up with creative content. It has provided opportunities to nurture talents as artists and musicians are employed to release content, tell various stories, and address several themes through playlists, songs, videos, and even podcasts (Eriksson et al., 2019). The company has been highly innovative over the years, which has seen it come up with data-powered playlists that include personalized information such as release radar, discover weekly and fresh fines. These contents were able to reap millions of listeners throughout the world. Generally, through the innovative progress of the company, it has been able to compete favorably with other competitors such as Tidal and Apple music. Therefore, the company has recorded steady growth despite stiff competition from giant competitors like Amazon.
Significantly, data is fundamental in every company. The aspect of data is crucial as it is from the analysis of data that conclusions are made. Data collection has greatly contributed toward the success of Spotify Company. The collected data enabled Spotify to come up with better strategies that have allowed the company to come up with new products that woo fans and users about particular times and moods of a season.
Porters Model
In most cases, once a company has been established and the boundaries created, many company stakeholders are faced with the problem of competitive forces analysis. The analysis is, therefore, important to identify the various opportunities and underlying risks in the business industry (Hill et al., 2014). Spotify Company employs the Porter model in competition analysis. The model deal with six aspects that shapes an industry. These are risks of market entry by other potential competitors, rivalry intensity, buyers' bargaining power, supplier bargaining power, substitutes to company products, and complements. The model analysis has helped the Spotify Company in understanding and coming up with solutions to competition nature and strategies to cope with stiff competition from rival companies.
Rivalry competition and bargaining power
Through a previous study conducted it show that the company has understood the needs of its customers and the major profitability aspects. Over time, Spotify has faced high competition concerning the advertisement, innovation, and pricing aspects. The high competition is a result of the existence of other companies in the industry offering similar streaming services such as Amazon Music, Tidal, Apple Music, and Tencent (Boscolo, 2020). Significantly, the bargaining power depends on the ability of buyers to bring down the set prices. Therefore, this depends on price sensitivity and the respective bargaining power.
Consequently, price sensitivity can be determined through factors such as product differentiation and product significance. On the contrary, the bargaining power of consumers is estimated by cost factors. In Spotify, the bargaining power of consumers is greatly determined by the cost and convenience of switching purchases from Spotify to other competitors. Therefore, Spotify subscribers have a high power of bargaining because of the presence of other numerous Companies with streaming services (Boscolo, 2013). Generally, the major suppliers of Spotify are artists. The artists' bargaining power is high since they have all the powers to boycott and shun the streaming services in case of unfairness.
New entry threats
On the other hand, the barriers that various companies face when entering new markets are different from industry to industry. When the barriers of entering a new market are low, the market can be easily entered by new companies (Hill et al., 2014). Therefore, new entrants' threat becomes high. On the contrary, if the entry barriers are high, entering into the industry becomes hard. In line with Spotify, the entry barriers into the music industry are low. Making entries into the music industry is not difficult. However, the question is how to cope with giant competitors.
Substitute and Complement
These are generally the products from different competitive /rivalry companies that satisfy similar consumer needs. Therefore, the presence of close substitutes indicates strong competitive conditions since it limits the setting of product prices. Therefore, Spotify faces stiff competition in the music industry since there are more substitutes, implying strong competitive forces from substitutes (Boscolo, 2013). On the other hand, complements are products sold by other companies, and they generally add value to other products. This happens when goods or services are used together as the combined products satisfy the customer's needs better. However, Spotify company experiences few complement services from other companies. Therefore, the existence of little complement services results in a weak complement force. The industry is consolidated, as there are limited large enterprises that share the market.
Macro environmental factors that affect Spotify
Covid-19 Pandemic
The music industry suffered the effects of the Corona Virus pandemic. In the wake of the Covid-19 pandemic, the related physical sales of music went down by one-third. Research shows that the way of listening to music by various people has drastically changed (Yeung, 2020). Likewise, the pandemic significantly scaled down the consumption for streaming services by Spotify in various countries. After the lockdown enforcement, the volume of music streaming was greatly reduced. People during the lockdown did not spend extensively on music services. Additionally, a recent report shows that music consumption went down by 12.5%. Interestingly, the research argues that the commuting time of the workers strongly correlated with music consumption decline (Yeung, 2020). The study showed that music consumption is reduced by restricted movements. However, during the pandemic, Spotify regained its subscribers and attained a widened listening scope for classical and children streaming services.
Use of technology
Technology hugely determines how business operations take place. With the advanced technology in the music industry, Spotify company has strived to remain innovative and at the top of technology to compete favorably with their rival businesses (Colbjornsen, 2020). The application of innovative Artificial intelligence, big data analysis, and machine learning has made Spotify stand out in the technological music industry. Generally, the company gets strength from its user base. Big data analysis allows for various comparisons and solid decisions through data interpretation. Additionally, the company implements API-based strategy technology for search options to the users.
Economy
The economic factor affecting Spotify is competitor pricing. Currently, Spotify has highly competitive prices in comparison to other music streaming companies in the industry. Spotify charges an amount of $9.99 for the use of a premium account, $14.99 for a family account with a maximum of six-user accounts (Statista, 2017). This generally seems to be the average trend prices of the industry, with companies like Apple music implementing the same pricing structure. Significantly, to remain relevant, competitive, and attract more customers, Spotify needs to maintain the same price point as its competitors. This prevents the company from realizing increased revenue by price increments (Colbjornsen, 2020). Therefore, this poses a challenge to Spotify Company even in the future. The position of Spotify within the industry life cycle is in the growth stage. This is the rapid growth stage of the company. Consequentially, rapid growth is experienced as a result of increased revenue. For instance, a research firm, Redburn, estimated that Spotify held 17% of revenues realized by revenue levels.
Conclusion
In conclusion, Spotify Company has always remained innovative through technological advancement for better music streaming services. The company uses Porter's model analysis for evaluating various competitive forces. The forces include suppliers' and buyers' bargaining power, industry competition, risk of entry, substitutes, and complements. Additionally, the company has been affected by external environmental factors such as the Covid-19 pandemic, technology use, and economy.
References
Boscolo, L. (2013). Managing Business Models in the Net Economy: the case of Spotify.
Colbjørnsen, T. (2020). The streaming network: Conceptualizing distribution economy, technology, and power in streaming media services. Convergence, 1354856520966911.
https://journals.sagepub.com/doi/full/10.1177/1354856520966911
Eriksson, M., Fleischer, R., Johansson, A., Snickars, P., & Vonderau, P. (2019). Spotify teardown: Inside the black box of streaming music. MIT Press.
Hill, C. W., Jones, G. R., & Schilling, M. A. (2014). Strategic management: Theory & cases: An integrated approach. Cengage Learning.
Statista. (2017). Music industry revenue in the U.S. 2017 | Statistic. [online] Available at:
https://www.statista.com/statistics/259980/music-industry-revenue-in-the-us/
Yeung, T. Y. C. (2020). Did the COVID-19 Pandemic trigger nostalgia? Evidence of music consumption on Spotify. Evidence of Music Consumption on Spotify (August 21, 2020).
