IT ALL STARTS HERE BERLIN I LONDON I MADRID I PARIS I TURIN I WARSAW

ESCP Working Paper

No. 71 – September 2022

Spotify
From music streaming start up to global
audio company

Stefan SCHMID
Tobias ROMEY
 ESCP Working Paper
No. 71 – September 2022

Spotify
From music streaming start-up to global
audio company

Stefan SCHMID
Tobias ROMEY

AUTHORS
Prof. Dr. Stefan Schmid
Chair of International Management
and Strategic Management
ESCP
Business School Berlin
Heubnerweg 8-10, 14059 Berlin
Germany
T: +49 (0) 30 / 3 20 07-136
F: +49 (0) 30 / 3 20 07-107
[email protected]

Tobias Romey, M.A. ISSN: 1869-5426

Department of International Management
and Strategic Management EDITOR
ESCP © ESCP Europe Wirtschaftshochschule
Business School Berlin Berlin e.V.
Heubnerweg 8-10, 14059 Berlin Heubnerweg 8-10, 14059 Berlin, Germany
Germany T: +49 (0) 30 / 3 20 07-0
T: +49 (0) 30 / 3 20 07-137 F: +49 (0) 30 / 3 20 07-111
F: +49 (0) 30 / 3 20 07-107 [email protected]
[email protected] www.escp.eu

ESCP Working Paper

No. 71 – 09/22
ABSTRACT: During the last few decades, the internet and digital technology have
fundamentally changed the global music industry. As a consequence, new companies
and novel business models have emerged. Spotify, one of the new players in the music
industry, has expanded its business activities and grown to become the leading
streaming company worldwide. Today, Spotify offers a wide variety of audio products,
such as podcasts and audiobooks, to subscribers, as well as significant service solutions
for artists and music producers alike. This case study describes the development of the
music industry before the advent of Spotify. After presenting Spotify’s origins and after
discussing Spotify’s market entry into the most important music market in the world,
namely, the US, the case study focuses on the company’s growth. We show that
acquisitions of other companies enabled Spotify to develop its services further, as well as
to diversify its product portfolio. We also shed light on Spotify’s internationalization as
another important driver of firm growth. Over time, Spotify’s relationship with major
labels has changed, and this case study reveals how Spotify has gained power while
getting more independent from the major labels.

KEYWORDS: Acquisitions, Case Study, Diversification, Internationalization, Digital Music,

Firm Growth, Internet, Music Label, Market Entry, Music Industry, Platform, Podcast,
Product Development, Spotify, Streaming.

J.E.L. CLASSIFICATION CODES: A20, A23, L13, L21, L25, L82, M10, M13, M16

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No. 71 – 09/22 I
Contents

1 Digital disruption of the music industry ................................................................................................... 1

2 The launch of Spotify ........................................................................................................................................... 5
3 Spotify’s market entry into the US ............................................................................................................... 7
4 Spotify’s growth .................................................................................................................................................... 12
4.1 Software investments to enable new features ........................................................................ 12
4.2 Acquisitions to diversify .......................................................................................................................... 14
4.3 Further market entries to expand globally ................................................................................ 16
5 Spotify’s rising power ......................................................................................................................................... 19
6 Spotify’s future: challenges and opportunities ahead ...................................................................22
Questions ............................................................................................................................................................................25
References..........................................................................................................................................................................33

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List of Figures

Figure 1: Music revenues of the recording industry in the US................................................................ 4

Figure 2: Spotify´s subscription models in 2011. ..................................................................................................6
Figure 3: Artist revenue/payment scheme for Spotify and iTunes .......................................................9
Figure 4: Share of music industry revenues worldwide in 2014. .......................................................... 10
Figure 5: Global digital music revenues from 2009 to 2014 in billion USD. .................................. 11
Figure 6: Spotify’s acquisitions over time up to December 2021. ........................................................ 16
Figure 7: Spotify’s premium subscribers worldwide, Q4 2021 by region. ...................................... 17
Figure 8: Availability of Spotify worldwide as of June 2021. .......................................................................18
Figure 9: Spotify users worldwide from 2015 to 2021. ................................................................................... 20
Figure 10: Spotify’s revenue worldwide from 2009 to 2021. ....................................................................... 22
Figure 11: Spotify’s net income/loss from 2009 to 2021 ................................................................................. 23
Figure 12: Share of music streaming subscribers worldwide in 2021. .............................................. 24

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 Spotify
From music streaming start-up to global
audio company

1 Digital disruption of the music industry

Over the last few decades, the global music industry has undergone a radical change, in
particular in the realm of technology. Until the early 2000s, most people listened to
music via physical music products such as compact discs (CDs), vinyl discs, or, cassettes,
etc. The rise of the internet and digital music formats changed the way in which music
was heard and fundamentally affected the business models of players in the music
industry.

In 2000, the “traditional” music industry generated a total revenue of around USD 23.4
billion worldwide.1 Five major labels dominated the industry, namely BMG (Bertelsmann
Music Group), EMI (Electric and Musical Industries), Sony Music, Universal Music Group,
and Warner Music Group.2 The labels covered a broad spectrum of activities across the
entire music value chain. The process started by predicting future music tastes and
ended with selling music and ensuring the availability of new releases in as many stores
as possible.3 The labels also carried out other activities, such as scouting for future talents,
financing artists, recording music, advertising music, and producing music videos, CDs,
vinyl discs, or cassettes.4 Additionally, they signed exclusive contracts with artists which
specified, for instance, the selling price of physical music, royalties or copyright
ownership. 5 The textbox on the next page provides further information on copyright
management in the music industry.

Investments in music products, especially in new but also in established artists, were
risky for the labels, as only a low percentage of music releases would ever be
commercially successful. 6 Despite the risk of financing commercially unsuccessful
artists, labels usually made relatively high profits, and their business models remained
essentially unchanged for several decades—until the turn of the century, when the
business models started to be questioned.7

1
See IFPI (2019); Statista (2020a).
2
See McCourt and Burkart (2003); Moreau (2012); Peitz and Waelbroeck (2004); Schmid and Luber (2013).
3
See Benner and Waldfogel (2016).
4
See Peitz and Waelbroeck (2004); Thompson (2018).
5
See Wikström (2009).
6
See Benner and Waldfogel (2016); Vogel (2008).
7
See Panda and Patel (2012); Peitz and Waelbroeck (2004).

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 Copyright management in the music industry

Many artists wish to sign a record contract with a major label, as a contract increases
an artist’s chance of success due to increased prestige, exposure, and financial
support. With a traditional recording contract, the record label bears the cost for the
recording and promotion process of an artist. The label also covers other artist costs,
such as producer and arranger fees, studio and equipment rentals, living expenses,
etc. The cost for recording an album can amount from USD 150,000 to USD 500,000.
In exchange, the record label receives ownership of the copyrighted sound
recording. Depending on the terms of the contract between the label and the artist,
the former can also be the sole owner, a co-owner, or a licensee of any copyrighted
sound recording. Afterwards, the label has the right to license the recording (in both
physical and digital form) for profit to radio stations, TV stations and other platforms.
To use the recording, the licensee has to pay royalties to the label, which in turn
retains royalties from sales to recoup its costs. In general, many record contracts are
unprofitable for the label, as only a few artists become popular and successful. As
such, these few artists have to generate enough revenues for the label to pay for the
financial losses of all the other artists.
Sources: Benner and Waldfogel (2016); IFPI (2017); Lesser (2018); Okorocha and Douglas (2010) and
Passman (2019).

During the 1990s, audio compression via MP3 became increasingly popular and
challenged players in the traditional music industry. MP3 is a coding format for digital
audio developed by the Fraunhofer Society in Germany, and it allows for reducing the
size of a music file to 12% of its original size.8 Firms like Napster, a file-sharing platform
founded in 1999 in the US, used this new format to introduce a previously unknown
business model to the music industry by searching the hard drives of its users, listing all
available MP3 music files, and allowing individuals to send files to every other user on the
platform.9 In 2001, Napster enabled users to share around 165 million music files per day
without charging its customers and without paying the artists or the labels. 10 As a
consequence, Napster faced several lawsuits and was accused of being an “illegal piracy
service”.11 Total losses for the music industry due to pirate recordings were estimated at
USD 5 billion12 per annum.13 The new digital format fostered the development of portable
MP3 players, with the capacity for thousands of digital songs to be stored and listened
to by the user. The increasing success of MP3 players (such as the Rio PMP300 or
Compaq’s Personal Jukebox), alongside the potential of digitalizing music, directly
attacked the most dominant physical music product of that time, the CD. 14 The
Recording Industry Association of America (RIAA), for instance, criticized the growing
popularity of the MP3 player, stating ‘The MP3 player has no function other than playing

8
See Moreau (2012); Sterne (2012), p. 2.
9
See Dowling (2019); Panda and Patel (2012); Waldfogel (2017).
10
See Parloff (2003).
11
See McCourt and Burkart (2003).
12
All amounts in € were converted to USD by an exchange rate of 1:1.20 as this represents the average
exchange rate for the period from 2008 to 2021; see Statista (2022a).
13
See Parloff (2003); Woolley (2010).
14
See van Buskirk (2005).

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material that was stolen from record companies’15. As a result of MP3 downloads, global
sales of CDs fell by 7% from 2000 to 2001. Figure 1 also illustrates that CD sales in the US,
the most important music market, fell by about 12% in the same period.16

In 2001, as a result of competition with online music platforms like Napster and dropping
revenues in the physical music market, two of the traditional labels, Sony and Universal,
started to cooperate by establishing a digital music platform called Pressplay. In the
same year, BMG, EMI, and Warner joined forces and created a digital music platform
called MusicNet. 17 Also, many other companies, such as Rhapsody and Omnifone,
designed new business models around digital music, but most of them failed.18

At the end of 2001, Apple introduced their first MP3 player, the iPod, and launched the
music platform iTunes, which was considered one of the first legal digital music stores
offering MP3 files to buy. Initially, the iPod could only play music uploaded via iTunes.
This bundle of hardware and software protected Apple’s market share and allowed
iTunes to grow very quickly, as iPod users were forced to use the platform.

Figure 1 shows that the launch of iTunes was a major trigger in boosting revenues
generated by digital music products. Originally, it offered music tracks only, but later on,
music videos, ringtones, and, in some countries, several other services like audiobooks
or movies were made available.19 While revenues from iTunes only provided a low-profit
margin for Apple, the sales of iPods skyrocketed, and the device established itself as
another high-margin product for the company (next to already existing products such
as the iMac and Macintosh).20 As previously mentioned, in order to load MP3 files onto
the iPod, it was necessary for iPod users to download iTunes, as Apple hardware could
only be operated with Apple software. This principle allowed for an easy and high-quality
interconnection of different Apple products, while dependency on its software allowed
iTunes further, extremely fast growth.

15
Kaufmann (1998)
16
See IFPI (2019); Peitz and Waelbroeck (2004); Statista (2021d).
17
See McCourt and Burkart (2003); Simon (2000).
18
See Catalano (2018); Dredge (2016); Wikström (2009), p. 104.
19
See Leurdijk et al. (2012).
20
See Kim (2005); Moreau (2012).

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Figure 1: Music revenues of the recording industry in the US.

Source: Based on RIAA (2022) and Routley (2018).

In the beginning, iTunes offered around 200,000 different songs for download. In the
first week after launch, around one million songs were downloaded in the US, Apple’s
home market.21 iTunes used a uniform price model of USD 0.99 per download, and in the
first year, it generated a higher turnover than the music platforms offered by the major
labels Musicnet and Pressplay combined.22 iTunes opted for a purchase-based and not
subscription-based business model, as at the time Apple believed that users wanted to
”own” music they wished to listen to.23 With its focus on digital music and the changing
habits of US customers who bought more digital music and less physical music
products, iTunes grew and became the number one music retailer in the US, achieving
a digital market share of around 69% in the US in 2008.24 In parallel with the rise of iTunes,
sales of CDs declined by around 70% in the US market between 2000 and 2020.25

21
See Apple (2003a); Apple (2003b).
22
See Leurdijk et al. (2012).
23
See Knopper (2013); Martell (2007).
24
See Cheng (2009); Ingraham (2013); Leurdijk et al. (2012); RIAA (2009).
25
See Peitz and Waelbroeck (2004); Statista (2021d).

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2 The launch of Spotify
Spotify was founded in 2006 by two Swedish entrepreneurs, Daniel Ek and Martin
Lorentson, both of whom already had experience of digital business models. Ek started
his first venture at the age of 13 by building websites.26 Later on, he worked for eBay,
launched his own digital advertising company Advertigo in 2005, and, in 2006, became
CEO of uTorrent, a peer-to-peer file-sharing platform. 27 Lorentson was co-founder of
Tradedoubler, one of Europe’s leading affiliate marketing networks. In 2006,
Tradedoubler bought Ek’s company Advertigo, following which the two entrepreneurs
came up with the idea that led to Spotify.28 Two years after incorporation, Spotify officially
launched its service in October 2008 in Sweden, Finland, Norway, France, and Spain.29
Spotify’s mission was ‘to give people access to all the music they want, at all times – in
an entirely legal & accessible way’. 30 This also included niche genres such as indie or
metal, andclassical music.

In contrast to piracy services such as Napster, Spotify signed licensing agreements with
the major music labels.31 These licensing agreements allowed Spotify to provide users
with copyrighted music in a legal way, including a variety of top artists such as Coldplay,
Miles Davis, Frank Sinatra, Madonna, and Snoop Dogg. 32 To reduce the amount of
royalties paid to the major labels, Spotify agreed to grant the labels equity stakes. 33 By
2009, the major music labels owned around 16.3% of Spotify’s shares (Sony BMG 5.8%;
Universal 4.8%; Warner 3.8%; EMI 1.9%), by which time they had already sold their
unsuccessful platforms MusicNet and Pressplay.34

From the very outset, Spotify opted for a freemium business model (a combination of
the words ”free” and ”premium”) with two subscription models, as illustrated in Figure
2.35 The business model was based on two pillars, namely, an unpaid subscription and a
premium subscription. The unpaid subscription allowed full access to every song in the
Spotify music catalog, free of charge but with some limitations. Among these limitations
were the following: song playback was interrupted by advertisements, and users could
choose only a specific album or artist but not the particular track they wanted to listen
to. With the unpaid subscription option, users could also not download songs or listen to
them offline. These restrictions were intended to convince users to convert to a paid
subscription. Years previously, Napster and other piracy services had led to a customer
mindset according to which music was free. Hence, willingness to pay for music had
declined significantly.

26
See Griffith (2012).
27
See Bloomberg (2020); Henricson (2006); Music Business Worldwide (2019); Seabrook (2014).
28
See Eriksson et al. (2018); Tradedoubler (2019); Vonderau (2019).
29
See Lynskey (2013); Remneland and Knights (2016).
30
Spotify (2011b).
31
See Spotify (2008).
32
See Brown (2015); McElhearn (2009); Spotify (2008).
33
See Ingham (2016); Seabrook (2014); Teague (2012).
34
See Forbes (2005); Gibson (2003); Leurdijk et al. (2012). Ingham (2018); Lindvall (2009)
35
See Fleischer (2021); Gassmann et al. (2014), p. 167.

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Spotify recognized this trend; consequently, the company identified piracy services as its
biggest competitor, but it also saw piracy service users as the primary target group for
its unpaid subscription option. 36 In the early years, around 75% of Spotify users had
previously downloaded music illegally, with most of them admitting they did less illegal
downloading since using Spotify.37

With the premium subscription, the above-mentioned limitations were lifted, and users
could stream every song in the catalog as often as desired and without advertisements.
In 2010, Spotify’s premium subscription was made available for EUR/GBP 9.99 per month
in seven European countries (Sweden, Finland, France, Norway, Spain, United Kingdom,
and the Netherlands) and generated around 70% of its total revenues from this offering,
whilst the remaining 30% was earned through advertising.38 Later, Spotify adapted its
subscription prices to specific financial indicators such as the gross domestic product
(GDP) or average income in the operating countries.39

Figure 2: Spotify´s subscription models in 2011.

Source: Based on Spotify (2011a)

36
See Johnson and Charles (2009).
37
See Feldmann (2018); Robinson (2020); Tapper et al. (2009).
38
See Barker (2011).
39
See Charles (2009); Poples (2018).

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3 Spotify’s market entry into the US
In 2011, Spotify entered the first market outside Europe and launched its services in the
US. The licensing agreements Spotify had previously signed with major labels did not
include the US market. 40 Therefore, Spotify could not offer copyrighted music
immediately and had to negotiate new licensing agreements with the labels for the US.
Spotify’s negotiation power was limited because the major labels owned the copyrights
accounting for approximately 89% of the US market (with the following market shares
at that time: Universal Music Group 31%; Sony Music Entertainment 28%; Warner Music
Group 20%; and EMI 10%).41 The labels knew that market entry for Spotify into the US was
not possible without licensing agreements.

For a three-year contract with Sony, Spotify had to pay upfront royalties of around USD
42.5 million.42 Additionally, Spotify granted Sony advertisement time, valued at USD 9
million.43 The contract contained a ”Most Favored Nation” (MFN) clause, which entitled
Sony to make amendments to the agreement if any other label negotiated a better deal
than its own.44 After the deal, Spotify also had to negotiate agreements with the three
other major labels and finally paid a high—but undisclosed—amount of money to obtain
licensing agreements for the US market.45 Hence, for Spotify, which recorded a global
operating loss of USD 37 million against an overall turnover of USD 60 million in 2010,
market entry in the US was not only expensive but also risky.46

The US market was a breeding ground for social media and digital business models.
Leading corporations such as Alphabet (formerly known as Google, meanwhile also the
parent company of YouTube), Twitter, and Facebook (now the major brand of Meta
Platforms) were (and still are) based in the US, and with 33% of the population already
using social media in 2011, the US market was the most prominent social media market
globally. 47 In addition, it has been the most influential music outlet for decades, with
many successful artists such as Eminem, Michael Jackson, Rihanna, and Taylor Swift
growing up in the country and starting their careers at home before becoming popular
abroad. 48 Furthermore, the US was also the largest and most lucrative music market
globally and home to the headquarters of the three most important music labels:
Universal Music Group, based in Santa Monica, Sony Music Entertainment, and Warner
Music Group, both based in New York City.49

40
See Sisarion (2011).
41
See Leurdijk et al. (2012).
42
See Singleton (2015); Ulloa (2015).
43
See Singleton (2015); Ulloa (2015).
44
See Singleton (2015); Ulloa (2015).
45
See Constine (2017).
46
See BBC (2012).
47
See Hudson and Hudson (2013).
48
See Power and Hallencreutz (2005).
49
See Kiss (2011); Lynskey (2013).

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Early on, Spotify realized that users expected music to be integrated with social media,
including participation in discussions, sharing and recommending favorite songs, and
contributing to other people’s activities. 50 Hence, its strategy was to integrate social
features into its service and encourage its users to interact with each other. For instance,
in 2011, Spotify started to collaborate with Facebook, the leading US social media
company.51 At the time, Facebook was reaching about 90% of US social media users.52
The collaboration allowed Facebook users to listen to Spotify songs within their
Facebook application, share playlists with their friends, and publish their favorite songs
on their timeline. 53 Spotify discovered that users who linked their accounts with
Facebook were three times more likely to become paying premium subscribers.54

Following US market entry, Spotify introduced a new premium trial, allowing everyone
in the US to use the premium subscription for 6-months for free.55 After the trial period,
users had to downgrade their subscription to the free version or choose to pay. By
December 2012, Spotify already counted 1 million paying subscribers in the US and a total
of over 5 million paying subscribers in 17 operating countries.56 Deezer, one of Spotify’s
competitors, only had about 2 million users despite having been founded earlier (i.e. in
2007) and despite being available in 160 countries worldwide (but with no presence in
the US).57

The 6-month free trial helped Spotify increase its popularity in the US; nevertheless, it
also generated criticism from famous artists such as Adele, Taylor Swift, Radiohead, and
many others. 58 In 2014, Tayler Swift published an article in The Wall Street Journal,
stating ‘Music is art, and art is important and rare. Important, rare things are valuable.
Valuable things should be paid for. It's my opinion that music should not be free…’ 59 .
While around 40% of Spotify's users were listening to Taylor Swift at that time, she
removed all of her music from the platform because of the availability of her music in
the free version.60 Swift was one of the few superstars financially independent enough
through her extensive fan base and supported by her label Big Machine to boycott
Spotify successfully. 61 Many other artists, such as Adele, Beyoncé, Coldplay, and
Radiohead also criticized Spotify and tried to withdraw music or delay the release of new
songs. 62 The ongoing discussion about artists’ compensation revealed a complex
payment regime between Spotify, the labels, and the artists. Spotify claimed to keep 30%
of revenue per stream while paying out 70% to the labels, which depended on many

50
See Heinonen (2011); Hudson and Hudson (2013).
51
See Grabham (2011).
52
See Hudson and Hudson (2013).
53
See Dredge (2012); Fleischer and Snickars (2017); Statista (2020c).
54
See Dredge (2012).
55
See Tsotsia (2011).
56
See Lunden (2012b); Lunden (2012c); Reuters (2013).
57
See Lunden (2012a); Warren (2012).
58
See BBC (2013); Marshall (2015).
59
Swift (2014).
60
See Carlson (2014); Sternburg (2014).
61
See Knopper (2014).
62
See BBC (2013); Karp (2015); Lesser (2018); Luckerson (2014); Sisarion (2016).

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factors. 63 For example, streams from the add-supported version were less valuable than
streams from the paid version; additionally, the payment per stream also differed
according to the popularity of a song or the country in which the song was streamed.64
In 2015, Spotify stated that the average payout per stream to the labels was between
USD 0.0060 and USD 0.0084.65

However, individual payouts for each artist depended on the respective contract they
had with their labels. 66 Some especially famous artists had good and fair deals, while
others were not so fortunate. On average, the artists earned an estimated USD 0.0011 per
stream on Spotify in 2015 (see also Figure 3). 67 In comparison, a song on iTunes
generated, on average, USD 0.23 for the artists, USD 0.47 for the labels, and USD 0.30 for
iTunes.68 The iTunes and Spotify revenue streams were very different: the former sold
songs to music listeners, while the latter sold a subscription that allowed listening to
music within the paid subscription period. Therefore, the payment scheme was
fundamentally different as well, in that iTunes made a one-time payment to the artists
and the label, once a song was sold, whilst Spotify, in comparison, paid every time a song
was streamed.

Figure 3: Artist revenue/payment scheme for Spotify and iTunes

Source: Dredge (2015).

63
See King (2012); Lesser (2018).
64
See Lesser (2018); Seabrook (2014).
65
See Dredge (2015); Johnson (2014).
66
See Dredge (2015).
67
See Dredge (2015); Resnikoff (2016).
68
See Dredge (2015).

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Three years after Spotify's market entry into the US, digital music had become more
important than physical music products—around 66% of music revenues in the US
resulted from digital products, reaching a level of USD 4.5 billion (growth rate 24% from
2011 to 2014), while physical sales accounted only for 34% and USD 2.2bn of revenues
(growth rate -39% from 2011 to 2014).69 Within digital revenues, subscription services were
a major driver of growth. Between 2011 and 2014, music streaming service revenues
multiplied by a factor of 4.5 (from USD 241 million in 2011 to USD 1.09 billion in 2014). In
the same period, revenues from digital downloads slightly declined, from USD 2.58
billion to USD 2.55 billion. 70

On a worldwide scale, revenues from digital music sales reached USD 14.97 billion in 2014.
Total revenues in the music industry were equally split between digital music (46%) and
physical music (46%), with performance rights and synchronization accounting for the
remaining part (8%) (see also Figure 4).71

Figure 4: Share of music industry revenues worldwide in 2014.

Source: RIAA (2015).

With the growing revenues earned from digital music (see also Figure 5), other
companies, such as the global technology giants Alphabet and Amazon, entered the
digital music industry and offered new services. 72 Amazon released its Prime Music
service in 2014, and Alphabet started YouTube Music in 2015.73 With Apple, Amazon, and

69
See RIAA (2015).
70
See IFPI (2015); RIAA (2015).
71
See IFPI (2015).
72
See Gibbons (2020); Reuters (2013).
73
See Dredge (2014a); Popper (2015a); Statista (2016).

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Alphabet, Spotify had not only direct competitors in the US market, but all three were
also hardware providers and could pre-install their music service on their own devices
(Apple iPhone, Amazon Echo/Alexa smart-speaker, Alphabet Nexus/Pixel smartphones).

Figure 5: Global digital music revenues from 2009 to 2014 in billion USD.

Source: RIAA (2015).

To stay a step ahead of its competitors, Spotify took action. For instance, it offered two
new versions of the premium subscriptions in the US, namely, the “student plan” and the
“family plan”.74 The student plan offered a 50% discount to every student in the US, thus
reducing the overall price to USD 4.99 per month.75 Unlike the “student plan”, which was
only available for US students initially, the family plan was introduced to all Spotify
operating countries and enabled up to six family members to share a premium
subscription with a 50% discount.76

With all actions taken, Spotify increased its worldwide userbase to 28 million paying
subscribers and to 82 million total users by 2015.77 In the US, the company had grown to
be one of the Top10 apps by downloads in 2015.78

Nevertheless, growing the business did not mean becoming profitable. As Spotify was
under pressure from rising royalties, outraged artists, and direct competitors, operating
losses at a worldwide level grew from USD 76 million in 2013 to USD 227 million in 2014
and reached USD 278 million in 2015.79

74
See Constine (2014b); Dredge (2014b).
75
See Constine (2014b).
76
See Dillet (2016); O'Hear (2014).
77
See Statista (2021b); Statista (2021c).
78
See App Annie (2016).
79
See Statista (2022c).

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4 Spotify’s growth

4.1 Software investments to enable new features

At the end of 2014, Spotify’s music catalog contained over 30 million tracks.80 As most
other streaming services offered catalogs of similar size, differentiation by size was
complicated. Therefore, Spotify started to invest heavily in technological capabilities to
enhance personalized user experience and to provide intelligent music
recommendations.81

Spotify already owned Tunigo, an audio analysis and recommendation company, before
music intelligence and data platform Echo Nest was acquired for USD 100 million in 2014
(see also Figure 6). 82 Echo Nest allowed Spotify to set up so-called “taste profiles” by
analyzing the metadata of what customers listen to. These “taste profiles” were then
used to further improve music recommendations and playlists. 83 Additionally, in 2015,
Spotify acquired the data analytics start-up Seed Scientific.84 In 2016, the focus of the
company's acquisitions changed. Social interactions became more and more important
for its users, and so, for this reason, Spotify acquired Soundwave, a social music
experience software that allowed users to create private groups, start chat sessions, and
discuss songs, artists, and new music trends. 85 Spotify also acquired Cord Project, a
voice-messaging platform, and CrowdAlbum, a start-up for collecting shared photos and
videos of music events on social media platforms.86

In 2017, Spotify took over the audio detection start-up Sonalytic, the content
recommendation start-up MightyTV, and the AI technology start-up Niland. 87 These
acquisitions allowed Spotify to integrate new software, in order to understand better
customers' individual music tastes and personalize the service even more via custom-
made music recommendations.88

Spotify also built up its own social media channels on Twitter and Instagram to
communicate and interact with users, promote artists, and be part of the ongoing
conversation on social media platforms. Additionally, it announced cooperation with
Instagram, which integrated it into the Instagram app and enabled users and artists to
recommend Spotify albums, tracks, artists, and playlists directly via their Instagram
stories.89

80
See Grannell (2015).
81
See Cucinello (2018).
82
See Constine (2014a); Etherington (2013).
83
See Constine (2014a).
84
See Constine (2015).
85
See Lunden and Ha (2016); McIntyre (2016b); Wauter (2016).
86
See McIntyre (2016b).
87
See Perez (2017a); Perez (2017b); Russel (2017).
88
See Perez (2017a); Perez (2017b); Russel (2017).
89
See Spotify (2018b).

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Spotify started to host ”Music Hack Weekends” to engage software developers to build
third-party apps that would hook into Spotify´s music catalog.90 These investments led
to new features such as the Daily Mix, Discover Weekly, and Release Radar, which are
unique, individualized playlists based on user preferences, big data, and deep
personalization. 91 The producer and major label insider Jimmy Iovine stated ‘the only
song more important than the one you’re listening to is the one that comes next.
Whoever perfects this act of curation could win the streaming music war’92. Within one
year, most users had listened to Discover Weekly, and industry experts acknowledged
that Spotify was very successful in algorithmically-curated new playlists. 93 They also
claimed that, with Discover Weekly, Spotify may have just out-maneuvered the
competition:94 ‘It’s good. It’s better than I thought it would be,’ stated tech entrepreneur
Anil Dash, and even though Discover Weekly is produced by machines, he confirmed
‘They're as good as DJs—at scale’95.

Worldwide, Spotify’s investments in music recommendation software and social

interaction contributed to an increase of up to 71 million paying subscribers. Still, with
losses of USD 1.2 billion in 2017, the company reported the highest global loss since its
inception. 96 As the major labels were still rights holders to around 87% of its music
streams, Spotify depended strongly on the major labels and had to pay huge shares of
their income to serve royalty liabilities. 97 Some experts even questioned the business
model of Spotify and stated that the high cost of royalties would hinder Spotify from ever
being profitable at all.98

90
See Rao (2011); van Buskirk (2012).
91
See Constine (2016a); Lunden (2016).
92
Popper (2015b).
93
See Constine (2016b); McIntyre (2016a).
94
See Popper (2015b).
95
Popper (2015b).
96
See Kafka (2018); Statista (2022c). Statista (2021c)
97
See Kafka (2018).
98
See Ingham (2016).

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4.2 Acquisitions to diversify

Spotify started to acquire companies across the entire value chain of the music industry,
which granted it more independence from the major labels and the opportunity to gain
new revenue streams.
In 2017, the company bought cloud-based music recording studio Soundtrap and
blockchain-based media rights management company Mediachain. 99 In 2018, it took
over the e-music licensing platform Loudr, which paved the way for a more transparent
and efficient music publishing process, as it allows content creators, artists, and music
services to identify, track, and pay royalties to music publishers.100

Due to high royalty costs and a total of USD 14.3 billion paid to the labels since its launch,
Spotify decided to change its strategy. 101 In 2019, Spotify announced its ambition to
become the world’s leading audio platform, stating that ‘audio—not just music—[would]
be the future of Spotify’.102 This announcement mainly led to a new focus on subsequent
acquisitions.

Podcasting was a growing trend, to which (in 2019) an estimated 32% of the US
population listened every month.103 In order to be part of this trend, Spotify started to
invest in its podcast catalog and acquired the award-winning podcast company Gimlet,
the producer of famous podcasts such as StartUp and Reply All, for around USD 200
million in 2019.104 The same week, Spotify announced that it was taking over the podcast
production platform Anchor for approximately USD 140 million.105 Furthermore, in the
same year, Spotify bought the podcast studio Parcast, which creates and produces
podcasts around the mystery, crime, and history themes. 106 The following acquisition
target was the leading music production marketplace SoundBetter, which provides an
online marketplace for registered artists to source singers, sound engineers, producers,
and other professionals. Besides that, Sound Better enables musicians to connect with
each other to collaborate on projects or to connect with publishers who want to license
their music. 107 These acquisitions helped Spotify generate new revenue streams and
tighten its relationships with artists, by offering not only music distribution via its
streaming service, but also increasingly more services across the entire value chain.108
This nearly full-scale service from a single source made it more convenient for artists to
work with Spotify and use its software and services. In 2020, the company extended its
podcast catalog by purchasing The Ringer, a widespread network of podcasts with
around 100 million downloads per month.109

99
See Perez and Lunden (2017); Sawers (2017).
100
See Spotify (2018a).
101
See Shu and Lunden (2019); Spotify (2019d).
102
See Ek (2019).
103
See Edison Research (2019).
104
See Russel (2019); Spotify (2019b).
105
See Russel (2019); Spotify (2019b).
106
See Spotify (2019e).
107
See Spotify (2019a).
108
See Shu and Lunden (2019).
109
See Lunden (2020).

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Additionally, Spotify spent another USD 235 million to acquire Megaphone, a podcast
network offering podcast hosting, distribution, and ad-insertion tools as well as
technology for podcast publishers and advertisers seeking advertisement slots.110 It also
started producing its own shows, such as the Daily News podcast, which has
subsequently become a Top-20 show worldwide.111

Another significant investment in 2020 was the exclusive multi-year deal with Joe Rogan
for USD 100 million. At the time of signing the agreement, the podcast The Joe Rogan
Experience had around 8.4 million subscribers on YouTube and was No. 2 on the Apple
Music charts (formerly iTunes).112 Therefore, this deal was a direct attack on Spotify's most
significant competitors and offered the chance for Apple and YouTube customers to
switch to Spotify. The company also secured exclusive content and signed contracts with
popular and famous podcasters such as Michelle Obama, Prince Harry & Meghan Markle,
and Addison Rae.113 As a result, Spotify increased its popularity: in 2020, around 25% of
podcast listeners in the US used Spotify to stream podcasts, a 6% increase compared to
2019.114

Investments continued into 2021 with the acquisition of Betty Labs, the owner of Locker
Room, a live audio social app that focuses on sports. According to Spotify, this acquisition
was intended to develop ‘future formats of audio and accelerate Spotify’s entry into the
live audio’. 115 Spotify also bought podz, to further improve its podcast business. Podz
developed an audio newsfeed with 60-second clips from various podcasts, thereby
enabling listeners to discover new shows easily and find the right content at the right
time.116 Also, in 2021, Spotify acquired the digital audiobook distributor Findaway, which
connects content creators with resellers such as Audible, Scribd, Nook, Rakuten Kobo,
Storytel, and a multitude of other global brands. 117 Another acquisition in 2021 was
Whooshkaa, a podcast company that allows radio broadcasters to turn their existing
audio content into on-demand content.118

While, in 2021, around 117.8 million people in the US listened to podcasts, forecasts
predict that this number will rise to over 144 million by the end of 2025, i.e., an increase
of around 22%.119 Next to growing popularity, podcast ad spending in the US is expected
to increase to around USD 2.75 billion by 2025.120 To monetize this development, Spotify
launched its own audio advertisement marketplace, called Spotify Audience Network, in
2021, which allows advertisers to reach Spotify users across all services, including
podcasts, the Megaphone app, the creation platform Anchor, as well as its ad-supported

110
See Spotify (2020).
111
See Perez (2020b).
112
See Brian (2020); Bursztynsky (2020).
113
See BBC (2020); Bursztynsky (2020); Carman (2020).
114
See eMarketer (2020); Statista (2020b).
115
Spotify (2021f).
116
See Spotify (2021f).
117
See Spotify (2021e); Spotify (2021j).
118
See Spotify (2021h).
119
See Insider Intelligence (2021a).
120
See Insider Intelligence (2021b); Perez (2021a).

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music. 121 With technology powered by artificial intelligence and machine learning, it
enables advertisers to reach the right listeners at the right moments. Spotify also allowed
artists to publish exclusive podcasts, for which fans have to pay extra fees to listen to
them.122

By the end of 2021, Spotify had become an audio company focusing not only on music
(see also Figure 6). With new services along the audio production value chain, exclusive
content, and a growing podcast business, Spotify was attempting to attract new
customers and create new revenue streams alongside copyrighted music from the
major labels.

Figure 6: Spotify’s acquisitions over time up to December 2021.

Source: Based on Aidan et al. (2021); Aurelius (2020); Shu and Lunden (2019); Spotify (2019a); Spotify (2019b);
Spotify (2019e); Spotify (2021e); Spotify (2021f); Spotify (2021g) and Spotify (2021i).

4.3 Further market entries to expand globally

In order to drive growth, Spotify not only invested in usability, podcasts, and exclusive
content but also expanded into many countries. In the initial years, Spotify focused
mainly on European countries through simultaneous launches in several European
countries, i.e. Sweden, Finland, Norway, France, and Spain, in 2008.123 Thereafter, the US
market was entered in 2011, followed by Australia and New Zealand in 2012. In the
following years, the company launched its services in many Latin-American countries,
such as Argentina (2013), Bolivia (2013), and Chile (2013). 124 In 2013, Spotify counted 6
million paying users distributed across 35 operating countries.125 Compared to Spotify,
the French-based company Deezer was available in 180 countries worldwide but with

121
See Perez (2021b).
122
See Perez (2021c); Spotify (2021i).
123
See Lynskey (2013).
124
See Grundberg (2014); Kastrenakes (2013).
125
See Kastrenakes (2013).

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only five million paying users.126 In the ensuing years, Spotify launched its services in the
Philippines (2014), Brazil (2014), Japan (2016), and Thailand (2017), and in 2018, it expanded
to 13 Arabian markets, including Saudi Arabia, the United Arab Emirates, Egypt, and
Morocco before entering India in 2019 and 13 East-European countries, including Russia,
in 2020.127 Figure 7 shows that Europe, with 40% of premium subscribers, is still the most
crucial region for the company, followed by North America (29%), Latin America (20%),
and the Rest of the World (11%).128 At the end of 2021, Spotify was available in 178 countries
worldwide, including nine of the top 10 music markets in the world.129

Figure 7: Spotify’s premium subscribers worldwide, Q4 2021 by region.

Source: Spotify (2022b).

To grow its user base, Spotify not only continuously increases the number of countries it
serves, but it also attempts to win new customers within the countries it has already
entered. In Sweden, for instance, the company’s home country and often considered an
early adopter market for streaming, 43% of the population pays for subscription models
to listen to music and podcasts. 130 Other countries, such as the United States (27%),
Germany (18%), and Japan (8%), still lag behind Sweden when it comes to the popularity
of streaming music with subscription models.131

126
See Dredge (2013); Lunden (2013); McComick (2013).
127
See Reuters (2018); Reuters (2020); Spotify (2019c).
128
See Spotify (2021c).
129
See IFPI (2021); Spotify (2021a).
130
See Goldman Sachs (2020).
131
See Goldman Sachs (2020).

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Additional opportunities stem from emerging markets. India, for instance, is often called
music's ”sleeping giant”. 132 In 2021, for instance, only 11% of the Indian population (1.3
billion inhabitants) had signed up for a music streaming service (whether in ”free” or
”premium” options), and Spotify's market share was still below 1%. With millions of
people signing up for online services every month, the growth rates for music streaming
are currently very high in India.133

One large market still remains untouched by Spotify—China, with a population of 1.41
billion. 134 The third-largest shareholder of Spotify is Tencent, a Chinese multinational
technology conglomerate that held 8.72% of Spotify's equity in 2021. Additionally, Spotify
holds a minority stake of 16.9% in a subsidiary of Tencent, namely, Tencent Music
Entertainment Group, the leader in the Chinese music streaming market.135 As there are
already connections to the Chinese market, it will be interesting to see whether, how,
and when China will be entered by Spotify. Figure 8 illustrates that China, as with Iran,
Iraq, Cuba, and Venezuela, is one of the few countries that have not yet been tackled by
Spotify.

Figure 8: Availability of Spotify worldwide as of June 2021.

Source: Danindub (2021).

132
Hu (2017).
133
See SN (2020). Deahl (2019)
134
See Statista (2021a).
135
See Ingham (2017); MarketScreener (2021); Rodenbaugh (2021); Russel (2018).

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5 Spotify’s rising power
With tens of millions of songs available in Spotify's music catalog, finding a good song is
becoming more complex for users. Playlists such as Discover Weekly, an individual
playlist for every user, created according to the user’s music taste and updated every
Monday, Release Radar, a playlist of new releases from artists a user is listening to, which
updates every Friday, and many more options help to reduce this complexity. Next to
individual playlists, Spotify also offers curated playlists which are similar for all users.
These playlists are, for example, connected to a location (e.g., Top 50 USA, Top 50 Spain,
Top 50 Global), to the mood of the user (e.g., Happy Hits, Spring Fever, Alone Again), or
to a situation in which the user listens to music (e.g., Songs to Sing in the Car, Valentine’s
Day Love, Dinner Music).136

Playlists have become very popular, as they offer an easy solution for users to discover
their next favorite songs, without spending hours searching for them. In addition, they
have also become essential to the labels, since they are an effective method for music
promotion, as being listed in one of Spotify's playlists can generate an increase in
listeners by 50 to 100%.137 Additionally, placing a song in a playlist also ensures the labels
and their artists reach millions of new potential fans globally. If new releases are not
listed on Spotify and its famous playlists, it is unlikely for new songs or albums to develop
into a hit record, as they are inaccessible to millions of listeners.138

Although some of the playlists are the same all over the world and others are tailored
individually to each user, Spotify decides which songs will be included. As the company
is aware of the effect playlists have, it acts as a gatekeeper and tries to monetize these
playlists; as such, it has been accused by artists and labels of trying to create digital
“payola”.139 Payola originally describes cash bribes and other ”gifts” that record labels give
to music stores, radio programmers, and DJs in exchange for promotion and better
placement on playlists and preferential airtime. 140 This procedure is said to be not
necessarily illegal as long as the promoted tracks are labeled with an indication of the
paid promotion. 141 Spotify offered a similar feature that prioritized songs in selected
playlists in exchange for a cut in the royalties it had to pay to the labels. 142 The
development of this payola feature marked a fundamental change in the relationship
between Spotify and the labels. While Spotify had depended heavily on the labels and
their copyrights in the past, it was the first time the labels paid or granted a discount on
royalty rates to Spotify to get listed on popular playlists.143 This new approach allowed
Spotify to gain leverage over the labels, which could be used in license negotiations to
reduce royalty rates and therefore decrease its financial obligations to rights holders.

136
See Spotify (2022b).
137
See Kafka (2017).
138
See Constine (2017).
139
See Artist Rights Alliance (2020).
140
See Hern (2020); Yoo (2020).
141
See Hern (2020); Yoo (2020).
142
See Hern (2020); Nicolaou (2021).
143
See Nicolaou (2021); Yoo (2020).

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Additionally, Spotify benefited from the general trend of music artists demanding
ownership rights for new songs. In the traditional music business, ownership rights were
generally the centerpiece of any contract between artists and labels, and usually, the
rights were held by the labels.144 As Taylor Swift refused to renounce her ownership rights
in 2019 and departed the label to which she was signed, she encouraged numerous
artists to also push for ownership of their work and more significant independence from
their labels.145

This had a significant effect on the music industry. Nowadays, artists do not rely alone on
the labels for music distribution, as they also have the ability to utilize streaming services
such as Spotify. This movement has increased pressure on the labels to change their
business model and enhanced Spotify's position in the music market as a distributor
with access to 406 million users (see also Figure 9). Acquiring companies such as the
music recording studio Soundtrap or the collaboration platform SoundBetter has
tightened Spotify's relationship with artists as well as with music producers. As a
consequence, the company has expanded its influence in the music business while
draining the labels’ dominance.

Figure 9: Spotify users worldwide from 2015 to 2021.

Source: Statista (2021b).

144
See Flanagan and Tsioulcas (2019); Grady (2019).
145
See Grady (2019); Hann Chua (2019) Statista (2021b).

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Spotify also developed a position as an important distribution channel for the labels. In
the fiscal year 2020,146 it contributed significantly to the major labels’ total royalties.147 For
Universal (52%) as well as Warner (54%), income from streaming (all streaming services
such as Spotify, Apple Music, Deezer, etc.) amounted to the largest source of revenue,
with Sony Music also earning 33% of its revenue from streaming.148 While the exact share
of Spotify’s streaming revenue for the labels has not been disclosed, it is expected that
the company is accountable for a significant part thereof.

Furthermore, as its userbase is still growing, Spotify will remain the most important
partner for the labels in the near future, both in terms of hard power (revenues,
subscribers) and soft power (ability to promote artists and songs by payola etc.).
Therefore, the dependency of the labels on Spotify is expected to increase further.149

Moreover, Spotify has managed to decrease its dependency on the major labels. While
in 2017, around 87% of the global music streams on Spotify were copyrighted by the
major labels, this number declined to 78% in only three years.150 If this decline continues
at around -3% per year, the labels could own less than 50% of all annual streams on
Spotify by 2030. 151 In addition, Spotify continues to create new revenue streams from
music production, podcasts, and directly signed contracts with artists—all of which have
the potential to decrease further its dependency on the major labels.

In summary, over the years, Spotify has grown and become a vital distribution channel
for the labels. As the labels' business model is coming under more and more pressure,
Spotify is strengthening its position in the music industry.

146
For Sony Music, the fiscal year ended March 31, 2020, for Warner Music September 30, 2020, and for
Universal Music December 31, 2020
147
See Constine (2017); Spotify (2021a); Statista (2021b).
148
See Sony (2020); Vivendi (2021); Warner (2021).
149
See Ingham (2021).
150
See Ingham (2021).
151
See Ingham (2021).

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6 Spotify’s future: challenges and opportunities ahead
Investors value Spotify. For instance, as of December 2021, Spotify had achieved a market
capitalization of USD 45 billion.152 Moreover, with USD 11.6 billion in 2021, the company
generated the highest revenues in its history (Figure 10). However, while total income
grew by around 23% compared to the previous year, Spotify had to report a drop in
average revenue per premium user (ARPU). In 2021, its global ARPU was USD 5.15 per
month, a drop of 37% since 2015, when it was USD 8.66.153 This drop in the ARPU was
mainly driven by the company’s aggressive growth strategy, which was characterized by
increasing the number of premium subscribers on free trials and discounted
subscriptions, such as student and family plans. 154 In 2021, Spotify’s cost of revenue—
consisting predominantly of royalties—was high at around USD 9.5 billion.155 Taking into
account the cost of R&D, sales, and administration, Spotify suffered a net loss of USD 47
million in 2021.156 It has been operating at a loss since its inception (see also Figure 11); in
addition, Spotify accumulated a total loss of USD 4.7 billion up to 2021.157 Therefore, its
future will be determined by the question of whether the company can generate profit
as well as pay back its debts.

Figure 10: Spotify’s revenue worldwide from 2009 to 2021.

Source: Statista (2021f).

152
See Yahoo Finance (2022).
153
See Spotify (2022a); Statista (2022b).
154
See Peoples (2021); Spotify (2021b).
155
See Spotify (2022a).
156
See Spotify (2022a).
157
See Statista (2022c).

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Figure 11: Spotify’s net income/loss from 2009 to 2021

Source: Statista (2022c).

Spotify is the most popular service in the music streaming business, but for potential
customers, differentiating between the leading music platforms is not straightforward.
Spotify, Amazon Music, and Apple Music offer similar music streaming services and a
vast amount of songs and podcasts (as of 2021: Spotify; 70 million; Apple Music 75 million;
Amazon Music 70 million).158 The price for a premium subscription for all three platforms
is around USD 9.99 per month (in the U.S, in 2021, without discounts).159 To attract new
customers, all competitors offer discounts for students, family plans, and other price
reductions.

Direct competitors such as Amazon Music or Apple Music are part of huge, financially
stable, and extremely profitable corporations, while Spotify is still operating at a net loss.
The financial power of its two major competitors (net income of USD 33 billion for
Amazon and USD 94 billion for Apple in 2021),160 as well as the approach of pre-installing
their own music streaming service on sold Amazon and Apple devices, is a huge
competitive advantage for them. It is also questionable whether Spotify can keep up the
costly approach of offering the same discounts and price reductions as Amazon and
Apple in the future.161

New players, such as TikTok, could also affect Spotify's business model. TikTok is the third
largest social network in the world with growth rates of 59% in 2020 and 40% in 2021, and
it is expected that 755 million monthly users will use it throughout 2022. 162 TikTok
generates its revenue through advertisements, very much in the same way as Spotify
does in its free version, thereby allowing it to compete with Spotify for the budgets that
third parties are planning to spend for advertising. Furthermore, TikTok has its own

158
See Amazon (2021); Apple (2021); Spotify (2021a).
159
See Hensley (2020); Kumar (2020); Statista (2021e).
160
See Amazon (2022); Apple (2022).
161
See Auchard and Swahnberg (2018); Pendlebury (2022).
162
See eMarketer (2021); Perez (2021d).

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music platform, Resso, which was launched in 2020 and focuses on fast-growing
markets such as Brazil, Indonesia, and India.163 As Spotify is targeting the same markets,
TikTok can be considered a competitor.

Additionally, Spotify must cope with increasing demands for privacy rights and data
protection at the user level, next to growing nationalism, protectionism, and skepticism
against foreign corporations in some of its operating countries.164

In 2021, 32 percent of music streaming subscribers worldwide had a subscription to

Spotify, making it the biggest music streaming service in the world, followed by Apple
Music with 16% and Amazon Music with 13% (see Figure 12). 165 At the end of 2021, the
company had around 180 million premium subscribers worldwide. With an additional
200 million subscribers in the ad-supported version, Spotify has a vast potential to
further increase the conversion of users into premium subscriptions and thus one day
achieve profitability.166 But when will Spotify finally become profitable?

Figure 12: Share of music streaming subscribers worldwide in 2021.

Source: Statista (2021e).

163
See Cohen (2021); Freer (2020); Lunden and Sighn (2020); Perez (2020a).
164
See Huang and Madnick (2020); OECD (2021); Withehead (2021).
165
See Statista (2021e).
166
See Spotify (2021d).

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Questions
1. Music labels and artists are two major stakeholders in Spotify. Please describe
Spotify’s relationships

a. to artists and how they have changed over time.

b. to major labels and how they have changed over time.

2. Before formulating their strategy, firms should also be aware of their culture.

a. Please do some research, allowing you to describe Spotify’s corporate

culture. When doing so, please refer to both the concepta level and the
percepta level of culture.

b. In how far do you believe Spotify’s corporate culture is influenced by

Swedish culture, i.e., the culture of the country where its headquarters is
located?

3. In the case study you received some information on Spotify’s mission. It was stated
that Spotify was founded with the mission to ‘give people access to all the music
they want, at all times—in a wholly legal & accessible way’. Do you believe that
Spotify’s mission has changed over time?

4. One instrument to analyze an industry is Porter’s “Five Forces framework”.

a. Please describe the music industry in the year 2000, using Porter’s five
forces.

b. Please analyze the music industry in the year 2021, using Porter’s five forces.

c. What major changes can you identify when comparing Porter’s five forces
in 2000 and 2021?

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 5. Players in an industry are not homogeneous. Instead, they may be different and
even belong to different strategic groups. According to Porter, a broad range of
characteristics can be used to differentiate firms and form strategic groups.
Examples include pricing position, ownership structure, market segments, the
extent of product diversity, etc.

a. Based on your own choice of dimensions, please establish strategic groups

for the industry in which Spotify operates.

b. In a next step, please compare Spotify’s strategic positioning to the

strategic positioning of another competitor from a different strategic
group. Does Spotify only have differences with this competitor, or do you
also identify similarities?

6. Please read the following article: Benner/Waldfogel (2016): The Song Remains the
Same? Technological Change and Positioning in the Recorded Music Industry,
Strategy Science, Vol. 1, No. 3, pp. 129-147.

a. The article compares traditional, major labels, such as Sony, Universal,

Warner, and EMI, to independent labels. Which hypotheses do
Benner/Waldfogel establish when comparing major labels with
independent labels? Are these hypotheses supported by the empirical
study conducted by Benner/Waldfogel? Please provide a short summary.

b. The Spotify case study that you have read did not include information on
Spotify’s relationship with independent labels. Please do some research on
your own and discuss the role that independent labels play for Spotify. Can
you identify changes over time? If yes, what consequences could these
changes have for Spotify?

7. Imagine you are asked to analyze macro-environmental trends for the music
streaming industry.

a. In the case of Spotify, please discuss five major threats within the macro-
environment that affected the company between 2011 and 2021.

b. In your opinion, what five major threats within the macro-environment

could affect Spotify from now until 2030?

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 8. Please imagine that as of today you have to conduct a SWOT analysis, by
identifying strengths, weaknesses, opportunities, and threats for Spotify. To arrive
at the SWOT analysis, please use tools and frameworks that help you analyze the
firm as well as the macro-environment and the micro-environment.

a. Please establish a SWOT analysis for Spotify in the US market.

b. Please establish a SWOT analysis for Spotify in another country of your

choice.

9. Spotify has shown strong growth over the last few years.

a. Please describe Spotify’s growth strategy over the previous years by using
the Ansoff Matrix (i.e., referring to market penetration, market
development, product development, and diversification).

b. What would be your recommendation for Spotify’s development in the

next five years (market penetration, market development, product
development, diversification)?

10. Companies have to decide what they do within the firm and what they source out.

a. As a first step, please use Porter’s value chain and adapt it to Spotify.
What would the Spotify value chain look like?

b. Which of Spotify’s activities are currently outsourced?

c. Would you recommend changes in Spotify’s outsourcing strategy? Please

justify your answer.

11. Firms must have an underlying logic to their acquisitive behavior, since
acquisitions could fail and be very expensive. Please have a look at Spotify’s
acquisitions in recent years.

a. Do you recognize an underlying logic behind the acquisition activities of

Spotify?

b. In your opinion, has Spotify’s acquisition logic changed over the years?

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 12. In a “winner-takes-all industry”, the best performers can capture a very large
market share, while remaining competitors are left with small market shares.
Spotify has already been able to capture a significant share of the streaming
market. Please answer the following questions:

a. Please describe some characteristics which enable a company to lead a

winner-takes-all industry in general.

b. Would these characteristics also apply to the industry Spotify is in? Please
explain your answer in detail and provide reasons for your position.

13. While Spotify has been offering a streaming service since its inception, Apple
Music represents a “pay-to-own” service. Steve Jobs (Apple Music) stated in 2007:
‘The subscription model has failed so far’ and ‘People want to own their music’.
Please compare Spotify’s service with Apple Music’s service.

a. Describe the advantages and disadvantages of how Apple Music sold

music in 2010 compared to Spotify’s streaming service.

b. Why did Apple Music later revoke this decision and implement a
subscription service?

c. How did Apple Music’s strategic change affect Spotify?

14. Even though Spotify has a dominant position in music streaming worldwide,
plenty of other firms, such as Apple Music, Amazon Music, Deezer, and YouTube
Music, successfully offer music. Please select one of these companies and conduct
some additional research

a. Please first establish some criteria in order to help you compare Spotify
with the other music service, and second, perform your comparison based
on these criteria.

b. Finally, please argue which of the two companies will be more successful
in the future.

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 15. Spotify not only has large competitors such as Apple or Amazon. Berlin-
headquartered Soundcloud is an example of another competitor. Please do some
research on Soundcloud.

a. Please compare Spotify with Soundcloud by establishing criteria that help

you to contrast both companies.

b. Imagine that you are managing a venture capital fund. Would you have
provided funding to Soundcloud in 2010? Please formulate your
arguments.

c. Would your decision to fund Soundcloud have been different in 2020?

Please justify your argumentation.

16. Please consider Spotify, Apple Music, and Amazon as well as two other competitors
of your own choice (such as Deezer, Soundcloud, etc.)

a. How would you describe Spotify’s competitive advantage as of now?

b. In your opinion, can Spotify’s competitive advantage be sustained over the

next few years? Or do you believe that Spotify will change its base for a
competitive advantage?

17. Please read the following definition of the term “business model” by
Osterwalder/Pigneur (2010):
“A business model describes the rationale of how an organization creates, delivers,
and captures value. […] Building blocks [of a business model] cover the four main
areas of a business: customers, offer, infrastructure, and financial viability. Thus, the
business model is like a blueprint for a strategy to be implemented through
organizational structures, processes, and systems.

a. How would you describe Spotify’s business model in 2010?

b. How would you describe Spotify’s business model in 2021?

c. What are the similarities and differences between the business models in
2010 and 2021?

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 18. Spotify has yet to attain profitability. Please discuss its efforts to monetize its
services over the years.

a. Why has Spotify never generated an operating profit since its inception?
Please summarize some arguments you draw from the case study and add
additional potential reasons.

b. Please explain two approaches Spotify has used to increase profitability

over the last few years (while still not being profitable).

c. What would you recommend to help Spotify increase profitability in the

future? Please describe two suggestions in detail.

19. Considering that Spotify is generating its income mainly through premium
subscriptions, please discuss three approaches to how it could convince more
users to sign up to its premium subscription.

20. Spotify opted for the freemium pricing model.

a. Please describe how Spotify’s freemium pricing model has contributed to

its growth.

b. The freemium pricing model faced major criticism from the artists. Please
summarize three criticisms.

21. In 2021, Spotify was available in 178 countries worldwide, including nine of the top
10 music markets globally, China being the exception.

a. Why was China treated differently compared to other countries? Please

provide your arguments.

b. Will Spotify enter China in the next five years? Please find at least five
arguments for and at least five arguments against market entry into China.
What would be your final recommendation?

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 22. You read that Spotify has a presence in nearly 200 countries. Please do some
research on Spotify in Japan.

a. Compare Spotify's offer in Japan to its offer in Germany in terms of service,

price, and communications. What similarities and differences do you see?

b. How would you explain the differences you identified with regards to the
macro-environment and the micro-environment?

23. In 2020 Spotify entered Russia. In 2022, Russia invaded Ukraine and the Russian-
Ukrainian war started. Imagine that, at the beginning of 2022, you were
responsible for Spotify’s business in Russia. Which measures would you have
taken?

24. Sweden is a relatively small country in terms of population and GDP. Nevertheless,
several Swedish companies have expanded successfully abroad, such as Ikea.

a. Please do some research and compare the personalities of Ingvar

Kamprad, the founder of Ikea, with the personalities of Daniel Ek and Martin
Lorentson, the founders of Spotify. Do you see similarities or differences?

b. Do you believe that Ingvar Kamprad would also have the personality to
successfully found and manage a company like Spotify? Please provide
justifications for your answers.

25. What recommendations would you give to Spotify for its future strategic
development?

a. In terms of Porter’s generic strategies, should Spotify be a cost leader, a

differentiator, or a focus company? Please justify your reasoning.

b. In terms of growth strategies, should Spotify concentrate on market

penetration, product development, market development, or
diversification? Please justify your reasoning.

26. You know that there are different reasons/motives for firms to internationalize.
Please briefly name each of Dunning’s main reasons/motives and apply them to
Spotify’s internationalization.

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 27. The Uppsala School advocates a particular pattern of internationalization in terms
of psychic distance. Please argue whether and, if so, how Spotify internationalized
according to the so-called “psychic distance chain”.

28. Please carry out some research on the market entry modes Spotify uses when
expanding abroad.

a. Why did Spotify prefer this/these entry mode(s)?

b. If Spotify eventually enters China, which entry mode would you

recommend, and why?

29. Not only music, but also videos and movies can be streamed. Netflix has developed
into a major (subscription) streaming company. Please establish some criteria that
help you to compare a music streaming service company like Spotify with a
video/movie (subscription) streaming service company like Netflix.

a. What are the similarities and differences between Netflix and Spotify?

b. In April 2022, Netflix shares dropped by 35% compared to the beginning of

2022. Please carry out some research on Spotify by analyzing Spotify’s share
price development in the first quarter of 2022. Which conclusion do you
draw when comparing Netflix with Spotify?

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WORKING PAPER SERIES
ESCP EUROPE WIRTSCHAFTSHOCHSCHULE BERLIN
ISSN 1869-5426 (FROM NO. 48 ONWARDS)

FORMERLY: WORKING PAPER SERIES

ESCP-EAP EUROPÄISCHE WIRTSCHAFTSHOCHSCHULE BERLIN
ISSN 1619-7658 (NO. 1-47)

The following contributions have already been published:

No. 1 Jacob, Frank (2002): Kundenintegrations-Kompetenz: Konzeptionalisierung,

Operationalisierung und Erfolgswirkung.

No. 2 Schmid, Stefan (2003): Blueprints from the U.S.? Zur Amerikanisierung der
Betriebswirtschafts- und Managementlehre.

No. 3 Festing, Marion/Hansmeyer, Marie Christine (2003): Frauen in Führungspositio-

nen in Banken – Ausgewählte Ergebnisse einer empirischen Untersuchung in
Deutschland.

No. 4 Pape, Ulrich/Merk, Andreas (2003): Zur Angemessenheit von Optionspreisen –

Ergebnisse einer empirischen Überprüfung des Black/Scholes-Modells.

No. 5 Brühl, Rolf (2003): Anmerkungen zur Dimensionsanalyse im betrieblichen

Rechnungswesen.

No. 6 Wicke, Lutz/Timm, Gerhard (2004): Beyond Kyoto – Preventing Dangerous

Climate Change by Continuing Kyoto or by the GCCS-Approach?

No. 7 Pape, Ulrich/Schmidt-Tank, Stephan (2004): Valuing Joint Ventures Using Real
Options.

No. 8 Schmid, Stefan/Kretschmer, Katharina (2004): The German Corporate

Governance System and the German “Mitbestimmung” – An Overview.

No. 9 Brühl, Rolf (2004): Learning and Management Accounting – A Behavioral

Perspective.

No. 10 Wrona, Thomas (2005): Die Fallstudienanalyse als wissenschaftliche For-

schungsmethode.

No. 11 Schmid, Stefan (2005): L’internationalisation et les décisions des dirigeants.

No. 12 Schmid, Stefan/Daub, Matthias (2005): Service Offshoring Subsidiaries – Towards

a Typology.

No. 13 Festing, Marion/Richthofen, Carolin von (2005): Die Auswahl von Studierenden
der Internationalen Betriebswirtschaftslehre.

No. 14 Schmid, Stefan/Kretschmer, Katharina (2005): How International Are German

Supervisory Boards? – An Exploratory Study.

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No. 15 Brühl, Rolf/Buch, Sabrina (2005): The Construction of Mental Models in
Management Accounting: How to Describe Mental Models of Causal Inferences
(3rd version).

No. 16 Schmid, Stefan/Machulik, Mario (2006): What has Perlmutter Really Written? A
Comprehensive Analysis of the EPRG Concept.

No. 17 Jacob, Frank/Plötner, Olaf/Zedler, Christien (2006): Competence Commercial-

ization von Industrieunternehmen: Phänomen, Einordnung und For-
schungsfragen.

No. 18 Schmid, Stefan/Kretschmer, Katharina (2006): Performance Evaluation of

Foreign Subsidiaries – A Contingency Framework.

No. 19 Festing, Marion/Lassalle, Julius (2006): Determinanten des psychologischen

Vertrags – Eine empirische Untersuchung am Beispiel von Alumni der ESCP-EAP
Europäische Wirtschaftshochschule Berlin.

No. 20 Brühl, Rolf/Buch, Sabrina (2006): Einheitliche Gütekriterien in der empirischen

Forschung? – Objektivität, Reliabilität und Validität in der Diskussion.

No. 21 Schmid, Stefan/Daniel, Andrea (2006): Measuring Board Internationalization –

Towards a More Holistic Approach.

No. 22 Festing, Marion/Eidems, Judith/Royer, Susanne/Kullak, Frank (2006): When in

Rome Pay as the Romans Pay? – Considerations about Transnational
Compensation Strategies and the Case of the German MNE.

No. 23 Schmid, Stefan/Daub, Matthias (2007): Embeddedness in International Business

Research – The Concept and Its Operationalization.

No. 24 Wrona, Thomas/Klingenfeld, Daniel (2007): Current Approaches in

Entrepreneurship Research: Overview and Relevance for Management
Research.

No. 25 Pape, Ulrich/Schlecker, Matthias (2007): Are Credit Spreads and Interest Rates
co-integrated? Empirical Analysis in the USD Corporate Bond Market.

No. 26 Schmid, Stefan (2007): Wie international sind Vorstände und Aufsichtsräte?
Deutsche Corporate-Governance-Gremien auf dem Prüfstand.

No. 27 Brown, Kerry/Burgess, John/Festing, Marion/Royer, Susanne/Steffen,

Charlotte/Waterhouse, Jennifer (2007): The Value Adding Web – A Multi-level
Framework of Competitive Advantage Realisation in Firm-Clusters.

No. 28 Oetting, Martin/Jacob, Frank (2007): Empowered Involvement and Word of

Mouth: an Agenda for Academic Inquiry.

No. 29 Buch, Sabrina (2007): Strukturgleichungsmodelle – Ein einführender Überblick.

No. 30 Schmid, Stefan/Daniel, Andrea (2007): Are Subsidiary Roles a Matter of

Perception? A Review of the Literature and Avenues for Future Research.

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No. 31 Okech, Jana (2007): Markteintritts- und Marktbearbeitungsformen kleiner und
mittlerer Personalberatungen im Ausland. Eine empirische Analyse unter
besonderer Berücksichtigung internationaler Netzwerke.

No. 32 Schmid, Stefan/Kotulla, Thomas (2007): Grenzüberschreitende Akquisitionen

und zentrale Konsequenzen für die internationale Marktbearbeitung – Der Fall
Adidas/Reebok.

No. 33 Wilken, Robert/Sichtmann, Christina (2007): Estimating Willingness-to-pay With

Different Utility Functions – A Comparison of Individual and Cluster Solutions

No. 34 Jacob, Frank/Lakotta, Jan (2008): Customer Confusion in Service-to-Business

Markets – Foundations and First Empirical Results.

No. 35 Schmid, Stefan/Maurer, Julia (2008): Relationships Between MNC Subsidiaries –

Towards a Classification Scheme.

No. 36 Bick, Markus/Kummer, Tyge-F./Rössing, Wiebke (2008): Ambient Intelligence in

Medical Environments and Devices – Qualitative Studie zu Nutzenpotentialen
ambienter Technologien in Krankenhäusern.

No. 37 Wilken, Robert/Krol, Lena (2008): Standardisierung von Werbung in Print-

anzeigen: Der Vergleich von Studenten und Nicht-Studenten am Beispiel von
Norwegen.

No. 38 Schmid, Stefan/Daniel, Andrea (2008): Cross-Border Mergers and their

Challenges – The Case of Telia.

No. 39 Jacob, Frank/Oguachuba Jane (2008): Kategorisierung produktbegleitender

Dienstleistungen in der Automobilindustrie.

No. 40 Festing, Marion/Müller, Bernadette/Yussefi, Sassan (2008): Careers in the

Auditing Business – A Static and Dynamic Perspective on the Psychological
Contract in the Up-or-out System.

No. 41 Schmid, Stefan/Grosche, Philipp (2008): Glokale Wertschöpfung im Volkswagen-

Konzern – Auf dem Weg zu mehr Dezentralisierung bei Produktion und
Entwicklung.

No. 42 Schmid, Stefan/Grosche, Philipp (2008): Dezentrale Zentralisierung – Rumänien

im Zentrum der Wertschöpfung für Renaults Logan.

No. 43 Schmid, Stefan/Grosche, Philipp (2008): Vom Montagewerk zum Kompetenz-

zentrum – Der Aufstieg von Audis Tochtergesellschaft im ungarischen Györ.

No. 44 Brühl, Rolf/Horch, Nils/Orth, Mathias (2008): Der Resource-based View als Theorie
des strategischen Managements – Empirische Befunde und methodologische
Anmerkungen.

No. 45 Bick, Markus/Börgmann, Kathrin/Schlotter, Thorsten (2009): ITIL Version 3 –Eine

Betrachtung aus Sicht des ganzheitlichen Wissensmanagements.

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No. 46 Schmid, Stefan/Dauth, Tobias/Kotulla, Thomas (2009): Die Internationalisierung
von Aldi und Lidl – Möglichkeiten und Grenzen bei der Übertragung von im
Inland erfolgreichen Geschäftsmodellen auf das Ausland.

No. 47 Schmid, Stefan (2009): Strategies of Internationalization – An Overview.

No. 48 Schmid, Stefan/Grosche, Philipp (2009): Konfiguration und Koordination von

Wertschöpfungsaktivitäten in internationalen Unternehmen – Ein kritischer
Beitrag zum State-of-the-Art.

No. 49 Alexander, Julia/Wilken, Robert (2009): Consumer-Related Determinants in

Product Bundling – An Empirical Study.

No. 50 Schmid, Stefan/Kotulla, Thomas (2009): The Debate on Standardization and

Adaptation in International Marketing and Management Research – What Do
We Know, What Should We Know?

No. 51 Festing, Marion/Maletzky, Martina/Frank, Franziska/Kashubskaya-Kimpelainen,

Ekaterina (2010): Creating Synergies for Leading: Three Key Success Factors for
Western Expatriates in Russia.

No. 52 Schmid, Stefan (2010): Do We Care about Relevance in the International Business
Field? On Major Problems of Transferring Our Research to Management
Practice.

No. 53 Plötner, Olaf/Lakotta, Jan/Jacob, Frank (2010): Differentiating Market Offerings

Using Complexity and Co-Creation: Implications for Customer Decision-Making
Uncertainty.

No. 54 Pape, Ulrich/Schlecker, Matthias (2010): Analyse von Credit Spreads in

Abhängigkeit des risikofreien Referenzzinssatzes.

No. 55 Schmid, Stefan/Dost, Ruben (2010): Export als zentrale

Internationalisierungsstrategie – Der Fall des türkischen Unternehmens Arçelik.

No. 56 Brühl, Rolf (2010): Kennzahlen für die Zielkostenkontrolle: vom Zielkostenindex
zur relativen Zielkostenabweichung.

No. 57 Basel, Jörn/Brühl, Rolf (2011): Concepts of Rationality in Management Research.

From Unbounded Rationality to Ecological Rationality.

No. 58 Bick, Markus/Schlotter, Thorsten/Börgmann, Kathrin (2011): Strukturen in der IT-

Organisation – Gestaltungsherausforderungen im Kontext zunehmender
Prozessorientierung.

No. 59 Schmid, Stefan/Dzedek, Lars R. (2011): Subsidiary Initiatives in Multinational

Corporations: What Do We Know about Them, Their Antecedents and Their
Consequences?

No. 60 Bick, Markus/Goetsch, Harald/Baur, Aaron W./Bühler, Julian/Ryschka, Stephanie

(2012): Barrieren und Potenziale des Human Resource Outsourcing – Eine
empirische Studie.

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No. 61 Kury, Max/Brühl, Rolf (2012): Vertrauen und Rechenschaft. Ein Wirkungsmodell
der Rechenschaftsabgabe.

No. 62 Pape, Ulrich/Reich, Katharina/Seehausen, Sven (2014): Pecking-Order-Theorie

und Kapitalstrukturpolitik börsennotierter Familienunternehmen

No. 63 Jacob, Frank/Bruns, Katherina/Bues, Mirja (2014): Co-Creation im

Produktentwicklungsprozess und Auswirkungen auf Vertrauen und
Commitment: eine empirische Untersuchung am Beispiel der
Automobilbranche.

No. 64 Sahakiants, Ihar/Festing, Marion (2014): The Minder Initiative and Executive Pay
Narratives in Germany and Russia: Cases of Path Dependence?

No. 65 Schmid, Stefan/Dauth, Tobias/Kotulla, Thomas/Orban, Fabienne (2016): Aldi and

Lidl: From Germany to the Rest of the World?

No. 66 Schmid, Stefan/Polat, Cigdem (2016): Lenovo: From Chinese Origins to a Global
Player.

No. 67 Schmid, Stefan/Gombert, Adrian (2016): McDonald’s: Is the Fast-Food Icon

Reaching the Limits of Growth?

No. 68 Schmid, Stefan/Polat, Cigdem (2017): Subsidiary Innovation Measured by

Patents: A Review of the Literature.

No. 69 Schmid, Stefan/Baldermann, Sebastian (2019): Entering New Markets and

Diversifying Business: The Role of Amazon's Acquisitions in International Growth
and Development.

No. 70 Schmid, Stefan/Roedder, Felix (2019): Takata: International Configuration and

Coordination of a Japanese Automotive Supplier.

No. 71 Schmid, Stefan/Romey, Tobias (2022): Spotify: From Music Streaming Start-up to
Global Audio Company.

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