Spotify Marketing Plan 2014

1 CHRISTIANA STEGMAN 724.433.0788 CSTEGMAN@KENT.EDU

DR. EILEEN BRIDGES MKTG 65051 DECEMBER 2, 2014

SPOTIFY, INC. 45 W. 18th Street 7th Floor New York, NY 10011 spotify.com

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EXECUTIVE SUMMARY

In the face of an increasingly saturated digital music market, Spotify’s objective must be to

defend and increase market share by demonstrating higher value of the service to customers and artists in comparison to its competitors. This can be achieved through increasing the number of Spotify Premium subscriptions. An increased number of Spotify Premium subscriptions would benefit Spotify, rights holders, and the music industry at large through increased revenues. Increasing subscriptions moves away from Spotify’s original strategy of converting free users, but increases market share of new Spotify Premium users.

A suggested marketing mix includes changes to product, price, place, and promotion for the

target market of Dedicated Listeners, a segment that includes young professionals. Customized features could enhance a Dedicated Listener’s service experience. Because Spotify is significantly higher than its competitors in terms of price range, Spotify may consider offering additional types of discounts, such as referral discounts. Spotify could increase the number of places where access to the service can be purchased by selling gift cards for one month’s membership in retail stores. Gift cards would increase visibility of the service and make access to the service available for purchase offline. Spotify can increase messages to the target market by becoming more visible or integrated with similar apps and social media channels; for example, Spotify could promote its services on apps that Dedicated Listeners may use. Visual social media posts could increase perceived connection to the emotional experience of listening to music.

Spotify must also consider people, process, and physical evidence. Spotify can increase

its reach by implementing front-line service providers, utilizing invite-only sign up processes, and providing physical evidence through song and album sales.

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TA B L E

O F

C O N T E N T S

Introduction.....................................................6 Situational Analysis.......................................16 Marketing Planning.......................................28 Implementation and Control..........................38 References....................................................42

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i n t ro d u c t i o n

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I N T R O D U C T I O N

BACKGROUND

Spotify is a music streaming service that provides Digital Rights Management (DRM) restricted

content from various record music labels including Sony, EMI, Warner Music Group, and Universal.

The core product is the company’s subscription service to stream DRM music content over the Internet. Launched in 2008, Spotify was founded by a Swedish startup company. The organization was founded by entrepreneurs Daniel Ek and Martin Lorentzon. Privately funded by the owners, Spotify is incorporated in Luxembourg. (Spotify Limited) The service is presently available on a variety of digital platforms through the web and the Spotify’s own music playing software, providing music streaming to its 40 million active users. (“Spotify Engineering Culture - Part 1”) Spotify’s core product is a service. The service is in the form of a free or paid subscription to stream DRM music and video over the Internet through computers and other Wi-Fi enabled devices. Spotify serves a B2C market by providing both free and paid content directly to customers through e-commerce.

HISTORY

Spotify was initially developed in 2006 by a team called Spotify AB in Stockholm, Sweden.

The application was launched for public access in October 2008, with free accounts made available by invitation only in order to maintain a sustainable growth rate of the service. At launch, paid subscriptions were open to all. (Spotify Limited) In order to expand the music catalog for its growing user base, the organization formed licensing deals with major music labels including Universal Music Group, Sony BMG, Warner Music Group, and others. (“We’ve only just begun!”) Spotify concluded 2008 reporting financial losses of $4.4 million, compared to losses of $2.2 million from the previous year. Motivated by rapid user growth in Europe the organization remained ambitions, planning expansion to the United States and China, despite these losses. (Nylander) Figure 1 shows a historical time line of Spotify.

Spotify has many other significant milestones in its organizational history. In 2008, the

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Figure 1: Spotify Historical Timeline (Chapman)

organization experienced difficulties unique to providers of digital content; the service experienced an Online attack which placed malicious code on victims’ computers, which caused Spotify to temporarily 10

remove display advertising from external sources on free accounts. (Kobie) In April 2011, Spotify announced that the amount of music free members could access would be drastically cut by May of the same year. Original users of Spotify Open and Spotify Free accounts would be transferred to a new service, where listening would be limited to ten hours per month and allowing only five plays of a single track. (Cionci) Spotify presently does not operate under this model; rather, Spotify Free users can access the entire library of music, with periodic advertisements between songs as well as visual advertisements on the app and proprietary desktop software.

In July 2011, Spotify launched in the United States after numerous delays and years of

negotiation with major labels. Kenneth Parks, Spotify’s Content Chief noted that this expansion was the organization’s largest. The appeal of the service in the United States included playlist sharing with Facebook friends. Difficulties in negotiation stemmed from record label executives’ concern that music would be devalued through Spotify’s free offering. (Milian) This sentiment continued through 2014, demonstrated by Spotify’s clash with artist Taylor Swift. Shortly after Apple reported declining

worldwide sales of 14% for its iTunes Store, Swift announced that she would not allow Spotify to stream her newly released album 1989, and removed her entire music catalog from the service.

Decline in worldwide music sales is likely caused by music streaming services which allow users to consume as much music as they want. (Lansiti) MISSION

A blog post in 2011 by Andrew Webb of Social Web Q and A notes Spotify’s mission statement

as, “Millions of tracks, any time you like. Just search for it in Spotify, then play it. Just help yourself to whatever you want, whenever you want it,” (Webb 2011). This information is no longer available on Spotify.com. There is no specific mission statement noted on the organization’s web site. However, it is worthwhile to note that the text immediately displayed when visiting Spotify.com is “Music for Everyone.” This message is also the title of the organization’s web page (“Music for Everyone – Spotify”). This could be interpreted as the company’s current mission statement.

PRODUCT CATEGORY

“Music for everyone,” has translated into significant growth for the organization. During

2014, the number of users increased over 67%, with increases in both free and subscription-based accounts (1 Newman). Spotify presently offers two product categories to provide content to users through unique, proprietary technology. An ad-supported, free-to-the-user model aims to combat music piracy by offering an exceptional user experience.

In this model, the costs of licensed content are offset by advertising. Spotify’s premium, ad-free service is offered to users Table 1: Spotify User Account Growth (“Spotify Artists” )

(Spotify).

for a monthly subscription fee

Table 1 shows the growth rate of both premium and free accounts from 2009 to 2013.

Officially released in the United States in 2011, the organization has experienced significant growth

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(Kroeck). The company also moved into new markets; in December 2013, Spotify launched in over 20 new markets, making the service available to 55 countries. The company’s growth strategy for the future is to continue rapid expansion into global markets to augment growth in existing markets.

PRODUCT CONCEPT & POSITIONING

Spotify operates as a response to seemingly insurmountable illegal downloading and file

sharing that has taken place on services including Limewire, Napster, and Bittorrent over the last decade. Spotify’s core product is a service In the form of a free or paid subscription to stream DRM music over the Internet through computers and other 12

Table 2: Piracy by Age (“Spotify Artists” )

Wi-Fi-enabled devices.

Spotify serves a B2C market by providing both free and paid content directly to customers through e-commerce. Spotify’s streaming service is positioned by product attribute as a noble alternative to illegal downloading while boasting an expansive music library through it’s mission, “Music for Everyone.” The product concept of the streaming service involves minimizing Online music piracy through widely, easily available content. Offering access to 15 million tracks at no charge to the user, the goal of the organization is to restore value to the music industry otherwise lost by piracy and less monetized methods of music consumption (Kroeck). Table 2 illustrates piracy by age.

ORGANIZATIONAL CULTURE

The organizational culture of the company utilizes a horizontal structure in terms of their

engineering teams, called “Autonomous Squads.” This allows the engineering teams to be autonomous in small groups, yet tightly aligned to achieve larger organizational goals. This demonstrates Spotify’s interest in creativity as part of the organizational culture (Spotify Engineering

Culture). The organization aggregates content from right holders and distributes to customers through a proprietary technical streaming platform. The service provided depends upon the acquisition of content licenses from rights holders (Spotify).

EXISTING PRODUCT

Two of the most prominent factors affecting Spotify include technological and socio-cultural

factors. Spotify’s availability to the public depends on the technologies available. This makes the company vulnerable to rapid changes in devices and operating platforms. Additionally, Spotify must respond to the socio-cultural nature of its users by appealing to the music tastes of users worldwide.

This may influence the music companies that Spotify purchases DRM rights from, changing the music selection available to stream. Spotify has been controversial among musicians, some of whom criticize the organization for taking profits away from musicians (1 Newman).

Spotify has experienced growing controversy; while the service is praised for its innovation

and admirable attempts to hinder the expansion of Online piracy, Spotify has been criticized by artists that claim they are not paid enough for their music. The two-tiered “freemium” model has become the center of the music industry’s growing debate on streaming music Online. Artists express concern that furthering developments in digital music decreases the value of their work. Proponents of the model argue that it gradually lures listeners away from piracy, therefore growing revenues.

The most recent artist to publicly deem the organization a villain in the music industry was

Taylor Swift. Swift criticized the service in an interview with Yahoo as “a grand experiment,” and noted her belief that the service did not justly compensate the writers, producers, and artists who make music. In defense of the model, chief executive Daniel Ek noted that the organization has paid $2 billion in royalties. The streaming service is situated as a convenient, desirable alternative to music piracy and aims to help listeners and artists connect through a platform that generates revenues for the music industry. The two-tier model that Spotify employs hinges on the idea that royalty revenues will accrue as the service grows in number of users and moves into new global markets. However, with royalties as low as 0.6 cents per stream, artists argue that these rates

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are too low and that the pervasiveness of streaming music Online has contributed to significant decreases in sales. The first half of 2014 demonstrated decreased revenues of CDs and downloads by 14.6% compared to the same period of the previous year according to the Recording Industry Association of America. In contrast, streaming services including Spotify, Pandora, and YouTube experienced significant growth of 28% in the United States for the first half of 2014 (Sisario). Taylor Swift’s move to remove her music catalog from Spotify’s free streaming service demonstrates the increased bargaining power of more famous artists. Spotify’s success depends on the ability to provide a wealth of content to the user; this content can increase or decrease the user’s willingness to pay for the premium service, and can influence whether or not a potential user engages in the free service. Revenues generated by the premium service and ad revenues provided by free accounts allow Spotify to pay royalties to artists.

This marketing plan aims to expand upon the practices currently used by Spotify to increase

the ratio of paid subscriptions to free user accounts. In order for the organization to grow in a 14 profitable direction, Spotify must appease their target market, which demonstrates low willingness to pay, while satisfying content producers who ultimately have greater bargaining power.

ANTICIPATED SUCCESS

Increased bargaining power demonstrated by artists (Taylor Swift’s catalog removal from

Spotify) demonstrates a threat to the potential success of all digital music streaming services.

Despite artists’ bargaining power, digital music streaming services do demonstrate significant market share, demonstrated by the negative impact on iTunes Store sales in 2014. (Milian) Spotify has demonstrated exponential growth in both Spotify Free and Spotify Premium services; however, the success of the organization will rely heavily on increasing the number of paid users.

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s i t u a t i o n a l a n a l y s i s

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S I T U AT I O N A L

A N A LY S I S

ENVIRONMENT

One of the most prominent factors affecting Spotify includes technological advancement.

Spotify’s availability to the public depends on the technologies available. This makes the company vulnerable to rapid changes in devices and operating platforms. For example, Spotify must respond to advances in mobile platforms such as Android and iOS by releasing updated versions of their app. For example, the digital music streaming service released an updated version of its app for iPad users. The update featured refreshed typography and rounded iconography as improvements to the user interface. (Planas Rego) Both performance and aesthetic updates of the app impact the customer’s experience; as Spotify has no people physically serving as front-line service providers, both the app and software serve as the customer’s primary interaction with the service. Thus, ease of use and beauty of the interface play a critical role in fostering interaction with consumers. Spotify must also provide updates to its proprietary desktop software to protect users’ Online security.

Spotify must respond to the socio-cultural nature of its users by appealing to the music tastes

of users worldwide. This may influence the music companies that Spotify purchases DRM rights from, changing the music selection available to stream. Spotify licenses music from various labels and content aggregators; however, large selections of music come from big labels in the music industry.

This includes Merlin, who worked with Spotify early in the organization’s development to provide a selection of Indie content. Statistics show that the majority of top-100 Indie tracks played on Spotify in the United Kingdom were provided by Merlin. Merlin licensed over six thousand Indie labels to Spotify, including many of the world’s leading artists in that genre. (Cionci) Spotify’s licensed Indie content provided by Merlin serves as an example of how Spotify responds to socio-cultural music demand by increasing its catalog for users.

Spotify is also affected by legal constraints. In 2009, Spotify removed a number of songs in

their catalog, as well as adding country restrictions to some songs. These restrictions were required

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by stipulations in label deals. (“Some Important Changes to the Spotify Music Catalogue.”) This affects Spotify’s social sharing features, as sharing music with friends in different countries could be affected by country restrictions. For some users, this also decreases the size of the catalog of music available to stream in comparison to other users.

INDUSTRY

Since 2008, the global digital music market has expanded continuously, contributing to the

Phonographic Industry’s first increase of 0.9 percent in global recorded music sales since 1999.

Significant decreases in physical formats of music consumption have been compensated by a growing number of users of music streaming services.

Because of this growth,

20 Table 3: Recorded Music Sales in the US, 2000-2012 (Tschmuck)

music streaming represents

the fastest growing segment in the Phonographic Industry. A 2013 report from the International Federation of the Phonographic Industry (IFPI) demonstrates that revenues from streaming services grew by 62 percent (evaluated in USD) from 2011 to 2012. Music streaming revenue accounts for 13 percent of the global digital music market. Table 3 illustrates recorded music sales in the United States from 2000 to 2012, indicating a simultaneous increase in digital music sales and decline in physical product music sales. If the downward trend of physical sales continues, it is possible that physical sales would drop to $1.53 billion by 2015. In order to compensate for this sales loss, digital music sales must grow to $5.37 billion.

Music streaming providers play an important role in the increasingly dynamic Phonographic

Industry environment. In 2012, sales share of subscription and streaming services in the digital music market was 25.5 percent. This includes revenues from ad supported services as well as subscription

revenues; licensing payments paid to rights holders; and other direct payments to content providers.

(Tschmuck) This demonstrates a propensity of music listeners toward an access model as opposed to an ownership model. A significant issue demonstrated by all players involved in digital music streaming subscription services (Spotify, Pandora, and others) includes converting free account users into paid account users. This issue may be exacerbated by ubiquitous mobile technology, allowing users to be more frequently connected to free accounts. Consumers may also be less affected by adsupported free accounts, ignoring visual advertisements by simply turning off the device’s display.

SPOTIFY

Spotify’s business model involves gaining Spotify Free users, then converting these users

to Spotify Premium (paid) users. This model aims to increase monetization to the Phonographic Industry by producing more value per listener than other available formats. According to Russ Crupnick of NPD Group, a music consultancy firm, only 45 percent of the United States Internet population (190 million people) purchase music, spending an average of $55.45 per year. In contrast, a Spotify Premium user spends $120 per year on their music streaming membership. Spotify Premium subscriptions potentially double revenues to the music industry. (Spotify Artists)

As of November 2014, Spotify had over 50 million global users, with more than 12.5 million

subscribing to the Spotify Premium tier. As revenues have increased, payouts of royalty fees have also increased. Spotify pays nearly 70 percent of its total revenues to rights holders, including labels,

Figure 2: Spotify Royalty Payment Detail (“Spotify Artists”)

publishers, distributors, digital distributors, and independent artists. Royalties are then distributed by the publisher or label to each artist according to their contract. Figure 2 explains Spotify’s royalty payment process in greater detail. To date the organization has paid $1 billion in royalties. Spotify

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also increases revenues through various types of advertising, including both visual and audio advertisements. The company estimates that each user is worth $41; an average of all subscription and ad-based revenues, divided by the total number of users.

CUSTOMER BASE

Potential Spotify customers are categorized by user-type, time spent listening to music, and

platform used to listen to music. This categorization focuses on paid subscription music content from Spotify. The potential market includes music listeners who own devices that support the Spotify app or software. The target market includes music listeners who own particular devices that are interested in streaming music and are interested in a subscription service. The organization provides value to these target customers by providing a free version of the streaming service with ads, and the option to subscribe to the service without ads. The costs customers incur include the subscription fee ($5 per month for students and $9.99 per month for a regular subscription), the cost of a device that supports the software (smartphone, tablet, laptop, etc.). Customers also spend time in downloading 22 the software or app and curating their own playlists.

Table 4: Potential Customer Analysis Potential Customers

Market Size

Market Growth

Identifying Characteristics

Platform Used

Commuters

Large

High

Spend 30 minutes to 1 hour listening to music. Young working adults.

Mobile

Students

Large

High

Spend over 1 hour listening to music.

Mobile, Computer

Musicians

Small

Low

Use Spotify to distribute original music.

Computer

“Would-be” Illegal Downloaders (WBID)

Small

Low

Would otherwise download music illegally (ease of use is critical).

Mobile, Computer

Potential Spotify customers include commuters, students, musicians, and “Would-be” Illegal Downloaders. The organization focuses on bringing in customers who would otherwise engage in music piracy.

Table 4 describes potential customer analysis. All potential customers own either a personal

computer or Internet-capable mobile device. Potential customers include commuters, students, musicians, and “Would-be” Illegal Downloaders (WBID). Commuters would be attracted to Spotify Premium for customizable playlists and ad-free playback on mobile devices. These potential customers spend 30 minutes to one hour per day listening to music, and are typically young working adults. Students comprise a fast-growing potential customer group. Using both mobile devices and personal computers, this group spends over one hour per day listening to music. Musicians include a potential customer group, as individual artists can use Spotify to distribute original music. WBID are those who would otherwise engage in Internet piracy through programs such as BitTorrent. This potential customer group would be attracted to Spotify Premium’s ease of use, reliability, and large music catalog in comparison to downloading content from unknown sources.

Possible market segmentation includes the Dedicated Listener segment, Sociable segment,

Passive Listener segment, and Independent segment, described in Table 5. The potential market may be split by time spent listening to music, familiarity with the Internet, age, use of social media, or use of digital means to listen to music. These segmentation methods are both behavioral and Table 5: Possible Market Segmentation Dedicated Sociable Listener Segment Segment

Passive Independent Listener Segment segment

Principal Benefit Sought

High level of customization

Social media “sharing” of content

Ease of use

Price

Demographic Strengths

Young Professionals

Teens

Students

Men

Special Behavioral Playlist Creation Characteristics

Facebook Users

Passive users, music Passive users, genfocused eral web browsing

Brand Especially Favored

Spotify

Deezer

Pandora

Free (Grooveshark, 8tracks, etc.)

Lifestyle Characteristics

Time spent commuting

Tech savvy

Active

Price-oriented

Potential Spotify market segmentation includes the Dedicated Listener segment, Sociable segment, Passive Listener segment, and Independent segment. The organization focuses on capturing value for customers who would otherwise engage in music piracy or listen to music on another platform.

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demographic. Spotify is able to best serve the Dedicated Listener segment as it offers a high level of customization. While Spotify has social media integration through Facebook, certain other digital music apps are more dominant to the Sociable segment. Spotify has the competitive advantage of customization and playlist creation. It is also available on a number of mobile devices. This supports the demographic strength, young professionals, who may spend the majority of their time spent listening to music while commuting.

COMPETITORS

Spotify’s most significant industry competitors include Apple’s iTunes Store, Google Play

Music, Last.fm, and Pandora. While these are still competitors of Spotify, they may target different audiences through integration with other websites. Competitors that serve the same potential market as Spotify include those that integrate with other websites in order to reach a larger target audience.

Spotify integrates with Facebook in order to reach Facebook’s billions of users.

Competitors that serve the same potential market as Spotify would have to be connected

24 to Facebook, meaning that the music streaming service would have to be integrated as an official Facebook music streaming app. Facebook apps have the option to log into an account simply with a Facebook account. Facebook music apps that target the same market as Spotify include iHeartRadio, BandPage, Deezer, 8tracks, and Vevo. Of these competitors, Spotify demonstrates the largest number of monthly active users at 24 million followed by iHeartRadio at 4.1 million users, demonstrated in Table 6.

Table 6: Monthly Active User Analysis Service

Monthly Active Users

Spotify

24 Million

iHeartRadio

4.1 Million

Deezer

3.4 Million

BandPage

2.4 Million

Vevo

780k

8tracks

380k

Spotify is a leader among its competitors in terms of monthly active users.

Through its Facebook integration as a music app, Spotify is able to collect data such as

name, gender, location, and age. Additionally, when users connect to Spotify through their Facebook account, Spotify is allowed to publish the user’s activities on Facebook. This can be changed in Spotify’s settings, as well as Facebook’s app settings. Spotify can also collect listening patterns, number of listens to a particular song, as well as overall time spent listening to music (and on what platform – mobile app/software). This gives Spotify a competitive advantage in terms of specific user data collection.

Industry Competitors:

iTunes Store - Purchase and stream music Online

Google Play Music - Purchase and stream music Online

Last.fm - Online-based music player with downloadable software

Pandora - Online-based music player

Close Competitors (Facebook Integration):

iHeartRadio - Online radio station app

Deezer - Subscription-based Online music player

BandPage - Used by musicians to share music and information with fans.

Vevo - Online music video content

8Tracks – Online-based music player which utilizes shareable playlists

Both iTunes Store and Google Play Music are integrated as part of the iOS and Android

systems, unlike the close competitors previously identified which are unaffiliated with mobile operating systems and provide services as separate applications. Additionally, both iTunes Store and Google Play Music purchase the rights to sell music to their customers to own, unlike the close competitors, which operate only as streaming services and do not sell music to users. Rather, these organizations either offer free streaming with ads or the opportunity to pay for ad-free streaming with the purchase

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of a subscription. An analysis of Spotify’s close competitors is described in Table 7.

Table 7: Competitor Content Offerings Analysis Service

Video Available

HD Music Original Radio Programming Available

Largest Target Customers

Spotify

No

No

No

Yes

Commuters, Students

iHeartRadio

No

No

Yes

Yes

Commuters

Deezer

No

No

No

No

Students, WBID

BandPage

No

No

Yes

No

Musicians

8tracks

No

No

No

Yes

Students, WBID

Vevo

Yes

Yes

Yes

No

Students, WBID

The music streaming market competes through offerings including a variety of content to enhance the customer experience.

While Spotify demonstrates the greatest relative market share in terms of monthly active

listeners, the service could increase its value by adding content offerings that its competitors lack in order to differentiate. For example, although Vevo lacks market share, it has a high offering of content that adds value to its user base, increasing brand loyalty. Spotify also has the advantage 26 of wide geographic availability; its competitor, Deezer, has not yet entered the US market. Spotify’s strategy of rapid expansion into new markets has given them the competitive advantage of being an early entrant in the United States as a digital music streaming provider.

high # features

sociable segment

musicians BandPage

young professionals Spotify students

Pandora

passive listeners

low # features

8tracks illegal downloaders

iHeartRadio

dedicated listeners Deezer

Vevo

low willingness to pay

Figure 3: Perceptual map, Willingness to Pay v. Features

high willingness to pay

Figure 3 shows a perceptual map analyzing competitors in the digital music streaming industry

in terms of willingness to pay and features. Spotify demonstrates higher willingness to pay, with cost of Spotify Premium totaling $120 per year. In comparison, Pandora One subscription service costs $60 per year (advertised on Pandora.com), capturing those less willing to pay. BandPage offers a high number of features to musicians, allowing them to share videos, songs, updates, and tour schedules.

DEVELOPMENT OF STRATEGIC MARKETING DECISIONS

Strategic marketing decisions for Spotify will be based on the preceding situational analysis;

these decisions include segmentation, targeting, and positioning. Spotify’s potential customers include commuters, who comprise the Dedicated Listener segmentation. In order to increase revenues, Spotify must increase Spotify Premium subscriptions. The Dedicated Listener segment will inform strategic marketing decisions as the target market to increase these subscriptions. Positioning involves establishing and communicating the product’s key benefits to Spotify’s target market, the Dedicated Listener segment. The key benefits to the target market are the high level of customization. 27 The brand image focuses on how users are to take music on the go (listening without a Wi-Fi connection) and remove ads through the paid subscription account.

m a r k e t i n g p l a n n i n g

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M A R K E T I N G

P L A N N I N G

OBJECTIVES

Spotify competes in the Phonographic Industry as a provider of on-demand music streaming.

The digital music within this industry has gradually increased over the past decade while physical music sales have simultaneously suffered. Spotify has increased exponentially in both total user growth and paid subscriptions in a market where piracy is commonplace. Possible market segmentation includes the Dedicated Listener segment, Sociable segment, Passive Listener segment, and Independent segment, described previously in Table ##. The Dedicated Listener segment includes young professionals who may use Online streaming while working. Spotify would be the brand most likely favored by this segment for its convenient playlist creation and curation, as well as its ease of use on mobile platforms. The lifestyle characteristic of this segment includes time spent commuting to and from the workplace. The Sociable segment represents those heavily engaged in social media. This segment includes tech savvy teens and young adults. The brand favored by this group would include Deezer. The Passive Listener segment includes students living active, busy lifestyles who prefer ease of use above features. This describes the qualities of the music application Pandora. The independent segment includes men who may be more priceoriented, engaging in free streaming services that do not require an account (Grooveshark, 8tracks).

The present business model utilized by Spotify involves increasing the number of free users

and then converting these users into paid subscribers. As overall global music sales demonstrate a declining trend, Spotify must adjust this strategy to defend market share in an increasingly saturated market. The organization must increase revenues to demonstrate profitability to attract popular artists and record labels, who hold significant power in this industry. The threat of buyer power is high, as switching costs are low and there is a higher concentration of buyers to that of digital streaming music firms. The threat of substitution is high, as switching costs are low and buyers demonstrate

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Table 8: Five Forces Analysis

Digital Music Streaming Market

Threat of Buyer Power

Threat of Substitutes

Supplier Power

Threat of Rivalry New Entrants

HIGH; The concentration of buyers is greater than the concentration of firms. Buyer switching costs are low.

HIGH; Services compete based on subscription fees, music catalog, and features.

HIGH; Suppliers include music labels who have low switching costs.

HIGH; Product differeces are low, and the digital music industry is experiencing growth.

HIGH; Few product differences.

Brand identity becomes increasingly important.

a propensity to substitute for lower cost services. Threat of new entrants is high as the digital music market increases, thereby increasing rivalry. This analysis is further described in Table 8.

Spotify’s objective must be to defend and increase market share by demonstrating higher

value of the service to customers and artists in comparison to its competitors. This can be achieved through increasing the number of Spotify Premium subscriptions. An increased number of Spotify 32 Premium subscriptions would benefit Spotify, rights holders, and the music industry at large through increased revenues. An increase in Spotify Premium subscriptions would specifically benefit Spotify by increasing the average value per user; a Spotify Premium user is worth $120 per year, while the average value per user was $41. More Spotify Premium users could decrease the gap between the average user and premium user amounts. Increased revenues for the organization would yield higher payouts to rights holders, thereby ensuring the interest of artists in the market.

The suggested market segmentation includes the Dedicated Listener segment (young

professionals), Sociable segment (teens/young adults), Passive Listener (students), and Independent segment (men). This segmentation, based on behavioral characteristics, demonstrates distinct customer groups who may require their own products or other marketing mix activities. The behavioral segmentation method offers analysis of service benefits, usage, user status, and loyalty; all of these attributes are effective ways to describe the digital music streaming market.

TARGET MARKET

As the digital music market adapts to attract customers who previously relied on illegal options

for their music needs, services like Spotify are challenged to find a business model that satisfies both consumers and investors through high value and high profit, respectively. The organization is open to the threat of dissatisfied artists or labels who may opt for other methods for their digital music distribution, thus both value and profit are essential. Spotify has previously relied on a freemium model in which they attempt to target free users, then later convert them to premium subscriptions.

Rather than convert free users demonstrating low willingness to pay, Spotify must actively target users who will pay for premium subscriptions from the start. The segment with the most potential to initially purchase a Spotify Premium subscription is the Dedicated Listener segment. The Dedicated Listener segment represents young professionals who rely on mobile technology, spend significant time listening to music, and have disposable income to spend on digital services. The Dedicated Listener target market selection is a single-segment concentration.

Dedicated Listeners are substantial in that the outstanding majority of members of this

segment have a high level of familiarity with technology. The Dedicated Listener target market is accessible; members of this segment are familiar with web-based distribution channels as well as digital content subscription services. This segment also has a high propensity to listen to music from either a mobile device or personal computer throughout the day. This target market is differentiable by age and working status including young entry level and mid-management workers. This segment also demonstrates disposable income; 25-34 year olds spend on average $2,423 annually on entertainment. (“Where Americans Spend Their Money.”)

Positioning involves establishing and communicating the product’s key benefits to Spotify’s

target market, the Dedicated Listener segment. The key benefits to the target market are the high level of customization. The brand image focuses on how users are able to create playlists on both free and paid accounts, but can take music on the go (commuting without a Wi-Fi connection) and remove ads through the paid subscription account. This support for listening without a Wi-Fi

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connection is essential for listening to music while commuting.

The positioning strategy involves points-of-difference; Spotify can position itself around the

emotional experience of listening to music (e.g., music can make you feel more productive, happier, etc.). For the target market of Dedicated Listeners, this could evoke feelings of trust (Spotify understanding why they listen to music) and earn brand loyalty. Positioning in terms of functionality could also entice users who seek ease of use in their music streaming platform. This demonstrates the service as desirable, deliverable, and differentiated.

MARKETING MIX

Positioning Spotify around Dedicated Listeners’ emotional experience of listening to music

involves employing a marketing mix which focuses on building a sense of trust and cameraderie between the user and the service. This is especially difficult for Spotify, as the service offers only digital content, and presently does not have front-line service providers. However, this sense of trust and brand loyalty can be built through methods of product, price, place, and promotion.

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Figure 4: Marketing Mix Summary

PRODUCT. Spotify can customize its features to be more integrated with young professionals.

Presently, the service excels in playlist curation and creation, as well as social music sharing through

integration with Facebook. Customization of features could include syncing musing with a calendar, to pause music play for scheduled meetings and other events. When the user returns to their desk, they can pick up where they left off. As the Dedicated Listener will use the service while traveling to and from work and at their desk, Spotify could introduce an equalizer feature, which could prevent louder songs from blaring through an office. This could reassure the user that music will always be played at a desired level.

PRICE. Spotify currently charges $9.99/month for Spotify Premium. Generally, consumers of

digital music are highly sensitive to price as a great amount of digital content is made available Online through piracy. Because of this, consumers typically have low willingness to pay. By demonstrating a high level of value for a low price, Spotify can increase market share. The established price point for digital streaming music subscriptions is low, ranging from $7 to $10 per month. For example, industry competitor Pandora offers a one year subscription for $60. (Pandora.com) Discounts are presently offered to students, families, and users of the Sprint cellular service. Because Spotify is significantly higher than its competitors in terms of price range, Spotify may consider offering additional types of discounts, such as referral discounts.

PLACE. Buyers typically look for Spotify’s service solely on the Internet, procured through

Spotify.com or a mobile app store. Spotify could increase its product visibility by becoming a defaultinstalled app on Android devices or Windows computers, increasing the places where the product is found. Spotify could also increase the number of places where access to the service can be purchased by selling gift cards for one month’s membership in retail stores. Gift cards would increase visibility of the service and make access to the service available for purchase offline.

PROMOTION. Spotify can increase messages to the target market by becoming more visible

or integrated with similar apps and social media channels; for example, Spotify could promote its services on apps that Dedicated Listeners may use, including Instagram. Visual social media posts could increase perceived connection to the emotional experience of listening to music. Industry competitor Pandora promotes its offerings by integrating with TV commercials for other products. For

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example, the Pandora app logo recently made an appearance in a commercial for a new television streaming device. The Pandora app is offered on many platforms where Spotify is not, especially physical television streaming devices such as Roku, Amazon Fire TV, and Apple TV. Any time a customer purchases or researches one of those products, Pandora is promoted.

Spotify can create marketing communications geared specifically toward the young

professionals that make up the Dedicated Listening target. By sending out personalized music suggestions via email, or custom-generated playlists for new music discovery, Spotify could foster a greater sense of connection with the user. Creating a custom-generated playlist requires significant data analysis which would require an investment in new technology for the organization.

People, process, and physical evidence are involved in providing an effective customer

experience for services. Presently, Spotify does not have a team of front-line service members who interact one-on-one with customers. Instead, the company relies solely on a customer service Twitter account to handle all queries and problems. Spotify should implement a team of individuals 36 who can interact personally with customers. Interaction could still be digital, but involve a specific person in an instantaneous chat, rather than having a customer wait to have their problem solved by an anonymous Twitter user. Spotify presently employs a highly efficient sign up process to engage new users. This process includes integration with Facebook; users can create a Spotify account by logging in with Facebook. At its launch, Spotify operated with a sense of exclusivity created by invitation-only sign ups. (Spotify Limited) Anyone with an invitation could sign up for the service. This promoted content sharing, network building, and user-promotion of the service. Returning to this model of making the service seem exclusive may make the service seem more desirable to users, with the added benefits of user-promotion, enhancing the social aspect of Spotify. The only physical evidence associated with Spotify includes the proprietary software used for personal computers as well as a mobile platform app. When Spotify users cancel their accounts, they do not keep any music or related files. Presently, Spotify does not sell digital tracks in the United States; adding this feature could increase the service’s value to consumers.

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i m p l e m e n t a t i o n & c o n t ro l

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I M P L E M E N TAT I O N

A N D

C O N T R O L

Spotify utilizes a more horizontal organizational structure. This team-based structure is

used to creatively drive the organization. Spotify operates in large groups called tribes composed subgroups called squads, described as a combination of high alignment and high autonomy. (“Spotify Engineering Culture - part 1.”) Thus, the dedicated marketing tribe would be responsible for how marketing plans are implemented and controlled in the organization. Marketing efforts are also coordinated by Spotify’s Vice President of Creative and Brand Strategy, Jackie Jantos. (Peterson) To successfully implement the proposed marketing plan, squads work autonomously to analyze individual components of the marketing plan and bring them to fruition. Time tables for organizational implementation focus on small and frequent releases. This suggests that Spotify’s marketing focuses on small, frequent advertisements. This is demonstrated by Spotify’s 30 second advertisements played on Spotify Free accounts between songs. Historically, Spotify has implemented marketing plans through its own proprietary software and mobile app, but has recently shifted to outside advertising on social media. (Peterson)

In order to measure results, Spotify utilizes data and analytics to observe user listening habits,

popular songs, successful features, and evaluate other content. Spotify has used a combination of proprietary information and outsourced analytics provided by The Echo Nest, a leading music intelligence firm to analyze such data. Prior to 2014, The Echo Nest provided analytics not only to Spotify, but to the organization’s competitors as well. In order to gain exclusive advantage of the data analysis offered by The Echo Nest, Spotify acquired the company in March 2014. This allowed Spotify to leverage the firm’s expertise and analytical tools to improve its music delivery service. (“Spotify Acquires The Echo Nest.”) Marketing plan efficacy would be evaluated in terms of results including increased listening time per user as well as an increase in both Spotify Free and Spotify Premium accounts. Increased subscriptions will yield greater profit for both artists and the music industry at large.

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Section divider images from Spotify.com

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