Shaping Strategies: Spotify case study
About Pragmatic Pathways: New approaches to organizational change
Read full report or view case study below:
Napster broke the music industry by removing content from its traditional wrapper, the album, and the industry has not been the same since. International revenues for the music industry peaked in 1999 at $56.7 billion and have declined to an estimated $28.7 billion in 2012. After Napster was litigated out of the picture, Apple’s iTunes legally continued the digital trend of separating the single from the CD. Although the revolutionary distribution method appealed to consumers, it undeniably eroded profit margins for music labels, artists, and other participants in the industry. It affected regional music industries around the world, which has likewise been in steady decline since its peak in 1999.
Enter Spotify in 2008, a new player in the fray. Swedish company Spotify has single-handedly reversed this trend in its home country, and its digital streaming and social sharing platform may just be able to save the international market.
Before the 2012 Grammys, Spotify cofounder and CEO Daniel Ek spoke before a gathering of industry executives and spent most of the night describing his vision to them:
The value of music is not $15 billion [2011 international digital music sales]; it’s worth much, much more than that13.
After Spotify’s launch, Sweden’s music industry experienced growth for the first time in 2011, with Spotify accounting for approximately half of the music revenue. To the Spotify team, they are not just a streaming service or an application to access your playlists; from the founder on down, the company views itself as the “operating system (OS) of music.” The executive team is aligned on its central vision to deliver music to people wherever, and whenever, they want to consume it. More importantly, Spotify is pursuing a shaping strategy, mobilizing and orchestrating global ecosystems around its vision to transform the music industry.
Shaping strategies are an effort to transform an industry or market by creating incentives for external participants, demonstrating that all participants can benefit from this new vision, and providing a platform for these participants to interact on. The goal is to redefine the nature of competition for the market sector. There are three specific components of a successful shaping strategy:
- Shaping view: First, the orchestrator must articulate a shaping view, a long-term vision of where the market is heading that identifies where the opportunities and economic incentives lie for participants, yet is big picture enough to leave considerable room for refinement. The orchestrator needs to be a compelling evangelist, able to clearly articulate the vision of the direction of the new market and the value creation opportunities for all participants in the industry.
- Shaping platform: Second, the orchestrator must provide a shaping platform, or a set of clearly defined standards and practices, that organize the activities of the participants and also provide them with leverage by reducing initial investment and lowering the cost of interactions between participants.
- Acts and assets: Third, the orchestrator needs to demonstrate its capability and commitment to realizing its vision through a mixture of “acts” and “assets.” Acts are necessary to define the shaper’s intentions, demonstrating the shaping company’s assets can be a significant factor in persuading potential participants to invest in the shaper’s view.
Shaping view: Spotify’s actions to date demonstrate a very specific vision of where the music industry will evolve—to an industry that is thriving on, rather than suffering from, the new digital platforms. Spotify sees itself as the key platform in this new era; as Sten Garmark, director of Spotify, describes it:
We have to turn ourselves into the OS of Music14.
As this “operating system,” or music platform, Spotify intends to deliver music and interactive experiences through third-party applications to its consumers. By broadcasting this vision and directly engaging and orchestrating key ecosystem participants, such as major music labels, artists, music industry media, third-party developers, and consumers, Spotify has multiplied the depth and complexity of the listening experience on its platform.
Spotify differs from Apple, Pandora, and other prominent digital music aggregators through the integration of social graphs into the music listening experience. Spotify’s launch in the United States reflected this strategy, as the service was deeply integrated with Facebook Connect from the start. Users’ playlists are highlighted to their Facebook friends in real time, and users are able to “send” tracks to each other in order to recommend a new artist. Social recommendations are a crucial factor in increasing engagement with new and established artists alike. As Daniel Ek observed in an interview at the Grammy Awards:
The sales cycle of [a] record is anywhere from four to twelve weeks in most typical cases. With Spotify, we keep seeing the effect [extend] up to twenty-five, thirty-five [weeks], or even a year15.
This is a crucial differentiator that enables Spotify to deliver music anywhere, anytime, while still fostering a healthy ecosystem and growing the music industry. Spotify is also aggressively targeting partnerships with new media channels to increase its user base; for example, it recently signed a distribution deal with Yahoo that will highlight the music service as the preferred service for all of Yahoo’s 700 million unique monthly visitors. Such distribution partnerships are crucial to Spotify’s long-term success in realizing its vision, as the addition of each new user increases the value for other participants in the music ecosystem.
A shaping platform: Spotify has created a platform and a set of clearly defined standards and practices that organize and support the activities of its many participants. Since launching as a platform in December 2011, Spotify has actively engaged the ecosystem of third-party developers by providing best practices and coaching to ensure all applications hosted on Spotify meet a minimum quality standard before going live on the platform. By having an open-admit policy for third-party developers and providing them with the tools and training to deliver quality applications, Spotify is fostering specialization on its platform and increasing the odds consumers will be able to find the specific features they want to engage with. Targeted applications increase engagement for customer niches that might not be reached otherwise; as a result, consumers are willing to spend more time and money on the music industry (e.g., on the platform, at live events). This, in turn, increases the value for application developers, musicians, and labels as a whole.
This strategy is working—Spotify’s paid membership in the United States increased by one million in the past year, and since the platform launch, US consumers have spent more than 23.7 million hours in Spotify applications, listening to music and engaging with the content creators in new and unique ways16, 17. The platform not only makes Spotify’s shaping vision possible; it is also an integral piece of the vision. The ability to stream music anywhere requires a sophisticated infrastructure and would not have been possible even five years ago. When envisioning the company, Ek presupposed the existence of this architecture and was one of the early music streaming services to capitalize on its existence. He had a bold vision for Spotify and moved on it before people realized it was even possible.
Acts and assets: To date, Spotify has demonstrated that it has both the conviction and the assets to help realize this vision. By opening up an application program interface to its catalog of more than 15 million songs to any third-party developer for free, they have committed to creating a much richer, deeper music ecosystem than what currently exists. By demonstrating they are willing to invest a significant amount of money on its platform and making these assets available for free, they are creating powerful incentives for third-party developers to adopt its platform. Spotify has also signaled a long-term commitment to improving the music industry by actively engaging the four major music labels (each of whom is a minority shareholder in Spotify) throughout the evolution of its platform. They have identified opportunities for creating value in many distinct niches for the labels, artists, publications, live promoters, third-party developers, and any number of other participants within the music industry. For example, Ken Parks, Spotify’s chief content officer, has worked with music labels and other parties to develop new metrics to measure customer engagement with artists and applications on the Spotify platform. By nature of their diversity and specialization, the applications created by third-party developers help expose niche artists who might not otherwise have a platform for their music. These types of actions demonstrate that the shaper is committed to creating value for the entire ecosystem, rather than exploiting the other participants for its own gain.
Spotify has demonstrated the potential to shape the music industry by describing a compelling vision of the future of music, introducing a platform to help realize this, and signaling its commitment to developing this vision in tandem with its broader ecosystem. As it continues to grow as a company, Spotify might find it useful to adopt a metrics that matter strategy in order to drive adoption of technologies or practices necessary to transition into a publicly traded company.
13 Alex Pham, “Spotify’s Daniel Ek and the music ‘dinosaurs’,” Los Angeles Times, February 10, 2012, http://latimesblogs.latimes.com/entertainmentnewsbuzz/2012/02/daniel-ek-spotify-grammy-keynote-entertainment-law-initiative.html.
14 Guardian Technology Blog, “Spotify Apps Platform,” Guardian, March 6, 2012, http://www.guardian.co.uk/technology/appsblog/2012/mar/06/spotify-apps-platform.
15 Evolver.fm, “Spotify CEO Daniel Ek Talks Royalties, Social and the Future,” February 10, 2012, http://evolver.fm/2012/02/10/spotify-ceo-daniel-ek-talks-royalties-social-and-the-future/.
16 Ingrid Lunden, “Spotify by the Numbers: Now 5M Paying Subscribers, with 1M in the US Alone; 20M Users Overall,” TechCrunch, December 6, 2012, http://techcrunch.com/2012/12/06/spotify-by-the-numbers-now-5m-paying-subscribers-with-1m-in-the-u-s-alone-20m-users-overall/.
17 Hisham Dahud, “Spotify Releases U.S. Figures, Sees More Than 13 Billion Streams,” Hypebot, July 23, 2012, http://www.hypebot.com/hypebot/2012/07/spotify-releases-us-figures-sees-more-than-13-billion-streams-.html.
As used in this document, “Deloitte” means Deloitte LLP [and its subsidiaries]. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.