Introduction (Krystal & Stacia)
Over the last two decades, the Internet has changed multiple aspects of our lives. The way we communicate with each other, learn and gather knowledge, and how and where we purchase items and services. The buying and selling of products and services over the Internet, referred to as Electronic Commerce (e-commerce), has been revolutionising the business world and brings with it the capacity to radically alter economic activities, and social and cultural environments as it breaks into traditional markets.
The following report aims to discuss and address the question, ‘What is the fundamental economic basis of Internet commerce?’ It will do so in relation to the music industry which, due to digitisation and convergence, has seen dramatic changes to its economic system. Specifically, we will be using the case study of Spotify, an online music service, in association with defining and discussing what is e-commerce, business models, network economy, attention economy and gift economy.
Understanding E-Commerce (Krystal & Stacia)
((...))
Defining E-Commerce? (Krystal & Stacia)
Launched October 2008 in Sweden, Spotify is commercial music streaming service that aims to be an alternative to music piracy by offering superior user experience. They provide a wide range of DRM-protected content, from major and independent record labels, that are monetised with both an ad-supported, free-to-the-user model and a premium, paid models (www.spotify.com).
Examples of the benefits of Spotify are;
Brief History of Spotify
Spotify was (and is) a great success within its home country of Sweden with the service producing more revenue in its first five months for record label Universal than formidable competitor iTunes (Geere, 2010), however while Spotify took to London to celebrate reaching 10 million users across Europe by the end of September 2010, it should be noted that it was still a long way for bridging the gap to match Apple’s 160 million iTunes users (Geere, 2010). Spotify took the huge leap on July 14, 2011 launching its services to the USA after there was much delay due to the concerns of big music labels over the success of Spotify’s business model (Ek, 2011)(“Spotify Hits,” 2011). By December 2012, Spotify had increased its user base to 20 million users with an estimated 5 million on paid subscriptions, 1 million of those in the USA alone (Weber, 2012). 2012 was also the year that Spotify spread to Australia on the 22nd of May (Catanzariti, 2012). Roughly six months later Spotify’s manager director, Kate Vale stated, “While we can’t reveal exact local numbers, to put it into context, Australia and New Zealand are the most successful country launches of Spotify globally so far” (Catanzariti, 2012).
Over the last two decades, the Internet has changed multiple aspects of our lives. The way we communicate with each other, learn and gather knowledge, and how and where we purchase items and services. The buying and selling of products and services over the Internet, referred to as Electronic Commerce (e-commerce), has been revolutionising the business world and brings with it the capacity to radically alter economic activities, and social and cultural environments as it breaks into traditional markets.
The following report aims to discuss and address the question, ‘What is the fundamental economic basis of Internet commerce?’ It will do so in relation to the music industry which, due to digitisation and convergence, has seen dramatic changes to its economic system. Specifically, we will be using the case study of Spotify, an online music service, in association with defining and discussing what is e-commerce, business models, network economy, attention economy and gift economy.
Understanding E-Commerce (Krystal & Stacia)
((...))
Defining E-Commerce? (Krystal & Stacia)
Launched October 2008 in Sweden, Spotify is commercial music streaming service that aims to be an alternative to music piracy by offering superior user experience. They provide a wide range of DRM-protected content, from major and independent record labels, that are monetised with both an ad-supported, free-to-the-user model and a premium, paid models (www.spotify.com).
Examples of the benefits of Spotify are;
- Has a wide variety of platform support including, but not limited to, Windows, iOS, Linux, iPhones, Symbian, Android, and Blackberry.
- Playlists can be created from newly discovered music as well as music already owned by the user.
- Share playlists, titles, even specific moments within a song across multiple social networks
- A wide variety of free Apps can be accessed, and developers are welcome to create new apps for Spotify
- A six-month free trial period is activated upon Spotify account registration or first login with a Facebook account, where a user can listen to an unlimited amount of music supported by visual and radio-style advertising
- “Unlimited” and “Premium” subscriptions are available. The former removes advertisements and time limits, the latter introducing new features such as offline mode to play music. (www.spotify.com)
Brief History of Spotify
Spotify was (and is) a great success within its home country of Sweden with the service producing more revenue in its first five months for record label Universal than formidable competitor iTunes (Geere, 2010), however while Spotify took to London to celebrate reaching 10 million users across Europe by the end of September 2010, it should be noted that it was still a long way for bridging the gap to match Apple’s 160 million iTunes users (Geere, 2010). Spotify took the huge leap on July 14, 2011 launching its services to the USA after there was much delay due to the concerns of big music labels over the success of Spotify’s business model (Ek, 2011)(“Spotify Hits,” 2011). By December 2012, Spotify had increased its user base to 20 million users with an estimated 5 million on paid subscriptions, 1 million of those in the USA alone (Weber, 2012). 2012 was also the year that Spotify spread to Australia on the 22nd of May (Catanzariti, 2012). Roughly six months later Spotify’s manager director, Kate Vale stated, “While we can’t reveal exact local numbers, to put it into context, Australia and New Zealand are the most successful country launches of Spotify globally so far” (Catanzariti, 2012).
A year of Spotify in Australia (PC World, 2013)
While Spotify has quickly become a popular service, it is not a ‘new’ concept. There are many online music services with some, like Apples iTunes, boasting staggering user numbers and popularity. So what makes Spotify different?
Why was it chosen?
While this report is to present the fundamentals of e-commerce rather than an analysis of Spotify, it is important to outline why Spotify was chosen as the case study for this report. The following is a brief outline of how Spotify compares to its competitors, an outline of its future focus and how it represents the chosen fundamentals of e-commerce.
The following image is a graph comparing Australian available music services in 2012. While its information is now out-dated as the digital music industry and the services within are rapidly changing, it does serve a purpose in outlining the comparative differences of music services a year ago, as well as the important difference between streaming music services like Spotify and music services such as iTunes.
(Comparing Music Services (News.com.au, 2012)
While Spotify has quickly become a popular service, it is not a ‘new’ concept. There are many online music services with some, like Apples iTunes, boasting staggering user numbers and popularity. So what makes Spotify different?
Why was it chosen?
While this report is to present the fundamentals of e-commerce rather than an analysis of Spotify, it is important to outline why Spotify was chosen as the case study for this report. The following is a brief outline of how Spotify compares to its competitors, an outline of its future focus and how it represents the chosen fundamentals of e-commerce.
The following image is a graph comparing Australian available music services in 2012. While its information is now out-dated as the digital music industry and the services within are rapidly changing, it does serve a purpose in outlining the comparative differences of music services a year ago, as well as the important difference between streaming music services like Spotify and music services such as iTunes.
(Comparing Music Services (News.com.au, 2012)
It should be noted that iTunes announced on the 10th of June 2013 that it would release a free Internet radio service called iTunes Radio (Apple, 2013). This service competes directly with the majority of online streaming services, especially services such as Pandora, but has dramatically flawed itself as iTunes Radio will be platform specific, meaning that it will only be available for users with Apple devices (McHugh, 2013). Considering Apple’s slow response to entering the streaming music market, it seems a poor decision to stick with its usual segregation of the consumer market. It will be argued that iTunes radio is here to challenge Spotify however also iTunes Radio only allows the downloading of purchased songs whereas Spotify allows the free downloading of music to the user’s computer for offline play, though these songs are not owned by the user and should they cancel their subscription will be subsequently removed (Harris, n.d.) (www.spotify.com) (Apple, 2013). With Apple’s splitting of the consumer market and Spotify’s consistent attempts to answer all aspects of consumer demand, Spotify appears to be the winner of who will prosper in the digital music economy despite Apple’s massive user base.
A large part of considering Spotify as a leader in the digital music industry is their future vision and along with it the admittance of needing to evolve its current business model to achieve the desired result. Spotify’s vision as explained by board member Sean Parker is to see Spotify, “… opening up and becoming a platform so that music can truly become ubiquitous. Coming up with a revenue market that works, Spotify is the best chance we have for restoring industry growth and getting artists paid… it’s hopefully going to grow their business and grow it substantially” (“Spotify, Sean Parker’s Napster 2.0”, 2011). In a world that is seeing digital music sales top physical sales (Segall, 2012), Spotify CEO Daniel Ek understands the value of connecting to and supporting the online music community, both artists and consumers, and desires to see Spotify become the online platform for all areas concerning music, “the way we think about it is that there are 500 million people right now that listen to music online, and out of those 500 million the vast majority of people listen illegally. We just feel that what is missing right now is sort of music across the Web. The other thing we realized is that music is something that is deeply personal to people…” (Bursari, 2011). Actively moving towards its goal of being the platform for online music, Spotify has deeply integrated itself with major social networking platforms as well as opening up its platform to allow developers to curate their own apps for Spotify (Segall, 2011), establishing not only a wide selection of free applications to improve user experience but a trust and support with the community that they’re here for a better future of music, "We're creating this platform knowing it's the early days, and we'll figure things out along the way," Daniel Ek said. "Right now, there's really no monetization within this platform" (Segall, 2011). Daniel Ek also stated that the future of music is access, not ownership (Griggs, 2011) and that at Spotify, “We want music to be everywhere and in every device, in every place. It really doesn't matter where in the world that is or on what device that is or what I'm doing. I should always have music accessible” (Busari, 2011). It is these stated goals and visions that make Spotify the focus for our case study as while they build towards them they display a strong understanding and use of fundamental e-commerce basics as will be discussed, defined and supported in the rest of this report.
The 30th of April 1993 is a vital date in history. It is the date that CERN, the international organisation otherwise known as the European Organization for Nuclear Research, published a statement that made the World Wide Web (W3) technology freely available to the public with no cost (http://info.cern.ch/). It was the beginning of the Internet as we know it today and the fuel that ignited the business world into a blaze of new opportunities and the prominent shift to a digital economy.
“A digital economy is a convergence of communications, computing, and information… digital economy is based more in the form of intangibles, information, innovation and creativity to expand economic potential” (Sharma, 2006, p302). The concept of electronic commerce (e-commerce) existed prior to the Internet boom as the electronic data interchange (EDI) and referred to the computer-to-computer system of information exchange, order placement and electronic fund transfers (Sawabini, 2001). With the widespread introduction of the W3 technology the inclusion of new technologies and Internet-based commerce has seen the definition of e-commerce evolve.
Instead of considering e-commerce as simply buying and selling using the Internet, Chaffey (2009) explains that all electronically mediated transactions between an organization and its external stakeholders should be considered, including non-financial transactions. He provided a quote from the UK Government that provides a broad definition on the scope of e-commerce;
“E-commerce is the exchange of information across electronic networks, at any stage in the supply chain, whether within an organization, between businesses, between businesses and consumers, or between the public and private sector, whether paid or unpaid.”
(Cabinet Office, as cited in Chaffey, 2009, p.11)
E-commerce is redefining industry value chains and traditional intermediaries functions will be replaced; bridging the gap to create closer relationships between businesses and consumers (OECD, 1999; Understanding and Implementing, 2000). Industry structure, marketplace structure and business model changes are forcing businesses to re-appraise their strategic approaches and create new e-commerce strategies to compete in the digital boom (Chaffey, 2009; Flew, 2008; Understanding and Implementing, 2000).
In Internet Commerce: Digital Models for Business, Elaine Lawrence (2003) laid out nine models of e-commerce;
The most common of these discussed in relation to e-commerce are;
With the rapid evolution of the digital economy there has been extended fragmentation in many industries – the music industry being the focal point for the case study of this report. Artists, record label companies, and distributors are being challenged to re-define traditional business models as;
References
Apple. (2013, June 10). Apple Announces iTunes Radio [Press release]. Retrieved from http://www.apple.com/au/pr/library/2013/06/10Apple-Announces-iTunes-Radio.html
Busari, S. (2011, December 8). Spotify founder: I’m not music industry’s savior [Web log post]. Retrieved from http://edition.cnn.com/2011/12/08/tech/web/spotify-daniel-ek
Catanzariti, R. (2012). Spotify gradually rolling out new follow, discover features. Retrieved from http://www.pcworld.idg.com.au/article/444028/spotify_gradually_rolling_new_follow_discover_features/
Ek, D. (2011, June 14). Hello America. Spotify Here. [Web log post]. Retrieved from https://www.spotify.com/au/blog/archives/2011/07/14/hello-america-spotify-here/
Geere, D. (2010). Spotify hits 10 million users and 10 million tracks. Retrieved July 6, 2013, from http://www.wired.co.uk/news/archive/2010-09/15/spotify-milestones
Griggs, B. (2011, July 21). Spotify founder: Future of music is access, not ownership [Web log post]. Retrieved from http://edition.cnn.com/2011/TECH/web/07/21/spotify.fortune.brainstorm/index.html
Harris, M. (n.d.). Streaming Services with a Music Cashing Feature: Listen to Your Music Offline. Retrieved July 18, 2013, from http://mp3.about.com/od/digitalmusicdelivery/tp/Streaming-Services-With-A-Music-Caching-Feature-Listen-To-Your-Music-Offline.htm
McHugh, M. (2013, June 10). Pandora Killer? Spotify Slayer? iTunes Radio Needs More Than Hype To Compete. [Web log post]. Retrieved from http://www.digitaltrends.com/music/its-time-to-get-a-hold-of-the-itunes-radio-hype/
News.com.au. (2012). Comparing Music Services [Image]. Retrieved from http://resources2.news.com.au/images/2012/05/22/1226363/535022-music-streaming-services.gif
PC World. (2013). A year of Spotify in Australia [Image]. Retrieved from http://www.pcworld.idg.com.au/article/462417/spotify_1st_birthday_oz_all_stats/
Segall, L. (2011, November 30). Spotify wants to be a platform – like Facebook [Web log post]. Retrieved from http://money.cnn.com/2011/11/30/technology/spotify_apps/index.htm?iid=EAL
Segall, L. (2012, January 5). Digital music sales top physical sales [Web log post]. Retrieved from http://money.cnn.com/2012/01/05/technology/digital_music_sales/index.htm
Spotify hits milestone with 1 million subscribers. (2011). Retrieved from http://www.bbc.co.uk/news/business-12676327
Spotify, Sean Parker’s Napster 2.0 [Streaming video]. (2011). Retrieved from http://edition.cnn.com/video/data/2.0/video/tech/2011/11/30/intv-sean-parker-napster-spotify.cnn.html
Weber, H. (2012, December 6). Spotify announces 5M+ paid subscribers globally, 1M paid in US, 20M total active users, 1B playlists. [Web log post]. Retrieved from http://thenextweb.com/insider/2012/12/06/spotify-announces/
Business Models For Research (Krystal & Stacia)
A business model can be defined as “the method by which a firm builds and uses its resources to offer its customers better value than its competitors and to make money doing so” (Afuah & Tucci, 2003). The concept of an online business model is the same however used in the online presence. The impact of the Web 2.0 phenomenon has led to fundamental changes in both the Internet and traditional business models. Osterwalder and Pigneur (n.d.) identify nine valuable components of a business model:
The process of business model structure can either be quite simple, whilst other models can be more “intricately woven” (Rappa, 2010). The challenges and strategies differ from industry to industry. The rise of Internet commerce has seen the development of new kinds of business models (Rappa, 2010). Rappa (2010) suggests that in order to sustain and produce income, online business models should be categorised as follows:
Spotify principally operates under a business model defined as 'Freemium', which predominantly relies on a combination of advertising and subscription models.
Advertising Model – The online advertising model is a development of the traditional media broadcast model (Rappa, 2010). In the advertising model webpages provide content or services that also displays advertising space (banners) to gain revenue. Websites must attract high volume of view traffic to sell advertising and make an advertising model work effectively (Rappa, 2010). Spotify presents advertising steaming using both visual and radio-style advertising in Spotify's Freemium subscription.
Subscription Model – A subscription model charges users periodic (monthly, yearly, or seasonal) to have access to a service or product. Websites commonly combined free content with restrict access to premium features to paying subscribers. A subscription fee with Spotify allows premium users’ access to unlimited use of streamed music, access to the premium services without any advertising present.
Freemium is a business model that offers simple and basic services free for the user to try. The core product is given away for free, with the objective of making money on selling the premium products.
“When the service is free, word spreads” (Heires, 2007)
For a model to be freemium, the free has to be something that can be used in and of itself, without necessarily buying something else.
Ways in which the product or service may be restricted in Freemium models:
In order for freemium businesses to be successful, the following characteristics generally show:
Other Freemium models like LinkedIn or Pandora are proprietary product or service (typically a digital offering such as software, media, games or web services) that are provided free of charge, but money (premium) is charged for advanced features, functionality, or virtual goods.
A large part of considering Spotify as a leader in the digital music industry is their future vision and along with it the admittance of needing to evolve its current business model to achieve the desired result. Spotify’s vision as explained by board member Sean Parker is to see Spotify, “… opening up and becoming a platform so that music can truly become ubiquitous. Coming up with a revenue market that works, Spotify is the best chance we have for restoring industry growth and getting artists paid… it’s hopefully going to grow their business and grow it substantially” (“Spotify, Sean Parker’s Napster 2.0”, 2011). In a world that is seeing digital music sales top physical sales (Segall, 2012), Spotify CEO Daniel Ek understands the value of connecting to and supporting the online music community, both artists and consumers, and desires to see Spotify become the online platform for all areas concerning music, “the way we think about it is that there are 500 million people right now that listen to music online, and out of those 500 million the vast majority of people listen illegally. We just feel that what is missing right now is sort of music across the Web. The other thing we realized is that music is something that is deeply personal to people…” (Bursari, 2011). Actively moving towards its goal of being the platform for online music, Spotify has deeply integrated itself with major social networking platforms as well as opening up its platform to allow developers to curate their own apps for Spotify (Segall, 2011), establishing not only a wide selection of free applications to improve user experience but a trust and support with the community that they’re here for a better future of music, "We're creating this platform knowing it's the early days, and we'll figure things out along the way," Daniel Ek said. "Right now, there's really no monetization within this platform" (Segall, 2011). Daniel Ek also stated that the future of music is access, not ownership (Griggs, 2011) and that at Spotify, “We want music to be everywhere and in every device, in every place. It really doesn't matter where in the world that is or on what device that is or what I'm doing. I should always have music accessible” (Busari, 2011). It is these stated goals and visions that make Spotify the focus for our case study as while they build towards them they display a strong understanding and use of fundamental e-commerce basics as will be discussed, defined and supported in the rest of this report.
The 30th of April 1993 is a vital date in history. It is the date that CERN, the international organisation otherwise known as the European Organization for Nuclear Research, published a statement that made the World Wide Web (W3) technology freely available to the public with no cost (http://info.cern.ch/). It was the beginning of the Internet as we know it today and the fuel that ignited the business world into a blaze of new opportunities and the prominent shift to a digital economy.
“A digital economy is a convergence of communications, computing, and information… digital economy is based more in the form of intangibles, information, innovation and creativity to expand economic potential” (Sharma, 2006, p302). The concept of electronic commerce (e-commerce) existed prior to the Internet boom as the electronic data interchange (EDI) and referred to the computer-to-computer system of information exchange, order placement and electronic fund transfers (Sawabini, 2001). With the widespread introduction of the W3 technology the inclusion of new technologies and Internet-based commerce has seen the definition of e-commerce evolve.
Instead of considering e-commerce as simply buying and selling using the Internet, Chaffey (2009) explains that all electronically mediated transactions between an organization and its external stakeholders should be considered, including non-financial transactions. He provided a quote from the UK Government that provides a broad definition on the scope of e-commerce;
“E-commerce is the exchange of information across electronic networks, at any stage in the supply chain, whether within an organization, between businesses, between businesses and consumers, or between the public and private sector, whether paid or unpaid.”
(Cabinet Office, as cited in Chaffey, 2009, p.11)
E-commerce is redefining industry value chains and traditional intermediaries functions will be replaced; bridging the gap to create closer relationships between businesses and consumers (OECD, 1999; Understanding and Implementing, 2000). Industry structure, marketplace structure and business model changes are forcing businesses to re-appraise their strategic approaches and create new e-commerce strategies to compete in the digital boom (Chaffey, 2009; Flew, 2008; Understanding and Implementing, 2000).
In Internet Commerce: Digital Models for Business, Elaine Lawrence (2003) laid out nine models of e-commerce;
- business to consumer (B2C)
- business to business (B2B)
- business to government (B2G)
- consumer to consumer (C2C)
- consumer to business (C2B)
- consumer to government (C2G)
- government to government (G2)
- government to consumer (G2C)
- government to business (G2B)
The most common of these discussed in relation to e-commerce are;
- B2B (Business-to-Business)
Transactions between trading partners, such as manufacturers selling to distributors and wholesalers selling to retailers. Economic factors affect the adoption of e-commerce segments differently however B2B as an EDI has been, and is expected to remain, one of the dominate segments in relation to total value of e-commerce activity
- B2C (Business-to-Consumer)
Businesses selling to the general public typically utilizing shopping cart software. It involves direct selling to the customer; service or products do not have to intangible or virtual. Amazon.com is a successful B2C model. Business to consumer represents the bulk of all electronic commerce.
- C2B (Consumer-to-Business)
C2B is the reverse of B2C where consumers can offer goods or services to be purchased by businesses. Examples of such include; Freelance developers, online surveys, and affiliate programs.
- C2C (Consumer-to-Consumer)
In C2C a third party bridges the transaction gap between two or more consumers. Auction sites such as Ebay, payment systems like Paypal and free classifieds like Gumtree, allow consumers to charge other consumers for a service or product.
With the rapid evolution of the digital economy there has been extended fragmentation in many industries – the music industry being the focal point for the case study of this report. Artists, record label companies, and distributors are being challenged to re-define traditional business models as;
- Marketplaces are no longer contained to ‘brick-n-mortar’, physical locations;
- Artists can now bypass companies/distributors and go directly to consumers;
- Mobile technologies, social networking platforms and the creation of peer-to-peer services are putting intense, unprecedented pressure on the industry to create, distribute and price content in a way that meets all stakeholder demands.
References
Apple. (2013, June 10). Apple Announces iTunes Radio [Press release]. Retrieved from http://www.apple.com/au/pr/library/2013/06/10Apple-Announces-iTunes-Radio.html
Busari, S. (2011, December 8). Spotify founder: I’m not music industry’s savior [Web log post]. Retrieved from http://edition.cnn.com/2011/12/08/tech/web/spotify-daniel-ek
Catanzariti, R. (2012). Spotify gradually rolling out new follow, discover features. Retrieved from http://www.pcworld.idg.com.au/article/444028/spotify_gradually_rolling_new_follow_discover_features/
Ek, D. (2011, June 14). Hello America. Spotify Here. [Web log post]. Retrieved from https://www.spotify.com/au/blog/archives/2011/07/14/hello-america-spotify-here/
Geere, D. (2010). Spotify hits 10 million users and 10 million tracks. Retrieved July 6, 2013, from http://www.wired.co.uk/news/archive/2010-09/15/spotify-milestones
Griggs, B. (2011, July 21). Spotify founder: Future of music is access, not ownership [Web log post]. Retrieved from http://edition.cnn.com/2011/TECH/web/07/21/spotify.fortune.brainstorm/index.html
Harris, M. (n.d.). Streaming Services with a Music Cashing Feature: Listen to Your Music Offline. Retrieved July 18, 2013, from http://mp3.about.com/od/digitalmusicdelivery/tp/Streaming-Services-With-A-Music-Caching-Feature-Listen-To-Your-Music-Offline.htm
McHugh, M. (2013, June 10). Pandora Killer? Spotify Slayer? iTunes Radio Needs More Than Hype To Compete. [Web log post]. Retrieved from http://www.digitaltrends.com/music/its-time-to-get-a-hold-of-the-itunes-radio-hype/
News.com.au. (2012). Comparing Music Services [Image]. Retrieved from http://resources2.news.com.au/images/2012/05/22/1226363/535022-music-streaming-services.gif
PC World. (2013). A year of Spotify in Australia [Image]. Retrieved from http://www.pcworld.idg.com.au/article/462417/spotify_1st_birthday_oz_all_stats/
Segall, L. (2011, November 30). Spotify wants to be a platform – like Facebook [Web log post]. Retrieved from http://money.cnn.com/2011/11/30/technology/spotify_apps/index.htm?iid=EAL
Segall, L. (2012, January 5). Digital music sales top physical sales [Web log post]. Retrieved from http://money.cnn.com/2012/01/05/technology/digital_music_sales/index.htm
Spotify hits milestone with 1 million subscribers. (2011). Retrieved from http://www.bbc.co.uk/news/business-12676327
Spotify, Sean Parker’s Napster 2.0 [Streaming video]. (2011). Retrieved from http://edition.cnn.com/video/data/2.0/video/tech/2011/11/30/intv-sean-parker-napster-spotify.cnn.html
Weber, H. (2012, December 6). Spotify announces 5M+ paid subscribers globally, 1M paid in US, 20M total active users, 1B playlists. [Web log post]. Retrieved from http://thenextweb.com/insider/2012/12/06/spotify-announces/
Business Models For Research (Krystal & Stacia)
A business model can be defined as “the method by which a firm builds and uses its resources to offer its customers better value than its competitors and to make money doing so” (Afuah & Tucci, 2003). The concept of an online business model is the same however used in the online presence. The impact of the Web 2.0 phenomenon has led to fundamental changes in both the Internet and traditional business models. Osterwalder and Pigneur (n.d.) identify nine valuable components of a business model:
- Customer Segments - the different groups of people or organizations an enterprise aims to reach and serve. Customers comprise the heart of any business model.
- Value Propositions - It seeks to solve customer problems and satisfy customer needs with value propositions. The bundle of products and services that create value for a specific Customer Segment.
- Channels - Value propositions are delivered to customers through communication, distribution, and sales channels.
- Customer Relationships - Customer relationships are established and maintained with ease customer segment.
- Revenue Streams - Revenue streams result from value propositions successfully offered to customers. The cash a company generates from each Customer Segment.
- Key Resources - The most important assets required to make a business model work. Different Key Resources are needed depending on the type of business model.
- Key Activities - Every business model calls for a number of Key Activities. These are the most important actions a company must take to operate successfully
- Key Partnerships - the network of suppliers and partners that make the business model work Companies forge partnerships for many reasons, and partnerships are becoming a cornerstone of many business models.
- Cost Structure - The Cost Structure describes all costs incurred to operate a business model. Creating and delivering value, maintaining Customer Relationships, and generating revenue all incur costs.
The process of business model structure can either be quite simple, whilst other models can be more “intricately woven” (Rappa, 2010). The challenges and strategies differ from industry to industry. The rise of Internet commerce has seen the development of new kinds of business models (Rappa, 2010). Rappa (2010) suggests that in order to sustain and produce income, online business models should be categorised as follows:
- Brokerage
- Advertising
- Infomediary
- Merchant
- Manufacturer
- Affiliate
- Community
- Subscription and
- Utility
Spotify principally operates under a business model defined as 'Freemium', which predominantly relies on a combination of advertising and subscription models.
Advertising Model – The online advertising model is a development of the traditional media broadcast model (Rappa, 2010). In the advertising model webpages provide content or services that also displays advertising space (banners) to gain revenue. Websites must attract high volume of view traffic to sell advertising and make an advertising model work effectively (Rappa, 2010). Spotify presents advertising steaming using both visual and radio-style advertising in Spotify's Freemium subscription.
Subscription Model – A subscription model charges users periodic (monthly, yearly, or seasonal) to have access to a service or product. Websites commonly combined free content with restrict access to premium features to paying subscribers. A subscription fee with Spotify allows premium users’ access to unlimited use of streamed music, access to the premium services without any advertising present.
Freemium is a business model that offers simple and basic services free for the user to try. The core product is given away for free, with the objective of making money on selling the premium products.
“When the service is free, word spreads” (Heires, 2007)
For a model to be freemium, the free has to be something that can be used in and of itself, without necessarily buying something else.
Ways in which the product or service may be restricted in Freemium models:
- Feature limited
- Time or bandwidth limited
- Capacity limited
- Seat limited (number of users)
- Customer class limited (education use only)
In order for freemium businesses to be successful, the following characteristics generally show:
- A large free user base
- A low marginal cost to serve each new subscriber
- A product that values to the user and increases over time.
Other Freemium models like LinkedIn or Pandora are proprietary product or service (typically a digital offering such as software, media, games or web services) that are provided free of charge, but money (premium) is charged for advanced features, functionality, or virtual goods.
Examples of Other E-Commerce Business Models include:
Spotify Business Model
Spotify’s business model is to sell unlimited access to music instead of ownership of individual songs or album. Royalties are generated every time a song or album is streamed unlike traditional music business models that only profit the one time a song or album is purchased. Spotify's as a freemium business model has a free tier that enables music fans to try out the service in a limited, ad-supported context. Just like television, radio, YouTube, or Pandora, Spotify freemium enables users to pay for their music by viewing advertisements that frequently interrupt their listening.
According to Spotify’s website:
"Spotify's goal is to grow a service which people love, ultimately want to pay for, and which will provide the financial support to the music industry necessary to invest in new talent and music… We're 100 percent committed to making Spotify the most artist-friendly music service possible, and are constantly talking to artists and managers about how Spotify can help build their careers.”
(www.spotify.com)
By combining an ingenious branding campaign that focused on exclusivity as a means of drawing interest, as well as designing a business model that could appease both digital music lovers and the recording industry that is attempting to win them back. Unlike old business models; where short-term financial success is king. Spotify’s online business model and financial success is the destination however not the short-term goal.
Basically the Spotify Business Model looks like this:
- Online direct marketing
- Electronic tendering systems
- Name your own price
- Find the best price
- Affiliate marketing
- Viral marketing
- Group purchasing
- Online auctions
- Product and service customisations
- Electronic marketplace and exchanges
- Information brokers
- Bartering
- Deep discounting
- Membership
- Value-chain integrators
- Value-chain service providers
- Social networks, communities, and blogging
- Direct sale by manufacturers
- Negotiation
Spotify Business Model
Spotify’s business model is to sell unlimited access to music instead of ownership of individual songs or album. Royalties are generated every time a song or album is streamed unlike traditional music business models that only profit the one time a song or album is purchased. Spotify's as a freemium business model has a free tier that enables music fans to try out the service in a limited, ad-supported context. Just like television, radio, YouTube, or Pandora, Spotify freemium enables users to pay for their music by viewing advertisements that frequently interrupt their listening.
According to Spotify’s website:
"Spotify's goal is to grow a service which people love, ultimately want to pay for, and which will provide the financial support to the music industry necessary to invest in new talent and music… We're 100 percent committed to making Spotify the most artist-friendly music service possible, and are constantly talking to artists and managers about how Spotify can help build their careers.”
(www.spotify.com)
By combining an ingenious branding campaign that focused on exclusivity as a means of drawing interest, as well as designing a business model that could appease both digital music lovers and the recording industry that is attempting to win them back. Unlike old business models; where short-term financial success is king. Spotify’s online business model and financial success is the destination however not the short-term goal.
Basically the Spotify Business Model looks like this:
Image: Fleerackers (2012)
Spotify S.W.O.T
Strengths
Weaknesses
Opportunities
Threats
References
Afuah, A. & Tucci C.L. (2003). Internet business models and strategies (2nd ed.). New York: McGraw-Hill.
Fleerackers, T. (2012) re-Focus the traditional business model if you want to survive in the “E” world. Retrieved from: http://flatworldbusiness.files.wordpress.com/2012/10/spotify_businessmodel.png
Gobry, P.E. (2011) How Spotify’s Business Works. Retrieved from: http://au.businessinsider.com/how-spotifys-business-works-2011-10
Heires, K. (2007) Why it pays to give away the store:Investors are abuzz about 'freemiums' - services that lure users in with a basic product, then charge for more features. Retrieved from: http://money.cnn.com/magazines/business2/business2_archive/2006/10/01/8387115/index.htm
Kincaid, J. (2009). Startup School: Wired Editor Chris Anderson On Freemium Business Models. Retrieved from: http://techcrunch.com/2009/10/24/startup-school-wired-editor-chris-anderson-on-freemium-business-models/
Miles, T. (2012) What's the Freemium Economy All About? Retrieved from:
http://www.mavenlink.com/community/blogs/543-the-price-of-free
Osterwalder, A. & Pigneur, Y. (n.d.) Business Model Generation. Retrieved from: http://www.consulteam.be/media/5985/businessmodelgenerationpreview.pdf
Rappa, M. (2009). Managing the Digital Enterprise: Business Models. Business models on the web. Retrieved from: http://digitalenterprise.org/models/models.html
Rick, C. (2012). Freemium: The Category Expander. Retrieved from: http://cdn.reelstatic.com/wp-content/uploads/2012/05/freemium-info2.jpg
Teece D.J. (2010). Business Models, Business Strategy and Innovation. Retrieved from: http://www.bmcommunity.sitew.com/fs/Root/8jig8-businessmodelsbusinessstrategy.pdf
Wadhwa, V. (2011, Jan 11). What Exactly is a Business Model? Retrieved from: http://techcrunch.com/2011/01/08/business-models-and-teenage-sex/
Spotify S.W.O.T
Strengths
- Streaming advertising allows Spotify to guarantee revenue for music publishers and providers, while still allowing users to build and craft music libraries that access their favourite artists and preferred musical genres
- Unparalleled mobile and desktop app design provides perhaps the most user-friendly digital music service on the market
- A brain and investment trust consisting of proven start-up veterans like Sean Parker ensures faith in the management behind the service
- With hundreds of millions of music fans around the world, market cap potential remains extraordinarily high for the service
Weaknesses
- Music library is still limited by artists (especially older ones) refusing to publish their catalogs on Spotify’s service
- While Spotify does ensure revenue for publishers and artists, the returns are not usually close to those produced through the traditional brick-and-mortar store and physical album sales
- Spotify’s insistence on premium subscriptions for full mobile services and access to files limits its appeal to consumers used to accessing free music (and who can still access free music through torrent downloads)
Opportunities
- With the continued evolution of mobile technology, live concert video streams and performance broadcasts remain an area of potential expansion
- Spotify’s ability to appease music creators and producers allows them an advantage on illegal services potentially threatened with shutdown
Threats
- Established competitors like the iTunes Store, as well as new forays by Amazon and Google, ensure long-term challenges for user preference
- Revenue and profits remain low, as the service attempts to both appease consumers acclimated to free music while also remaining viable as a profitable business model
- Revenue questions still leave open the threat for litigation from spurned artists or aspects of the recording industry
References
Afuah, A. & Tucci C.L. (2003). Internet business models and strategies (2nd ed.). New York: McGraw-Hill.
Fleerackers, T. (2012) re-Focus the traditional business model if you want to survive in the “E” world. Retrieved from: http://flatworldbusiness.files.wordpress.com/2012/10/spotify_businessmodel.png
Gobry, P.E. (2011) How Spotify’s Business Works. Retrieved from: http://au.businessinsider.com/how-spotifys-business-works-2011-10
Heires, K. (2007) Why it pays to give away the store:Investors are abuzz about 'freemiums' - services that lure users in with a basic product, then charge for more features. Retrieved from: http://money.cnn.com/magazines/business2/business2_archive/2006/10/01/8387115/index.htm
Kincaid, J. (2009). Startup School: Wired Editor Chris Anderson On Freemium Business Models. Retrieved from: http://techcrunch.com/2009/10/24/startup-school-wired-editor-chris-anderson-on-freemium-business-models/
Miles, T. (2012) What's the Freemium Economy All About? Retrieved from:
http://www.mavenlink.com/community/blogs/543-the-price-of-free
Osterwalder, A. & Pigneur, Y. (n.d.) Business Model Generation. Retrieved from: http://www.consulteam.be/media/5985/businessmodelgenerationpreview.pdf
Rappa, M. (2009). Managing the Digital Enterprise: Business Models. Business models on the web. Retrieved from: http://digitalenterprise.org/models/models.html
Rick, C. (2012). Freemium: The Category Expander. Retrieved from: http://cdn.reelstatic.com/wp-content/uploads/2012/05/freemium-info2.jpg
Teece D.J. (2010). Business Models, Business Strategy and Innovation. Retrieved from: http://www.bmcommunity.sitew.com/fs/Root/8jig8-businessmodelsbusinessstrategy.pdf
Wadhwa, V. (2011, Jan 11). What Exactly is a Business Model? Retrieved from: http://techcrunch.com/2011/01/08/business-models-and-teenage-sex/