Spotify Case

How much revenue did artists make?

10%

How much revenue did Labels make?

70%

How much revenue did distributors make

20%

Before digital distribution, how did you distribute?

Brick and Mortar (Virgin Records)

Online Retail (Amazon)

Radio and Movies

After digital distribution, how did you distrubute

Piracy (Napster)

Streaming (Spotify)

Downloads (iTunes)

Napster

Simply was a platform used to upload MP3s, but caused Piracy which TANKED the music industry revenue

Napster was safe because they did not own or trade music (kind of like how Uber didn’t own cars or hire drivers)

Their game of regulatory arbitrage was hiding behind the fact that people were using their platform for piracy, but they just made smth to upload MP3s

Three developments made Napster possible: MP3 Compression, Internet use becoming faster and widespread, New devices

What kind of game was digital music?

Crime Equation and Piracy

P: probability of getting caught was very low

r: Young kids who were pirating were risk loving, so they highly valued expected dollars (r was negative in some cases)

G: monetary gain was significant as young adults weren’t paying for entire albums

Digital Distribution made Physical Distribution…

Obsolete

Economic benefits of digital (greater than costs)

Unbundled songs

Instant access anywhere

Remote purchase virtual storage

Napster made digital music EASY to share

Economic costs of digital (less than benefits)

No artistically-inspired packaging (shi was bland)

quality uncertainty (MP3s were inconsistent in quality)

unable to resell your music

expenses of data storage

expense of device (in the case of iTunes, you needed an Apple product)

What did record labels do?

First, they sued the people who invented MP3 files (dumb move)

Second, they tried to become their own digital distribution businesses (Music Net)

Finally, they surrendered and licensed their distributors to other digital distributors

Why did record labels fail as digital disbturos

You could only get music from artists under that label, so you needed to subscribe to multiple labels

Limited device compatability

They had heavy restricitons on what you could do

What did Apple do as a distributor?

Apple already had market reputation as an innovator

They built a closed technology ecosystem

• You could listen to digital music but had to have an iPod or iPhone

• Apple solved the copyrights problem (look up how tho)

chiquita diversified in the EU?

What did Spotify do?

Winner take all market strategy (become the dominant provider of a service)

• Brought the consumer in and made it difficult for them to leave (high switching costs or entanglement)

• Made high barriers to entry

• Created a network that everyone wants to join by integrating with Facebook and Intstagram

Artists label bond disruption

Radiohead went directly to consumers by selling album on iTunes

Wu Tang Clan sold just one copy of their album to a rich guy

Frank Ocean released album on Apple

Spotify expansion

They became a luanch site for artists without a label

They became a platform for podcasters

Spotify beat Apple and Amazon

They did not win the winner takes all strategy, but they won

Spotify CEO’s concern about going public

Google and Apple were threatening because they entered with their own music streaming services

Piracy in the music industry

Piracy was simply more convenient than the nromal product, so Spotify bridged that gap through streaming

What happened after Napster was stopped

A judge called for Napster to sotp its services, but numerous other sharing platforms took its place

Digital Music indsurty origins

When these first stated, libraries lacked artist labels, so popualr songs were unavilable

Rhapsody

Early example of a streaming platform. The company simply lost traction

iTunes differentiation

iTunes and Sony both made it so that you could only use their music platforms on comaptible devices like iPod or a Walkman

Digital RIghts Management technologies made this posisble

Amazon

Amazon started selling msic without the DRM so that you could play music on any device

Smartphones

Streaming services weren’t popular int he past, but smartphones made them very attractive

Pandora popped off

Spotify on release

Was initially a freemium service that allowed a limited number of users to join

The paid version had no restriction on number of users

When launching in the US, it offered 6 months of free premium before you had to pay

Spotify promotions

Ran promotions with mobile carrier Sprint to offer free trials to customers

Spotify created a network effect

Integrated facebook and twitter with friend actviity

‘Hack time”

Employees were strongly encouraged to think of new design changes and features frequently

Two types of business in digital oeprations

Download operations (selling single tracks or albums digitally) iTunes lead this market

Streaming operations (listen without downloading) Spotify and Pandora lead this market

Spotify costs of goods sold issue

Spotify paid out so many royalties it was difficult to make profit, and yet artists were complaining they weren’t being paid enough

Youtube

Youtube was a crazy compeititor, as they relaized thier onw potential and combined google music with youtube