world market for recorded music
The internet has radically changed the music industry in the last two decades.
Let’s start from the beginning. Ever since Edison emphasized phonographs, people began to listen to music from the comfort of their homes. Since then, the means of consuming music has undergone many changes, from phonographs to flat records, vinyl, RCA magnetic taps and music CDs. Although software like Napster was controversial and illegal, it rang the bell for sharing music over the Internet. iTunes was the pioneer in legally sharing music. some companies started subscription models for limited record labels, while others opted for the internet radio model.
Reading: Spotify competitor analysis
The era of music streaming began when the Swedish company Spotify entered the scene with the licensed music library. we started renting the music and listening to commercials instead of owning and buying the music. spotify changed the music industry and provided a great way for artists and consumers alike to benefit from the digital transformation of the music industry.
The global recorded music market grew by 7.4% in 2020, the sixth consecutive year of growth, according to the ifpi World Music Report 2021.
The report disclosed that the main growth force was music streaming, especially as revenue from paid subscriptions increased 18.5%. total streaming grew by 19.9% and reached 13.4 billion dollars, that is, 62.1% of total recorded music revenues worldwide. streaming revenue growth more than offset declines in revenue from other formats, including physical revenue which decreased 4.7%; and income from performance rights that decreased by 10.1%.
According to industry analysis and forecasts by research and markets, the global streaming music market size is expected to reach $60.5 billion by 2026, with market growth of 16% cagr over the the forecast period.
then again, it’s safe to say that streaming music currently leads the market and is the most convenient way to listen to music right now. one reason is that people now have access to millions of songs at their fingertips. more or less the same concept of on-demand service that is based on the notion that access is better than ownership; which is becoming a reality as we have witnessed the massive growth of music streaming over the years.
Spotify is the world’s most popular Swedish audio streaming subscription and media service provider, founded in 2006 by Daniel Ek and Martin Lorentzon. spotify ab is based in stockholm, sweden, providing music to all markets.
Spotify has market strength with 356 million users, including 158 million subscribers, in 178 markets as of 1Q21.
Spotify’s Competitive Market Position
Spotify has a first mover advantage and quickly captured the music market with its attractive offerings. And it looks like Spotify wants to be an all-in-one audio venue with music, podcasts, and paid audio, as CEO Daniel Ek believes there is still 5-7x growth left in the market.
So it’s clear that spotify is looking to capture as much of the market as possible rather than leveraging its current huge user base for profit and servicing every user.
That said, competition from giants like apple, amazon and google doesn’t seem healthy.
according to midia research for 1q20, spotify remains the prominent leader in terms of subscribers with a 32% market share. Despite strong competition from Apple Music, Amazon Music, Tencent Music, Google’s YouTube Music in the streaming market; Spotify’s market share has hovered between 32% and 34% every quarter since 2015. Spotify’s growth is both an extension of, and a driver of, the broader market.
But that’s the only half party of the story. According to New Constructs research with Spotify is that while MAUs may have increased over the years but the year-over-year (YoY) growth rate in premium subscribers has fallen sharply from 73% in 1Q17 to just 28% in 2Q20.
Not to mention that premium subscribers generated 93% of Spotify’s revenue in 2Q20. Spotify’s average revenue per premium user (ARPU) has steadily declined from EUR 5.32 in 2017 to just EUR 4.41 in 2Q20. Spotify’s 2Q20 ARPU represents a 9% YoY decline. The combination of a slowing premium growth rate and falling ARPU has driven Spotify’s YoY revenue growth rate down from 57% in 2017 to 33% TTM.
Spotify has yet to figure out how to turn profitable. Because Spotify has been paying around 70% of its revenues to music right holders who then pay artists based on their individual agreements (Spotify recently renegotiated its agreements with all of the record labels), And Spotify pays artists just $0.0032 per stream compared to Apple Music at $0.0056 and Amazon Music Unlimited at $0.012, attracting criticism from artists like Taylor Swift and Thom Yorke who temporarily withdrew their music from the service.
so, bottom line, spotify can’t reduce royalties on the artists’ side. they would always want their payments to go up. From the point of view of users, it seems that Spotify is not ready to lose its leadership position by not charging more than its competitors and still providing free services with advertising. So, I’d say spotify’s financial situation is tight.
newbuild research establishes that while other peers like apple, amazon, alphabet, tencent enjoy healthy profit margins, spotify’s net operating profit after tax (nopat) margin of -3% is worst among its peer group and well below the 15% market cap-weighted average spread.
This goes to show that the ocean of the streaming music industry is turning red and in order to remain the dominant player in the industry, Spotify has to work harder than before considering all the facts discussed above. Still, Spotify’s numerous partnerships with companies, acquisitions, and a large amount of focus on podcasts look promising as a step toward its ambition to be the world’s audio browser.
what drives competitors
- market share, you know, everybody wants a piece of the pie. with the growth of music streaming, the growth of audio content is sure to occur.
what the competitor is doing or capable of doing
- other services. , so bundled subscriptions for each service they provide would make the switching cost for users high and thus generate gigantic profits.
- on the other hand, music label companies also they can be considered competitors because they enjoy dominance of the music market and are capable of forward integration.
- other companies like tidal, deezer trying to target the market with their niche offering and divergent value propositions or local-regional companies have also captured the large diverse musical audience.
Porter’s Five Forces Analysis
Porter’s Five Forces Analysis helps us identify the key structural characteristics of industries that determine the strength of competitive forces and thus industry profitability.
The five competitive forces (threat of entry, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among current competitors) jointly determine the intensity of competition and profitability in the industry, and which force or forces more powerful determine the government from the point of view of formulating the strategy.
- threat of new entrants: The threat of new entrants is low because the dominant industry structure has been established and competition has increased. especially with the giant players in the game, it is much more difficult to enter the market. Furthermore, to provide streaming services, providers have to partner with multiple parties to create a vast catalog of music that requires a large investment. Product differentiation is also high as most companies have established or are trying to establish a different identification of their product and brand. in short, the barriers to entry for new entrants are high.
- threat of substitution: the threat of substitute products is low. although people still like to have the music or listen to radios or maybe pirate music! still, the market will require innovation to replace the convenience of dominating on-demand streaming services, giving access to any song anywhere in the world. People say that music streaming is the pinnacle of innovation that has ever happened in the music industry. now let’s see where the next innovation in the industry will lead.
- bargaining power of buyers: customers have the option to listen to music for free with ads or go premium. that makes buyers’ bargaining power low as of now, with all platforms offering somewhat similar deals at similar prices if they’re thinking of upgrading to premium. though, the cost of switching is higher for free spotify users as no one provides as many services as spotify in the free tier.
- bargaining power of providers: the bargaining power of providers it’s high because a music service doesn’t actually own the music. And that’s why companies are trying to bring original content through innovations like AI or exclusive partnerships with artists. but the fact remains the same: Few record companies enjoy a monopoly over the music industry.
- Rivalry among current competitors: The intensity of rivalry is high because more companies are simply placed in one company first. industry, the greater the rivalry, period. and the industry already has big giants in the game as mentioned above. In addition, the homogeneity of services and offers between competitors also increases the chances that a rivalry will intensify.
spotify capabilities analysis
In my opinion, the ability to build and deliver the best personalized experience by leveraging vast amounts of user data is Spotify’s core competency. thus, gaining more user engagement. spotify strives to engage more and more users from both sides of the market. Furthermore, Spotify is still the only player that offers free music with some advanced features.
hours of content per mau (monthly active users) - spotify engagement matrix to assess user engagement.
source: spotify Q4 2020 press release
spotify vrio & vrin analysis
“vrio” is a mechanism that integrates two existing theoretical frameworks: the positioning perspective and the resource-based view. it is the main tool for performing internal analysis. represents four questions one should ask about a resource or capability to determine its competitive potential:
vrio: valuable, rare, inimitable and organized.
To have a sustainable competitive advantage, your resources must be vrio.
Here’s a most comprehensive Spotify VRION analysis done by Anne Marie Davis, Rancord Society.
VRIO/VRIN analysis assures that Spotify is still having sustained competitive advantage with its core competencies - High Brand Value, Dominant market share, and other strategic alliances and acquisitions, while some of its resources providing a temporary advantage.
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Music Industry Revenue Streams: The Arrival of Spotify and Music Streaming Services | berklee online
the motley fool, why did it take so long for spotify to turn a profit?
ovidius jurevicius, http://www.strategicmanagementinsight.com/tools/vrio.html
spotify vrio/vrin analysis & value chain analysis (resource-based view), https://www.rancord.org/spotify-vrin-vrio-analysis-value-chain-analysis-resource-based-view
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