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  SPOTIFY

Shadow Assignment Team 23

   Name

  Student number

   Kahnt, N.

   495397

   Popescu, A.

   494165

   Basile, M.

   493128

   Rinkel, S.

   497457

 Appel, M. T.

   492238

    12 NOVEMBER 2018

 Table of Contents

Introduction, General Information and History 2

Organizational Structure 2

The Spotify Model 3 Diversity 4

Marketing 4

Direct Listing 6 Financial Strategy 6 Financial Data 7

Technology 8 Business Ethics 9 Conclusion 10 Bibliography 11

1

 Introduction, General Information and History

Spotify Technology S.A. (hereby referred to as Spotify) is a Swedish music streaming platform that was founded in Stockholm in 2006 by Daniel Ek and Martin Lorentzon (Parsons 2018). It is currently available in 65 countries, has approximately 83 million paying subscribers worldwide and “more than a hundred million active monthly users” (Vonderau 2017). Spotify offers free, ad-supported accounts that allow users to stream music unlimitedly in return for personalized advertisement targeting. For a monthly fee they also provide unlimited amounts of music that can be downloaded and available offline without advertisements.

The idea behind Spotify was to provide an alternative to illegal music downloading, also known as pirating (facilitated through websites such as Napster), by offering a legal music streaming service for a comparatively small fee (Vonderau 2017). Spotify has encouraged a shift in the music industry from owning music to simply being able to access it by providing a service that customers are still willing to pay for while at the same time enabling music producers to generate revenue (which they were not able to do with pirating websites) (Vonderau 2017).

CEO and co-founder, Daniel Ek, initially came up with the idea for Spotify in 2006 but it was not until October of 2008 that he was able to launch his company in Europe (Parsons 2018). In 2011 Ek then also launched it in the United States (Parsons 2018). Spotify has been available on the Apple App Store since 2009 and for Android users since 2012 (Parsons 2018). In April of 2018, 10 years after its founding, the company went public through a direct listing that estimated Spotify's market value at approximately $26.5 billion, $166 per share (Wang 2018).

A key aspect that has shaped Spotify's development over the years is the way in which it uses data (Vonderau 2017). The company has progressed from merely offering its customers access to music to providing them with personalized playlists that are created through algorithms that determine the likes and dislikes of its users (Vonderau 2017).

Organizational Structure

When founding the company Spotify in 2006, Daniel Ek and Martin Lorentzon were hoping to solve a problem within the music industry. The company started as a small start-up business seeking to resolve the growing issue of unauthorized use and reproduction of music, without approval from the artists, throughout the global net (“How Spotify Came To,” 2018). Pärson (2018) explains how the company, before it had officially been launched in 2008, drew highly skilled people from Sweden, the US and England due to its brilliant and captivating concept. Within the next few years Spotify's tech employees had increased from 30 to around 250 and the once small startup business was rapidly growing (Kniberg and Ivarsson 2012).

Currently there are more than 2900 people working at Spotify, with the most important ones being: Daniel Ek (CEO and Chairman), Barry McCarthy (CFO), Martin Lorentzon (Co-Founder) and Seth Farbman (Chief Marketing Officer) (“Spotify Company Profile,” 2018). Employees at Spotify on average receive a compensation of $125.452 annually, where the best paid position is that of an Engineering Manager (Paysa 2018). Moreover, Spotify has a great amount of subsidiaries of which the main ones are Spotify AB (Sweden), Spotify USA Inc (the United States) and Spotify Ltd (the United Kingdom) (Reuters 2018).

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 Spotify is available in 65 territories and regions over the world (Spotify 2018). Furthermore, the major shareholders of the company include Daniel Ek, who has around 25% of the shares, Martin Lorentzon, owning about 13% and the companies Tencent, 7.5% and Sony, 5.7% (Fuscaldo 2018).

The Spotify Model

The Spotify Model is a structure that is unlike the ordinary hierarchical organizational structures typically used to run a business. It consists of a scaling model which is created to keep the company agile while evolving fast and having many different product development teams across the world that need to be managed efficiently (Kniberg and Ivarsson 2012). Currently, the Engineering and R&D departments include 180 teams, consisting of 1800 people (Kamer 2018). Another purpose of this establishment is to decrease bureaucracy within the company and to extend autonomy at a high level to the employees, which will also cause them to feel more engaged in the company (Kamer 2018).

Kniberg and Ivarsson (2012) explain that in order for the model to function properly within the Spotify culture, it consists of four divisions: Squads, Tribes, Chapters and Guilds. Firstly, a squad can be described as a team of six to twelve people that has its own autonomy and way of working to accomplish a long-term goal and can be compared to a mini-start up. Every squad has a different mission and operates according to the slogan “Think it, build it, ship it, tweak it” (Kniberg and Ivarsson 2012). This implies that the squads aim towards releasing their product early and often, while maintaining high quality. The teams are lead by one person, the product owner, who is responsible for planning the work that is expected to be done (Hardy 2016). However, the product owner does not get involved in the way the team members actually execute their work. All the product owners come together to discuss progress, any general challenges and how Spotify as a whole is developing (Kniberg and Ivarsson 2012).

Furthermore, several squads together that focus on similar areas are called a “tribe” and consist of less than a hundred employees (Kniberg and Ivarsson 2012). These tribes are created mainly to provide a social atmosphere and encourage interaction and collaboration between people, since the squads in a tribe are often physically located next to each other (Hardy 2016). A tribe leader is appointed in every tribe with the responsibility of preserving the right habitat for all employees in the squads (within the tribe), by for example organizing informal events for them (Hardy 2016).

To make sure that all the squads at Spotify stay connected and communication throughout the whole company does not become limited to merely within squads or tribes, Spotify introduced chapters and guilds (Kniberg and Ivarsson 2012). A chapters is made up of a group of people within a tribe who work in the same specific area and have similar competencies. (Kniberg and Ivarsson 2012). The employees within a chapter collaborate on their expertise and discuss their challenges and ideas, hereby promoting innovation. One person, the chapter lead, makes decisions on salaries and the development of the individuals within the chapter (Kniberg and Ivarsson 2012).

Lastly, a guild is a community of people who have shared interests and are keen to gain knowledge and discuss ideas on a certain topic, for example a testing guild (Hardy 2016). These guilds can be joined by anyone who has interest across the whole organisation and they are coordinated by a guild coordinator (Hardy 2016).

Even though small changes to the model have been made over the last years, the Spotify Model's general construction stays the same for the company and continues to be beneficial for the

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 organization's success and innovation (Kamer 2018). However, because the Spotify Model works efficiently for Spotify does not suggest that other companies should integrate the exact same structure, since every business is organized and managed differently from others. Nevertheless, inspiration for an organizational structure can be obtained from this distinct and impressive model.

Diversity

To spotify, diversity is of great importance to the company's success and level of innovation because it brings multiple perspectives and different talents together which contribute to faster software developments and higher employee satisfaction (Notermans 2018). Aside from improving the rate of diversity amongst people working at the company, Spotify is also striving to globally emphasize the fact that all people in the world matter and should be given a voice. Spotify does this by showing influential campaigns on their platform and is hoping to even become a leader concerning diversity within companies (Notermans 2018).

However, diversity itself is not enough for the company to create the organizational climate they desire with a strong sense of being valued and belonging amongst the employees​. ​For this they need to focus on inclusion (​Bolden-Barrett 2018)​. Because diversity does not automatically lead to this inclusion, Spotify has initiated a great amount of varied

activities to boost the inclusion in every aspect of the company, for example running an Unconscious Bias workshop in numerous worldwide offices (Notermans 2018). In the graph located to the right, a part of the Diversity Data Report of Spotify, June 2018, is presented, showing the current diversity numbers within the company and the percentage of change over the last two years (Spotify Technology S.A. 2018). Even though Spotify's diversity rates are improving, there is still progress that should made in the representation of women in leadership positions and technology departments. To further strengthen their diversity and inclusion the company should also stay focused non-bias recruitment and the prevention of discriminatory behaviour between employees.

Marketing

Fundamentally, Spotify's marketing strategy is based around two interdependent elements that coexist within a system of a dynamic equilibrium around the platform itself and its users. This means that marketing evolves around promoting Spotify's artists while at the same time promoting the platform itself to its users and the potential ‘target market' of the population willing to use a streaming service. Thus, in terms of the above-mentioned system of dynamic equilibrium, any potential change to its inputs, that mainly represent both changes to the medium of communication as well as the message itself, have a direct effect on the system's outputs; which represent, but are not limited to, the users' brand loyalty, and service satisfaction (Katumba 2018). Spotify has managed to remain such an important player in the market of music streaming through various

   4

 marketing strategies and media while still operating with a limited sales and marketing budget of only 567 million dollars (relative to other companies such as Apple Music and Netflix that spend between 1 and 6 billion dollars for the same purpose) (Statistica, 2018).

Initially, Spotify's growth in the market was largely dependant on its use of “co-marketing strategies” and “partnership with publishers” to develop its roots in the market and increase its market share. (Chaffey 2015). The way Spotify has implemented this strategy has been through its embedment of ‘widgets' (here referred to as an interactive tool that integrates itself within the design of a website, allowing the user to use Spotify as a third-party element within the context of that website within various websites). These widgets have not only allowed users to become familiar with the brand Spotify itself by retaining a subconscious association to the service, but have also facilitated the efficient use of Spotify within a multi-platform context where users can share their music across various online networks and websites. The ease of sharing music in such a way has made Spotify an attractive tool for current generations who are keen to optimise their online activity and are keen on using ‘fewer clicks' to navigate the web.

An example of this is, “Drowned in Sound”, a music blog. As such, Spotify has a ‘monthly playlist' which it integrates in the blog, encouraging the audience of this blog to “engage with Spotify”. (Chaffey 2015).

Additionally, Spotify gives great attention to campaigns as a marketing tool to promote its service. With these campaigns, Spotify aims at targeting a very broad demographic that incorporates both many age groups as well as various personality types when it comes to its user's music tastes. Its recent “Goals” campaign promotes, anonymously, the data of its various users, expressed through the medium of billboards and posters in a comedic way (Spotify for Artists, 2017). Various statistics and quotes were hereby promoted, all branded under the Spotify persona, worldwide in numerous languages, alongside popular artists from the platform (Spotify for Artists, 2017). The effectiveness of this campaign as a marketing strategy comes from two interrelated aspects. Firstly, this in an entirely in-house campaign meaning it uses resources (big data) entirely from within the company and costs are reduced as no third parties are needed to create the content for promotion. Secondly, Spotify decided to use the outdoor medium to bring out the brand from the digital environment into the physical environment. As the outdoor medium, which consists of using billboards and posters, is in decline at the expense of the increased use of digital media, costs are further reduced as it becomes cheaper to advertise ‘outside' rather than online. Nevertheless, this campaign turned into a viral phenomenon as people photographed these billboard ads and shared them online; effectively using the outdoor medium to create free advertising online for Spotify (Spotify for Artists, 2017). This is a revolutionary technique of marketing that helped Spotify “triple” their revenue in “Q1 of this year with Q2 seeing them list themselves on the New York Stock Exchange” (Katumba 2018)

Ultimately, Spotify's main marketing components lay their foundations in the framework of the Freemium Business Model (Kumar 2014). The model outlines the idea of individuals trying out the service for free, promoting it for free and then wanting to upgrade their service by ‘going premium' to remove the restrictions that the free version has (Kumar 2014). This way, Spotify builds trust

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 with their consumers and creates a strong brand image around its service even before its users become fully engaged and involved with it.

Finance

Direct Listing

In 2016 Spotify took on a $1 billion loan, while still allowing investors like TPG, a private equity firm, and Dragoneer Investment Group, a hedge fund, to convert their debts into equity once they go public.

Goldman Sachs and Discovery Capital Management are in the range of investment banking groups that made the company soar up to $526 million in 2015 (H​ayes 2018).

Spotify rejected an IPO, that makes the company unprecedented in a field of that size. On April 3rd of this year, the ordinary shares of Spotify were listed for sharing on the NYSE, by making a Direct Public offer (DPO) (Nicolaou 2018). Direct Listing does not require the company to issue new shares and saved them $70 million in fees that they would have had paid to underwriters. This choice makes them independent from financial centers and allows Spotify to maintain its value while still meeting the obligations of its 2016 $1 billion refinancing (Nicolaou 2018).

Financial Strategy

Spotify has never been profitable. The future potentials are impressive, but what has happened till now does not seem to be sufficient. The financial strategy is very risky, high revenues, but even higher costs lead the company to a steady debt. The problems are mainly due to licensing and royalties. Last year Spotify paid back 79 cents of each dollar to right holders which is still a success compared to the 88 cents they were paying in 2015. Another feature is that they also offer an ad-supported, free version and they invest a large amount of money in advertisements, even though they only make up 10% of their total revenue. The scope of this maneuver is to bring more people into the premium service and gain paying customers. Some professional analysts see a flourishing future for the company and say that the break-even is close to reality, once they will have 100 million paying subscribers, labels will need spotify more than the other way round (Nicolaou 2018). In addition, the threat of Apple Music, founded in 2015, should be taken into account, as its users are continuing to grow and have already reached 38 million (Nicolaou 2018).

Today Spotify has 87 million premium subscribers and these numbers are growing rapidly (“Spotify Technology S.A. Announces,” 2018).

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 Financial Data

  (Spotify Technology S.A. 2018)

Spotify's shareholders listed $1 billion of shares without an underwritten in February 2018.

Listed in the New York Stock Exchange, the company had a great opening with shares skyrocketing to $165.90, and now still flowing at $140 (Hayes 2018).

The graph illustrates the first quarter earning reports of 2018, where the company got $1,139 billion in revenue; growing 26% Y/Y, and 37% Y/Y after adjusting for the negative impact from changes in foreign exchange rates. The $74 million in Free Cash Flow lead to positive working dynamics for the company. At the end of the quarter they held $1.6 billions in cash, cash equivalents, restricted cash, and short-term investments (“Spotify Technology S.A. Announces,” 2018).

 (Spotify Technology S.A. 2018)

This table shows the end of the third quarter with a total revenue of $1,352 billion, the company plan is going on as expected. Furthermore premium subscribers are continually growing, now at 87 million, up 40% Y/Y which was possible through Family, Student plans and the expanded intro

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 campaign of 3 months for $0.99“Spotify Technology S.A. Announces Financial Results for Third Quarter 2018” 2018).

What stands out is the average revenue per user (“ARPU”) that was €4.73 in Q3. This represents a 6% Y/Y decline, a significant improvement from the 12% Y/Y ARPU decline they reported in Q2. Gross Margin was 25.3% in Q3, up from 22.3% in Q3 2017, and slightly lower than Q2. Gross Margins are seasonally lower in Q1 and Q3 resulting from the costs of the major seasonal promotional campaigns they typically run in Q2 and Q4 each year (“Spotify Technology S.A. Announces Financial Results for Third Quarter 2018” 2018).

Technology

The technology behind Spotify allows us to understand how the company was able to initiate a change in mindset within the music industry from a transaction-based model to a subscription-based model. What permits this shift from ownership to access is the dematerialization of “music” through technology. What is unique about Spotify is how it uses the data it collects from its users to personalize every user's music streaming experience. The algorithm behind the personalization process is complex which is why I will only discuss key aspects that make this process different from that of other companies.

Firstly, Spotify uses an approach called collaborative filtering that essentially collects data about other users' likes and dislikes and uses it to make automated recommendations about the preferences of a particular user (Pasick 2015). For example, Spotify assumes that if a certain song ‘A' in one's playlist is often associated with a specific other song ‘B' by other users that also listen to song ‘A', then one might like song ‘B' as well, and therefore the algorithm suggests it (Heath 2015).

Additionally, Spotify relies on natural language processing which uses Artificial Intelligence (AI) to continuously identify keywords found online and relate them to artists and songs in order to enhance personalized automatic predictions for each user (“How AI helps Spotify,” 2018).

Another approach used to make the music streaming experience more unique is deep learning, a method used for establishing certain patterns in the data collected from users (Pasick 2015).

The algorithm that encompasses the above mentioned techniques is expressed in features such as “Discover Weekly”, “Release Radar”, “Radio” and “Daily Mixes” (Titlow 2015). “Discover Weekly” and “Daily Mixes” are automatically generated playlists that appears for each user every Monday or every day. “Release Radar” allows users to discover new artists and songs that are similar to what they already listen to and “Radio” is a feature that, like turning on the radio, plays new songs that, according to the algorithm, suit your music taste.

All of these services effectively use the data collected from all Spotify users as well as individual preferences on each profile and allow for a more personalized experience that make every user feel like they are listening to a playlist made just for them (Heath 2015).

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 Business Ethics

Spotify has multiple important stakeholders who each have their own interests and requirements. Major stakeholders include their artists, record labels, employees, consumers, advertising agencies and shareholders. These stakeholders are extremely important to Spotify as they lay the foundation for the business model.

However, in the past there have been a lot of debates about whether streaming services are ethical. Spotify does not only give artists a platform to promote and release their music, they also make a lot of money off of them. The money users pay to listen to their favourite artists on Spotify, is the money they would have spent on an artist's album in the past. It turns out it takes approximately 5 years of streaming income for a small artist to repay the costs of making an album, while it would take only 2 years of album sales to repay it (Marshall 2015). The royalty rates Spotify gives to independent artists and record labels do not cover their declining loss in income from record sales (Marshall 2015). Small players in the music industry will not be able to weather the storm, as they do not have large financial reserves. It can be concluded that Spotify does not succeed to reward artists for their creative output.

However, times have changed and caused a shirt in the music industry from buying individual albums or songs to simply streaming them online. Therefore, artists would not be able to survive without companies such as Spotify, which is why they will continue to make their music available on Spotify.

Furthermore, Spotify has recently made a step into the talent marketplace, as they have engaged in deals with independent artist, in which these artists get a way onto the streaming platform and have closer ties with the company itself (Sisario 2018). These relationships between independent artists and Spotify do not engage the major record labels, which is perceived as a threat from their side (Sisario 2018). This could well be true as the advantages that Spotify offers the artists are very attractive: they offer them a bigger financial cut and ownership of their recordings, while still allowing them to stream their music on other platforms (Sisario 2018). As Spotify currently pays 52% of their revenue to record labels, if these record labels would not be necessary anymore, the company could offer artists a bigger piece of the pie which would allow them to use these 52% to enlarge their own revenue (Clark 2018). This could rigorously change the whole music business, as record labels have played a major role in the industry for the past couple decades and an industry without them might seem hard to imagine.

Spotify has further created a social impact team who try to bring artists and fans together to create social change through music, they engage in projects to bring people a new perspective through music (McPherson ​2017). They also collaborate with nonprofit organizations on different projects, for example to help parents enhance interactive moments with their children through music (McPherson ​2017). Spotify is a value driven company as they have always given corporate social responsibility a lot of importance through internal departments such as social impact teams and, according to Kerry Steib, they are built on the idea of “being for everyone” (McPherson​ ​2017). Even though Spotify does focus on the social impact of their platform, there has been a lot of fuss about a creepy advertisement Spotify used in October of this year. The advertisement was so scary that it was banned by the Advertising Standards Authority (ASA) for possibly causing distress to

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 children (“Spotify Ad Banned For,” 2018). Spotify has since apologized and admitted to regret putting up the advertisement, but as a platform open to young children, this is not acceptable at all.

Conclusion

Spotify, once a small start-up business, has grown over the past ten years into a company with more than 2900 employees under the watch of founder and CEO Daniel Ek.

The firm uses a distinctive model as their organizational structure to keep the company's product development teams manageable and maintain an enjoyable work atmosphere for their employees. The model distinguishes between four types of groups: squads, tribes, chapters and guilds, which each have their own purpose, autonomy and structure. Furthermore, an essential aspect within Spotify is diversity and inclusion as they strive for higher diversity rates and the enhancement of inclusion in their organization and promote this to the outside world as well.

Furthermore, all in all, Spotify's marketing strategy builds itself around a complex framework of interrelated characteristics and target groups; carefully assessing and accounting for the relationship between the users of the service, the artists on the platform and the brand image of the service. Through campaigns such as “Goals” and through the embedment of its content in other websites and web- platforms, Spotify promotes its “freemium model” to its wide demographic and growing audience within the complex, constantly evolving music industry.

Concerning the technical side of the firm, they use algorithms that include techniques such as collaborative filtering, natural language processing and deep learning to personalize every users music streaming experience. These automated recommendations based on data collected from all users and preferences denoted for every single user enable Spotify to make personalized predictions.

Regarding finance, Spotify has a long-term strategy for growing. Based on their business plan and assets they will be able to reach 100 million premium subscribers in only few more months, which will make them a strong company financially speaking. The factors that will ​strengthen the company are primarily the smaller the percentage in royalties they will have to pay, secondly their marketing maneuvers​, and finally alliances with other influential companies that will bring them a real financial enforcement, since the costs of revenues will be lower.

However, the low royalty rate causes dissatisfaction with their artists since they feel as though spotify does not give them enough credit for their creative output. On top of that, record labels are not content with Spotify either as they feel like Spotify is bypassing them in the process. Spotify has made private deals with independent artists, in which record labels are completely left out of the picture. Artist and record labels are important stakeholders of the company who are clearly unhappy with the way things are run.

Spotify has, and still is, essentially changing the music industry, causing a shift from buying individual digital products to subscribing to a digital service that allows users to access music unlimitedly. Their business strategy is unique and innovative and is shaping the future of the music sector as we know it today.

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