Wednesday, November 16, 2011

Spotify and major record labels demonstrate strategy agility

Spotify is a digital rights management (DRM) music-streaming service company started in Sweden in 2006. The company was opened to public access in October of 2008.[1] Spotify’s use of DRM technology is a departure from iTunes and other music software that have abandoned the method. The company boasts almost buffer-free streaming and a huge music library, acquired through years of negotiation with the four major record labels: Universal, Warner Music, Sony and EMI. For the first few years of its existence, Spotify Free could only be accessed by invitation only and was limited to a few European countries—users were only able to stream music on the desktop application and were limited to 20 hours of streaming each month. Its Spotify Premium service was open to any user in those countries where Spotify was available who was willing to pay a monthly fee. Spotify Premium has the added benefit of allowing unlimited streaming on mobile phones. The company’s revenue stream is made up of advertising on free accounts, paid subscriptions on Premium accounts, and from songs purchased via its partner sites.

In 2007 and 2008, Spotify reported a loss of a couple million dollars.[2] The company had strong investors backing it through its expansion through Europe and more recently, to the U.S. This last step required major strategizing on the part of the company. Negotiations with the major record labels delayed the launch for years. The decision to wait and build the company’s capacity needed to serve the added number of American users expansion would bring and to work out favorable deals with record labels was a smart one. It is consistent with Daniel Sull’s advice to mitigate risk and stay in the game in order to capitalize on strategic agility.[3] Record label executives also showed an aptitude for strategic agility when they decided to partner with Spotify instead of rejecting their business model. In the past, record labels have not been cooperative with companies who give users free access to music they do not own or intend to buy. This time, however, negotiations appear favorable for both the major record labels and Spotify—while most users do have free access to music streaming, a considerable portion pay subscriptions that are now generating more revenue for the record labels than iTunes, in some markets.[4] In addition, record labels sought to mitigate risks during negotiations by buying stock in Spotify and gaining more control of the decision making process—they could potentially shut down the company if things went array or share in its success if it was successful.

[1] Spotify Ltd Website., accessed November 15, 2011.

[2] “Spotify Doubled Its Loss Last Year.” Nylander, Johan. Published August 17, 2009.

[3] “Competing Through Organizational Agility.” McKinsey Quarterly, 2010.

[4] “Spotify Overtakes Apple’s iTunes.” Nylander, Johan. Published August 10, 2009.

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