It’s only been 12 years since the huge dot.com bubble bursted….and more recently Facebook, Groupon, … are facing a new “social” bubble situation, for the moment they survive but will they do so in the (near) future?! Both for Facebook and Groupon we see the over valuation of company shares (before they go public on stock exchange)….but the bottom line business model is therefore not so bad. Off course both Facebook and Groupon face the challenge of shaping their business model for a mobile environment, but with a little help from …. they probably will succeed. Both business models were “invented” in de digital era, but for many business models this isn’t the case. Most business models had to re-think their business model to adapt to the new digital environment. That’s what this post is all about….rethinking the off-line business model and make it online proof. For a long time “Spotify” was best in class for transforming the music business model into an online business model, until last week(s) were a lot of news sites/(tech)blogs pointed out that Spotify wasn’t profitable enough, and would go bankrupt if it didn’t change the business model…BUT is this really the case?
Spotify was one of the first “true” streaming music sites, which shifted the business model from ownership to (online) access to music (with a possibility to have off-line access as well – if you’re a premium user!)….AND for free (the first period). Afterwards you could choose to use the free model, but with mood based commercials OR pay a subscription fee and have access to the premium services (without the mood based advertising)…basically the Spofity Business Model looks like this:
It was PrivCo (a financial analytics bureau) who stated that with this business model 98% of revenue was spent on costs-of-sales and went to the “right-owners” of the music. If you take a closer look at this number and cross-reference with other available data, the correct number will be somewhere around 70% (same as iTunes for that matter!). How PrivCo came to this number is still to be uncovered….(but irrelevant in the discussion). With some proper accounting we see a different scenario….
What PrivCo did was thinking in “old business models” where short-term financial success is king, well in online business financial success is the destination but not the short-term goal. Controlling your cost structure and understanding your revenues structure is far more important than profit-making the first years, because of the specifications of the online business (24/7, potentially global market, interconnected supply chain, ….) So yes Spotify has a loss but is in a growing market where investments are needed to maintain their business model it is not so hard to understand that Spotify is in a growing fase. Within a (few) year(s) we’ll probably see a profit in this music business company…since the focus of this model is again where it should be: “the music – experience” in a global connected society (and yes this experience differs from our analogue society where traditional records were bought and played). With Spotify gives you access to millions songs for only €9,99 a month, where a traditional average record costs €10,00 for approx. 15 songs!
Where’s the challenge for Spotify to survive?
Not in the business model, but in the marketing of the business model…youngsters just don’t see music streaming as true valued alternative for their music exploration or discovery. Youngster use YouTube (yes you read it correct!) as primary music source, followed by old skool radio and then iTunes followed buy streaming music sites (Nielsen research, 2012). Off course youngsters don’t have the budget to pay €9,99 a month you would think, but I disagree they just don’t see the added value of this service(yet!) AND our wifi/3G/… networks aren’t fully made for 24/7 always on music streaming/connectivity…Within a few years technology will be better, connection will be obsolete and streaming music/video will be standard!
For the moment 20 mio people have downloaded the Spotify app, off which 15 mio users use the Spotify service on monthly basis, with 4 mio monthly paying subscribors…This isn’t so bad after all…
Time Magazine – http://business.time.com/2012/06/08/how-the-business-of-streaming-music-will-change-culture-for-the-better/
Time Magazine – http://business.time.com/2012/08/16/spotify-is-growing-but-the-idea-of-music-ownership-is-holding-it-back/
Billboard Biz – Business Matters – http://www.billboard.biz/bbbiz/industry/digital-and-mobile/business-matters-accounting-explains-how-1007973432.story
De Morgen – http://www.demorgen.be/dm/nl/2461/Opinie/article/detail/1514779/2012/10/11/Spotify-in-financiele-problemen-De-kern-van-de-zaak-is-veel-interessanter.dhtml [in dutch]
Management Team – http://www.mt.nl/332/69059/business/spotify-vertrouwen-in-businessmodel.html [in Dutch]
Image – http://gizmodo.com/5821267/is-spotify-really-your-streaming-music-savior