Over the past few years, Spotify has tremendously revolutionized the global digital music business with its on-demand streaming music service. Spotify now possesses 40 million paid subscribers, but it has been operating at a consistent loss since its foundation. Its current business model does not generate substantial profit to offset the heavy expenditure of music royalties. Therefore, this proposal determines to help Spotify to boost revenue and achieve profitability through integrating concert ticket and music merchandise selling into its current business model.
The study will analyze the viability of developing new business model from four aspects. First, the study will utilize statistics to show that music fans increasingly spend money on live performance and music merchandises. Second, the study will demonstrate that music artists are more and more interested in offering other music products to supplement their decreasing revenue due to the decline of physical album sales. Third, through revealing the instinctive advantage of online streaming music service, the study will prove that Spotify has the potential to become an online platform to connect music fans and artists.
At last, the study will turn to analyze the success of QQ Music being the first profitable streaming music provider. Learning from QQ Music, Spotify is able to gain new insight in developing profitable music business model. Introduction In recent years, digital music is at a crucial stage of its development, as people’s consumption of music is booming everywhere and digital revenues overtook income from physical music for the first time in 2015. The growing mobile devices usage and highly available mobile internet has fueled the streaming music revolution.
Today, streaming has exceeded music download service and emerged as the main driver of growth in the digital music industry. However, the new age that creates opportunities also comes along with substantial volatility. As the biggest player of streaming music services, Spotify has been struggling to achieve sustainable profitability, even though it has amassed a significant user base. Because of the heavy royalty it must pay to the major music label companies, the current business model could not generate enough revenue to counterbalance all the cost. The company is seeking opportunity to launch IPO.
Through public financing, Spotify wishes to further expand its user base to achieve economies of scale, which seems the only method to maintain its survival. On the contrary, recently, QQ Music, better known as Chinese version of Spotify, claimed to turn a profit. QQ Music extends the meaning of music streaming. Its business moves beyond streaming to be an online exchange platform of music-related marketplace. Unlike Spotify, QQ Music also offers other music services, like selling concert tickets and other ancillary items. Could Spotify adopt QQ Music’s strategy to solve its own issues and achieve continuous profitability?
The study will try to answer this question and provide further recommendations to Spotify. Background overview of music streaming Due to illegal music piracy, the music industry has suffered difficult conditions over the past decades. The rise of streaming has been taken as a significant opportunity for the whole industry to revive. According to the data provided by RIAA and IFPI (2016), in 2011, the strong presence of streaming leads to unprecedented growth of U. S. recorded music business over decades. In 2013, revenue from streaming services accounted for 20% of all music industry revenue.
The statistics displays that streaming plays a key role in current music business. With strong emergence of music streaming service, participants within music industry, like major music label companies, independent label companies, and music artists, have embraced the thriving digital marketplace, providing consumers increasing choice of music offerings. However, music artists cannot earn a profit matching their offerings from music streaming. The new streaming business has yet to develop a more profitable revenue model. Streaming-music providers generate revenue merely from subscription payment and advertisement fees.
The limited revenue fails to sustain its profitability, as they have to pay music label companies and artists a considerable amount of royalties to support the music database. Overview of music ticket and merchandise business As the biggest sector of consumer music spending, live music has always gained a lion’s share of U. S. music industry revenue. U. S. has long been a big market of music live performance because of its highly developed economy and high standard of living. The growing consumers’ disposable income has fueled the concerts business to a rapid growth.
IBISWorld report (Petrillo, 2016) forecasts that concert ticket business will boost at a projected annualized rate of 5. 1% to $25. 5 billion over the five years to 2016. According to Future of Music Organization (Cordero, 2016), music merchandise, such as T-shirt, posters, and bags with artists’ graphic, accounts for about 6% income of a rock band. Although data shows the merchandise market is of a small size, music industry insiders illustrate that music merchandise provides an indispensable approach for music fans to have a multimedia experience.
Meanwhile, it also creates a significant chance for music artists to monetize their brand value, as more people are spending money on music event and the industry is looking for another way to bring revenue. Industry experts agree that merchandise selling will be more important in future music business. Background of Spotify and QQ Music Revolving around the phrase “the right music for every moment”, Spotify develops its streaming platform with the guiding principle of being easy, personal, and fun. Up to August 2016, Spotify has more than 100 million active users and 40 million paying subscribers worldwide.
Spotify currently drive its revenue by selling premium subscription service to users and advertisement places to third companies. Spotify pays copyholder royalties for every streamed music. However, different from physical or download sales, which pay a fixed price per song or album, Spotify pays artists based on the times their songs were played on the streaming platform. Spotify claims that 70% of the revenue goes to pay copyholders.
The heavy royalties make it severely challenging for the company to earn a profit (D. D. Ferrali, D. S. Simantel, & Osazuwa, 2014). QQ Music is the music division product of Tencent corporation, a Chinese internet giant. Merged with China Music Corporation, QQ Music has become the absolutely dominant player in the Chinese digital music business that it grabs 70% market share. Interacting with Wechat and Wechat Pay, another two popular products from Tencent, QQ Music possesses numerous advantages that Spotify lacks. Wechat provides QQ Music an enormous potential user base, while Wechat Pay serves as an extremely convenient payment tool.
Their interaction promotes users to involve with more music digital products, like concert tickets, merchandise, providing an extended line of revenue to its freemium model of advertisements and paid subscription (Ho, 2016). Findings Problem As a newborn music provider based on internet, music streaming itself does not produce any music content but merely serves as a platform for exchange, which results in its weak ability to bargain with music content producers, such as Warner Music Group, Sony Corporation, and Universal Music Group.
When Spotify deals with these major labels, the company has to pay a huge amount of advances just to access their song library, and pay heavy royalties when their songs are streamed. According to the contract signed between Spotify and Sony in 2011, a fixed 60% proportion of Spotify’s gross revenue was paid to royalties. The major music business of Spotify has severely narrow profitability. Apart from royalty, Spotify has to pay the other costs of management, infrastructure, and marketing activities, posing big threat to its profitability and sustainability (McDuling, 2015).
There are several possible solutions for Spotify to relief its pressure. First, it could reduce the royalty rate by growing big enough to enhance its ability to bargain. However, it seems unlikely that Spotify could against these major label companies in a short term. Second, Spotify could modify its freemium model and give artists the opportunity to exclusively offer their new releases to paid subscribers. This approach runs against the initial spirit of Spotify, so it might cause a loss of customers.
The third solution is that Spotify could develop its subscription from a single offering into tiered pricing offerings based on access, thus leveraging unexplored variations and options (D. D. Ferrali et al. , 2014). Recommendations Learning from QQ Music, Spotify should develop a sophisticated understanding of the role that music streaming platform should play in the future music business. Moving beyond streaming service, Spotify should position itself as a bigger marketplace for music business, as the other industry participants and consumers are more and more demanding.
Currently, both music label companies and artists are looking for alternative methods to supplement the declining revenue gained from album selling. The industry has realized that ticket and merchandise selling is an ideal approach to monetize the relationship between artists and music fans. As live music ticket and merchandise are becoming more lucrative sources of income, Spotify should unlock the ticket and merchandise selling service. As a digital music service with enormous users, Spotify possesses unique advantages comparing with other online ticket platform.
It should leverage the power of algorithm and the valuable data that reflects users’ preferences to sell more music-related products. By acquiring or self-developing its tickets and music merchandise selling system, Spotify would accurately and automatically recommend concerts tickets and merchandises that best match users geographic location and music listening history. This feature could raise users’ awareness of music events that interest them and thus stimulate impulse purchases.
The platform will advance the ticket and merchandise selling business and generate additional revenue for the industry, since it is making more and deeper connections between music lovers, music artists, and music label companies. In addition, Spotify should leverage the power of social media and establish firm partnership with Facebook, Twitter, and Tumblr. The partnership with social media allows users to see what their friends are listening and what concert they RSVP.
According to Nielsen, these socially connected users are 90% more likely to spend money on music and 50% more likely on concert tickets. Connected with social media, Spotify would have a better performance on its ticket and merchandise business. Spotify would benefit from ticket and merchandise selling, since it provides an additional line of revenue and helps to develop its own music ecosystem where consumers and artists can have a sustainable interaction. It would enhance Spotify’s ability to bargain with music labels companies and reduce the reliance on streaming service to generate profit.
By earn extra profit with ticket and merchandise selling, Spotify would have a good chance to turn a profit. Conclusion The challenge for Spotify is how to counterbalance its heavy royalty fee. After conducting research on music industry and QQ Music, it comes to conclusion that moving beyond streaming service is crucial for Spotify to improve its profitability and sustainability. Selling ticket and merchandise as a viable and lucrative service should be added into Spotify’s current business model.