Spotify Porter’s Five Forces Analysis.
In this post, we will conduct a porter’s five forces analysis of Spotify, the world’s largest audio streaming services provider based in Sweden.
The music streaming industry has undergone a major transformation over the last five years. The company leading this transformation is Spotify Technology S.A. based in Luxembourg, Sweden. It is a public limited Company incorporated and domiciled in Luxembourg, Sweden. Over the past few years, Spotify has experienced impressive growth in its user base from across the globe. While its services are highly popular in the western countries, the level of market penetration of Spotify’s services in the other parts of the world has also grown driven by increased brand awareness.
Spotify offers its services globally across 184 countries and territories. It offers a large collection of music labels and podcasts. The company generates its revenue from premium subscriptions and ad supported services.
Spotify is operating in a highly competitive business environment where it is pitted against leading players like Amazon, Apple, and Google apart from several other smaller players. Despite the heavy competition, Spotify has maintained its leadership position and competitive edge.
SPOTIFY MARKETING MIX
Let’s take a look at how the Porter’s five forces affect Spotify's business.
PORTER'S FIVE FORCES ANALYSIS OF SPOTIFY
Bargaining power of suppliers: Moderate
The bargaining power of the Spotify suppliers is moderate. The main suppliers of Spotify include the music publishers and musicians. However, there are some top musicians who are among the most streamed on Spotify. Artists like Drake, Bad Bunny, and Ed Sheeran are among the most streamed artists on Spotify. The other leading suppliers that offer musical content through Spotify include Universal Music Group, Sony Music Entertainment, Warner Music Group, and Music and Entertainment Rights Licensing Independent Network (“Merlin”).
These suppliers enjoy moderate bargaining power. As a leading online distributor of musical content, Spotify enjoys strong brand awareness and popularity which helps it moderate the bargaining power of suppliers. The company uses Google Cloud Platform for the distribution of content worldwide. GCP is also a leading technology supplier for Spotify’s services which enjoys moderate bargaining power. Apart from Google, there are very few other suppliers from which, there is a threat of forward integration, which also reduces the bargaining power of suppliers. While Google also distributes musical content online through YouTube music, its market share is smaller compared to Spotify.
Bargaining power of buyers: Moderately high
The bargaining power of buyers is higher when the number of players in the market or brands offering similar content is higher. In such a case, the customers have several options or substitutes before them which increases their bargaining power against the brand. However, there are several factors that moderate the bargaining power of customers including quality, marketing, differentiation and pricing strategy. Spotify is the market leader in the online music distribution industry. It is also a leader in terms of product quality, marketing and pricing. The company offers one of the largest collections of musical content and podcasts in the entire industry. In this area, it is rivalled only by Apple Music. Spotify also enjoys strong brand awareness globally. The company invests a large sum in research and development each year which has helped it drive higher user retention and stronger loyalty.
Another critical factor that has helped it moderate the bargaining power of customers is its pricing strategy. The company also offers free or ad-based services where the user does not have to pay a subscription fee but can stream a vast number of songs for free. Such accounts are ad supported and therefore the number of such users is very high. As of the end of 2021, the number of ad-supported users of Spotify was more than 220 million. In terms of premium subscriptions too, the company has used a competitive pricing strategy. It offers plans according to the needs of various user segments and these plans are priced differently according to the purchasing power of the customers in various markets. For example, similar plans can be priced differently in the US and India. Overall, the Spotify customers enjoy moderate bargaining power. Spotify enjoys higher user loyalty and retention rate.
Availability of substitutes: moderate
The threat from Spotify substitutes in the market is moderate. There are several rival brands in the market that offer similar services. Apart from Apple Music Amazon Music and YouTube music, there are other rivals in the market also including Pandora and Napster.
While the number of rivals of Spotify might be high, the company enjoys a strong competitive position and continues to enjoy the leadership position in the online music streaming sector. As the leader in this sector, the company has the largest market share of all the brands followed by Apple and Amazon music which have only around half or less compared to Spotify's market share.
The factors that moderate the threat from substitute services include its global presence, large range of musical content, technology, quality and marketing. Spotify is the most popular online music streaming platform. Many of the rivals except the big three including Apple, Amazon and YouTube do not have a strong presence in the global market. So, the overall threat before Spotify from substitutes is moderate.
Threat of new entrants :- low
The threat of new entrants before Spotify is low. New players trying to enter this sector face some major barriers including financial, legal and technological barriers. Apart from the heavy investment in technology, the competition from the incumbent players and the legal requirements are also major barriers making entry of new players difficult. Companies like Amazon, Apple, Tencent, and Google have considerable resource and capabilities and make heavy investments in technological innovation and marketing, which is difficult to match for the other smaller players in the tech industry.
Any new entrant trying to establish itself will need to make a heavy investment in technology and acquisition of musical content. The laws related to copyright and streaming of musical content can also make entry difficult for new businesses. However, a key factor that deters new players from entry is that it is difficult to generate positive net income fast in this sector due to the heavy operating expenses. Moreover, companies like Spotify and its leading rivals such as Apple, Amazon and Google have continued to strengthen their competitive advantage making the entry to new players difficult if not impossible.
Competitive rivalry in the industry sector: high
The intensity of competitive rivalry in the music streaming sector is high. The leading players in this sector include Spotify, Apple, Amazon, YouTube and Tencent. Spotify and Apple have the largest collection of musical labels in the entire sector which is a leading advantage for the two platforms. However, Spotify continues to enjoy the strongest market share of all. Its market share during the second quarter of 2021 stood at 31%, and that of Apple at 15% followed by Amazon at 13%.
The number of Spotify subscribers including free subscribers and premium subscribers is above 400 million. Spotify’s leading competitors including Apple, Amazon and Google make heavy investments in research and development to improve their market share and competitive edge. Despite the intense competition in the sector, Spotify has retained its leadership position. Its financial performance has also improved sharply in 2021 compared to the past several years driven by user base growth, increased brand awareness and focus on technological innovation. These are also some leading factors that have helped it strengthen its competitive edge and maintain growth rate. The company is also entering new markets to beat the competitive pressure since several of its competitors are limited to fewer markets.
A FEW LAST WORDS:
Spotify continues to strengthen its competitive position and edge as it maintains a heavy focus on technological innovation. Innovation is the primary driver of competitive edge in the tech industry and since Spotify is operating in a highly competitive environment, its operating expenses have also continued to grow. However, there are many factors which have aided its market expansion and user base growth. The most important factor is its strong brand awareness apart from innovation. Its focus on product quality and user experience have helped the company manage superior growth and higher user engagement.
Spotify is also using digital marketing as a critical leverage to strengthen its market position. With strengthening competitive edge, the company has been able to moderate the bargaining power of customers and suppliers as well as moderate the threat from substitutes and rival brands. In recent years, it has increased its investment in research and development which is critical to maintaining its growth momentum in a highly competitive industry sector. The above Porter's five forces analysis shows that Spotify has cemented its position in the music streaming industry leveraging the power of technology and it will enable faster growth for the brand in the near future. It has also been successful in terms of branding and marketing, which has resulted in higher user loyalty. As it continues to penetrate new markets, the company is focusing on expanding its user base for higher financial success.