Individual Case Analysis:

Spotify

Crystal Kleminsky

Dr. Wiggins: MGMT-4710-M55

April 27, 2023

Financial Analysis

Profitability

Since 2018, Spotify’s gross profit margin has slightly decreased. Over the last five years, it has
not varied much, resulting in 24.95% in 2022. Additionally, Spotify has been unprofitable the
last five year, as shown through a negative net profit margin. Although it made a significant
jump from -7.37 to -0.35 in 2021, it then decreased in profitability again in 2022. Furthermore,
Spotify’s return on equity has been negative since 2018. In 2021, it made a significant increase
almost becoming positive; however, by 2022, there was a steep decline, resulting in the second
lowest return in the last five years.

Source: https://www.macrotrends.net/stocks/charts/SPOT/spotify-technology/roa
Lastly, Spotify has been reporting a negative return on assets over the past five years; this means
that the company is not using its assets to generate a profitable income. Although the company
almost went positive in 2021, it ended 2022 with a significant decrease. All in all, Spotify has
never been profitable in its entire lifetime.

Liquidity

According to Spotify’s current ratio, assets in 2018 were higher than debts. Following, it
increased debt to assets in both 2019 and 2020, but then decreased in 2021. By 2022, its debt to
assets increased slightly. At the end of 2022, Spotify had the means to cover all their liabilities
with their assets if necessary.

Source: https://www.macrotrends.net/stocks/charts/SPOT/spotify-technology/current-ratio
Since 2018, Spotify has increased its cash ratio. In 2019 and 2020, there was a significant drop;
however, the company went positive in 2021, meaning it could cover all current liabilities with
cash. Then, in 2022, it slightly decreased to 95%.
Leveragability

Since 2018, Spotify’s debt to equity ratio has doubled. This means that the company receives
more funding from debt rather than shareholder’s equity. Additionally, Spotify has gradually
increased its current liabilities to equity in the past five years; this means that they rely more on
short term debts than shareholder’s equity for funding.

Source: https://www.macrotrends.net/stocks/charts/SPOT/spotify-technology/debt-equity-ratio

Activity

Over the last five years, Spotify has increased its asset turnover ratio from 1.21 to 1.54. Although
it took a dip in 2020, it continued on its upward incline. Moreover, Spotify has increased its
accounts receivable turnover since 2018. Overall, Spotify is efficiently using its assets to produce
sales and effective at extending credit and collecting funds from debtors.

Source: https://www.macrotrends.net/stocks/charts/SPOT/spotify-technology/financial-ratios

Capital and Relationships

Spotify ended 2018 with $258.64 million in free cash flow. Then, Spotify almost doubled it in
2019, but it dropped over half in 2020. By 2021, it had increased by about $120 million;
however, it had another significant drop in 2022 to $22.13 million. Generally, Spotify’s free cash
flow has been highly volatile in the past five years. According to gurufocus.com, “As of today
(2023-03-13), Spotify Technology's weighted average cost of capital is 12.61%. […] Spotify
Technology earns returns that do not match up to its cost of capital. It will destroy value as it
grows.” Thus, Spotify’s cost of capital is negatively affecting the company. Because return on
equity has been negative since 2018, issuing more stock may not be the best option to increase
funds. By the end of 2022, ROE had significantly decreased; thus, Spotify’s stock remains a risk
for investors. Due to the company’s negative ROE, the relationship with shareholders is probably
strained. Further compounding this, Spotify has never paid a dividend due to the company not
being profitable. Despite this, Spotify most likely has a good relationship with its creditors since
it generates enough money to cover its liabilities, which can be seen in the current and cash
ratios.

Summary

Generally speaking, Spotify is currently financially secure because it can generate enough funds
to cover all liabilities; however, the company is losing billions of dollars due to being
unprofitable. In the coming years, Spotify will most likely remain unprofitable because of the
downward trend in profitability shown in return on assets, return on equity, and net profit margin
and the increased leverage from creditors. On the other hand, the company seems to be safe from
going bankrupt in the short-term since it has liquid assets, but this would not transfer to the long-
term because of the significantly reduced free cash flow and unprofitability. Ultimately, Spotify
should focus on increasing profitability, increasing shareholder value, and reducing debts.
Data
Ratios 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022
Gross Profit Margin 25.7273 25.4583 25.5711 26.7998 24.951
Net Profit Margin -1.4832 -2.7499 -7.3731 -0.3517 -3.6668
Return on Equity -3.7249 -9.1311 -20.713 -1.6045 -17.9092
Return on Assets -1.7989 -3.6314 -9.1843 -0.4742 -5.6321
Current 1.0461 0.9147 0.8159 1.3552 1.2378
Cash 84% 72% 60% 108% 95%
Debt to Equity 1.07 1.51 1.26 2.38 2.18
Current Liabilities to 1.0253 1.1197 1.0338 1.5224 1.4644
Equity
Asset Turnover 1.2129 1.3206 1.2457 1.3484 1.5358
Receivable Turnover 13.0821 16.6601 16.8376 15.4441 16.8734
Free Cash Flow $258.64 mil $490.56 mil $206.76 mil $326.54 mil $22.13 mil
Sources: https://www.macrotrends.net/stocks/charts/SPOT/spotify-technology/financial-ratios and
https://www.nasdaq.com/market-activity/stocks/spot/financials (cash ratio)

External Environment Analysis

General Environment Analysis

Demographic Segment

To gain a better understanding of Spotify and its role in the industry, it is necessary to discuss its
general environment. Starting with the demographic segment, the United States is expected to
see a population increase from 336 million to 373 million by 2053 with immigration accounting
for 75% of that growth, as reported in the Congressional Budget Office report. Important to note,
the US would not be able to maintain its population without this predicted immigration growth.
Because of the recent decline in fertility rates, the country’s population has begun to age; due to
this, older generations, such as baby boomers, are predicted to feel these impacts and
consequentially need to work past the standard retirement age of 65 years old. Additionally, the
US is becoming more racially diverse, with most of the population growth coming from people
of color, particularly Latinos and Asians. Despite this, income inequality is still a significant
concern in today’s day and age, with only a small percentage of households holding more than
25% of the nation's wealth majorly from Caucasian descent. Furthermore, the 2023 US census
states that only 23% of the population aged twenty-five and older in the US had a bachelor’s
degree as their highest form of education in 2022, while 28% had high school as the most
advanced; this issue was represented by 39% of women and 36.2% of men. As for Spotify, its
biggest demographic sits within the twenty-four to twenty-five age bracket, with women
representing slightly over half of its users. What's more, ages eighteen to twenty-four and fifty-
five and older are also strong audiences for the company. This means that Spotify covers a vast
area of the US demographic segment, which fairs well for the company.

Sociocultural Segment

As for the sociocultural segment within the US, there are significant findings pertaining to
women in the workforce, diversity, quality of work life, product/service preferences, and
environmental concerns. Although women constitute a considerable portion of the US
workforce, the pandemic has notably impacted women in comparison to men, which has resulted
in higher unemployment rates for them. Furthermore, women are still not well-represented in
higher-paying positions and face a gender pay gap. However, the US labor force is becoming
more diverse, with the number of non-caucasian workers on the rise, with the Latinx population
predicted to account for more than 20% of the labor force by 2028. Despite the fact that 72% of
job seekers value work-life balance, the professional service industry expects its employees to
work extended hours spanning over 50 hours a week, which can result in employee burnout and
decreased productivity. While companies have begun to offer more compensation to combat
inflation, some firms have resorted to reducing work hours to increase their competition, due to
their inability to offer higher wages. However, hybrid and remote work have reduced social
connections and increased the risk of employee turnover, which has caused a strain on
employers. In correspondence with the rise of remote work, the pandemic has also increased the
significance of online shopping. Businesses that have invested in their online platforms have
reaped benefits, due to consumers’ desire for comfort and quick accessibility. As suggested by
earth.org, the US is the world’s second-largest polluter of carbon dioxide. Because of this, the
country faces significant environmental challenges that necessitate sustainable business
practices. Accordingly, these happenings will affect Spotify and its business practices. For
example, with the increased burnout rate, consumers may look to music as a source of relaxation,
resulting in an increase in subscriptions. Overall, the COVID-19 pandemic, along with other
factors in recent years, has greatly affected the sociocultural environment of the United States.

Political and Legal Segment

Throughout the political and legal segment, recent laws in anti-trust, tax, and education have
affected the US general environment. The US House of Representatives passed three antitrust
bills on September 29, 2022: the Merger Filing Fee Modernization Act, the Foreign Merger
Subsidy Disclosure Act, and the State Antitrust Enforcement Venue Act. The bills aim to
decrease fees for smaller transactions, increase fees for larger mergers, require parties to disclose
information about subsidies from foreign entities, and enable State Attorneys General to file
antitrust actions in their own jurisdictions. In 2022, two laws were enacted, namely the Inflation
Reduction Act and the SECURE 2.0 Act. Correspondingly, taxpayers should be ready for
potential changes after December 31, 2025, that could result in increased taxes. Additionally, the
Supreme Court will take a stand on the legitimacy of the student loan forgiveness proposal by
President Biden. Although this could be beneficial for Spotify by reducing consumers’ financial
strains, it may be difficult to enforce due to uncertainties surrounding funding.

Technological Segment

Because technology is a significant factor regarding the US environment, advances in AR/VR,

autonomous vehicles, renewable energy, and quantum computing are predicted to bring
innovative changes. As virtual reality companies turn their attention to non-gaming applications
such as remote work, exercise, and socializing, it is anticipated that VR and AR technology will
see improvements in addition to the Metaverse according to Inverse.com. Due to the fact that
quantum computing is considered the future of computing, there have been recent investments
from government and private entities to improve hardware and software capabilities. For
example, the US is expected to see over $500 billion in AI to increase the development of
adaptive and generative functionalities. However, there will be scrutiny from online regulators to
ensure the prevention of misinformation and harmful/illegal content. The IIJA also introduced a
grant program in 2021 worth $1 billion to reconnect communities facing transportation
inequalities; this could give underserved communities the opportunity to have increased access to
resources. Moreover, Self-driving trucks are expected to launch in Texas, raising safety concerns
within the US. However, if this technology is successful, it could bring consumers more leisure
time. These innovations will be a great opportunity for Spotify because the company could
expand into AR/VR, use quantum computing and AI to enhance its program, and incorporate its
services into automated vehicles.

Macroeconomic Segment

According to Forbes' report "What's The US' Projected Inflation Rate In 2023?", the US inflation
rates have risen to levels not seen since the 1980s, mainly due to pandemic-related economic
decisions and geopolitical tensions. However, recent reductions in both consumer price index
and personal consumption expenditure inflation rates indicate that the Federal Reserve's tactics
of raising interest rates have been successful, causing the stock market to rise briefly and
alleviating concerns about a recession. Despite this, there are concerns that further efforts are
required to achieve the Federal Reserve's inflation goal of 2%. The US goods and services deficit
has increased, and although the savings rate is currently low, it is predicted to rise as a result of
the Federal Reserve's interest rate hikes. The Congressional Budget Office has raised its
projections for short- and long-term interest rates due to an increase in near-term inflation
estimates since May. Additionally, the CBO predicts that the US federal budget deficit will reach
$1.4 trillion in 2023 and $2.7 trillion in 2033, with the deficit being 5.3% of GDP in 2023 and
increasing to 6.9% in 2033, the highest ever recorded. For the industry, this means that
consumers may be inclined to reduce spending in the meantime, but since inflation is expected to
decrease, consumers’ financial strains will not be significantly extended.
Global Segment

Throughout the global environment, there have been significant happenings in Europe, China,
and India reported by imf.org. Although global inflation has improved, many countries still face
high core inflation rates. As suggested, over 80% of countries are expected to have higher
inflation levels by 2024. Accordingly, The Federal Reserve's interest rate hikes are expected to
slow US growth, while Europe is projected to have only 0.7% growth due to restrictions on the
monetary policy and the rise of imported energy costs. Furthermore, the ongoing war in Ukraine
continues to challenge global stability with threats to energy and food markets. However,
Europe's economy experienced strong growth during quarter 3 of 2022, driven by labor markets,
household consumption, business investment, and energy crisis responses. Additionally, the
reopening of China is expected to boost global economic activity and financial conditions, which
is partly due to the improved global inflation rates. Growth forecasts for 2023 and 2024 have
been revised slightly upward, with India and China projected to be the leaders of global growth.
Perhaps, Spotify will grow in countries such as China and India and within Europe, due to the
increase in economic activity.

Five Forces Analysis

Threat of New Entrants

Entering the music streaming industry, especially in the same sector as Spotify, is challenging
due to several high barriers, including financial, legal, and technological challenges. Established
players such as Apple Music, Amazon Music, Tencent, YouTube Music, and Pandora have a
significant advantage in terms of resources and capabilities, making it difficult for smaller
players to compete. New entrants must invest heavily in technology, acquire musical content,
navigate copyright and streaming laws, and face high operating costs. Major companies in the
industry have a competitive edge due to aggressive marketing tactics and prominent brand
loyalty, which poses challenges for new players. Thus, the threat of new entrants in this industry
is low.

Supplier Power

The suppliers of Spotify have moderate bargaining power, including top musicians and leading
publishers such as Warner Music Group, Music and Entertainment Rights Licensing Independent
Network, Universal Music Group, and Sony Music Entertainment. However, the major brand
awareness and accessibility of Spotify are beneficial in managing the suppliers’ power to
negotiate. Because Spotify uses the Google Cloud Platform for content distribution, this also
contributes to the moderate bargaining power of suppliers. On the other hand, the threat of
forward integration from very few other suppliers reduces the bargaining power of suppliers.
Although Google is a major competitor for Spotify because it’s stake in the music streaming
industry through YouTube Music, it has a smaller market share compared to Spotify. Due to
these factors, Spotify faces moderate bargaining power from suppliers.

Buyer Power
Because there are several major competitors in the music streaming industry, buyer power is
positively impacted. While Spotify is the leader in the market due to its effective marketing
tactics, high-quality content, and competitive pricing, it still faces moderately high bargaining
power from buyers. The company must maintain significant research and development costs to
advance its technology and pricing strategies to regulate buyers’ power. For example, Spotify
offers a free ad-based subscription tier, which helps to expand its market and reduce bargaining
power. Additionally, its premium services are catered to each segment’s purchasing power
throughout varying markets. However, the industry still encounters buyer’s bargaining power on
the moderately high end because of the difficulty to achieve differentiation in the market and the
low switching costs to another provider.

Threat of Substitutes

Although there are several competitors, such as Apple Music, Amazon Music, YouTube Music,
Pandora, and Tencent, the risk of substitutes for Spotify is not high. This is because Spotify has a
strong competitive position as the leader in the online music streaming sector, with the largest
market share. In addition, its advanced technology, effective marketing strategies, global reach,
high quality, and extensive music content further decrease the threat from substitute services. As
physical music distribution has significantly decreased in the past decade, these substitute
markets do not challenge the convenience of the music streaming industry. Furthermore, live
music is often high-priced and not as accessible. Thus, the threat of substitutes in the music
streaming industry is on the moderate-to-low side.

Rivalry

The music streaming industry is fiercely competitive, with major players such as Spotify, Apple,
Amazon, YouTube, and Tencent competing for market share. Spotify is the industry leader with
the largest market share and over 400 million subscribers, despite the intense competition from
companies like Apple and Amazon. These competitors invest heavily in research and
development to gain a competitive edge. However, Spotify's focus on product development,
brand awareness, and user growth has helped it maintain its leadership position and achieve an
improved financial standpoint in 2021. Additionally, Spotify is expanding into new markets to
counter the competitive pressure from its rivals. Thus, the rivalry is high due to the many
competitors and the challenges of differentiation.

Overall Industry

Because of Spotify's emphasis on efficient marketing, product development, extensive music

content, and global growth strategies, it has a significant competitive edge in the music streaming
industry. Despite its operating expenses increasing due to intense competition, it has remained
the largest holder of market share. Other factors such as user experience, branding, and product
quality have helped Spotify expand its market, grow its subscribers, moderate the bargaining
power of customers and suppliers, as well as reduce the threat from substitutes and competitors.
Additionally, the company's investment in research and development, along with its success in
branding and marketing, has increased brand loyalty. Spotify is focusing on user acquisition for
financial success as it expands into new markets. Overall, this analysis suggests that its
investment in technology is beneficial for future growth in the industry.

Four Arenas Analysis

Cost/Quality Analysis

Cost/Quality Chart
$12
Apple
$10 YouTube Spotify
Amazon
$8

$6
Price

Pandora
$4

$2
Tencent
$0
0% 5% 10% 15% 20% 25% 30% 35%
Perceived Quality

Source: https://www.statista.com/statistics/653926/music-streaming-service-subscriber-share/#:~:text=Subscriber%20share%20of%20music%20streaming%20services%20worldwide%20Q2%202022&text=In%20the
%20second%20quarter%20of,were%20subscribed%20to%20Apple%20Music.

In this chart, perceived quality has been determined by the achieved market share in the music
streaming industry, which is discussed below in the Stronghold Analysis. According to the cost
quality chart above, Spotify has taken on an outflanking position with a mid-pricing strategy;
thus, they have managed to differentiate itself from the competition despite the high competition.
Although pricing is similar to Apple Music, Amazon Music, and YouTube Music, Spotify’s
perceived quality is much higher which has resulted in its outflanked position. This means that
Spotify has a strong position in the market, which would be difficult for competitors to disrupt.

Timing and Knowhow Analysis

In 2000, Pandora was the first company to release its music streaming services; this initially was
a free platform receiving funding from advertisements. However, as its user base grew, it
expanded into paid subscription tiers. Despite its efforts, Pandora has struggled to gain
subscribers in comparison to its rivals, largely because it was slow to offer on-demand music,
which Spotify had already introduced by the time Pandora reacted. Because of this response lag,
Spotify was able to capture the market and has benefited from being the first to offer on-demand
music. Additionally, the company has used discounts to gain subscribers as well as partnering
with organizations such as Google to gift consumers free Google Home Mini devices. Similarly,
other companies such as Amazon have imitated this strategy and gained success. However, these
strategies may not be effective in the long run because of the low switching costs and strong
competition. Generally, Spotify’s timing and knowhow have positively impacted its business.

Stronghold Analysis
Because Spotify has the highest market share in the music streaming industry at 30.5%, it has a
stronghold over the competition. Since the company was the first to release on-demand music
services, it captured the market early and has maintained growth throughout the years. As
discussed above in the Timing and Knowhow Analysis, Pandora had a delayed response and
missed the first-mover advantage because of its lack of on-demand music. Thus, its initial
opportunity to create a stronghold was unsuccessful, leaving it with only 1% of the market.
Spotify’s biggest competition comes from Apple Music at 13.7% and Amazon at 13.3%.
Although these companies hold significance in the US, they lack a presence globally, which
Spotify has done well. As Spotify is a Swedish company, it has expanded across Europe, as well
as North America and South America. In the global market, Tencent is a strong rival at 13.4%
market share; however, its market is majorly focused on China. Despite the marketing tactics of
these competitors, Spotify has been able to maintain its stronghold in the music streaming
market.

Deep Pockets Analysis

Company Cash on Hand Date

Spotify $3,529.56 million 12/31/22
Apple (Apple Music) $48,304 million 9/30/22
Amazon (Amazon Music) $70,026 million 12/31/22
Alphabet (YouTube Music) $113,762 million 12/31/22
Sirius XM (Pandora) $57 million 12/31/22
Tencent $33,384.67 million 12/31/22
Sources: https://www.macrotrends.net/stocks/charts/SPOT/spotify-technology/balance-sheet https://www.macrotrends.net/stocks/charts/AAPL/apple/balance-sheet
https://www.macrotrends.net/stocks/charts/AMZN/amazon/balance-sheet https://www.macrotrends.net/stocks/charts/SIRI/sirius-xm-holdings/balance-sheet https://www.macrotrends.net/stocks/charts/TCEHY/tencent-
holding/balance-sheet https://www.macrotrends.net/stocks/charts/GOOGL/alphabet/balance-sheet

As suggested by the table, Alphabet Inc., the owner of YouTube Music, has the most cash on
hand as of the fourth quarter of 2022, with Amazon following behind at $70 million. Even
though Spotify has the highest market share, this company has the least cash on hand; this is
most likely because it has been unprofitable since its foundation. Although Spotify is not
currently at risk of bankruptcy, if the company took an unfavorable turn, it would not be able to
support itself in the long run, as discussed in the financial analysis. Thus, its competitors have an
advantage in terms of cash on hand. However, these competitors own more companies other than
their music streaming services; in a worst-case scenario, this means that they may decide to shut
down the music streaming portion of their companies instead of putting the entire corporation at
risk. As Spotify is the only company on this list that is a single entity, it must remain vigilant
with its finances because it does not have the same resources as its large well-established
competitors.

Competitor Analysis

Apple Music

In 2015, Apple founded a music streaming that has a large collection of songs that can be
accessed by paying a monthly or yearly fee. Although the service is a strong competitor in the
market because of its extensive music library and a variety of supporting products, it still has a
smaller market share compared to Spotify. To capture its share of the market, Apple Music
efficiently markets its brand to grow its user base and increase brand loyalty; this has generated a
significant amount of revenue for the company at $8.3 billion in 2022. Furthermore, Apple's
main competitive advantage is its range of products that support the service and its established
brand loyalty, while Spotify's advantage is its status as the leading player in music streaming.

Amazon Music

Amazon Music launched its music streaming service in 2007. As a significant competitor in the
industry alongside Spotify and Apple Music, it has captured a reasonable portion of the music
streaming market share. Despite offering a large library of songs, Amazon Music faces tough
competition due to its weak differentiation in music streaming and limited growth outside the
main purpose of the corporation. While it held a 13.3% share of the online music streaming
market in 2022, Apple Music had 13.7% and Spotify had 30.5%. However, its subscriber base
grew to 82.2 million users in 2022 due to the company’s e-commerce market. Since the company
is one of the largest online retailers in the world, Amazon Music has an advantage over Spotify
as far as growth and resources. In comparison to Spotify, Amazon is a major competitor, but it
does not create the same amount of brand loyalty with its consumers regarding its music
streaming business.

YouTube Music

In 2015, YouTube released its music streaming service, YouTube Music which allows users to
listen for free with advertisements, while paid subscribers of YouTube Red can access the ad-
free music. A unique feature of this platform is humans organize all of the music streaming
content, unlike other competitors that utilize artificial intelligence. Although it has a strong brand
name and a library of over 50 million songs, it has not made significant progress in the music
streaming market, with its subscription base surpassing 80 million subscribers as of September
2022. In 2022, it held an 8.9% share of the online music streaming market, in comparison to
Spotify at 30.5%. Overall, YouTube Music is a moderate competitor of Spotify; however, it
arrived later in the market than the other competitors, resulting in difficulty differentiating itself.

Pandora

Pandora was the first music streaming service, founded in 2000. As an industry innovator, it
originally allowed users to create personalized radio stations based on their preferred songs or
artists. In 2022, Pandora reported just 47.64 million active users, continuing on its path of
decline in recent years. The platform offers both free and paid versions, with unlimited skips and
an ad-free experience for the paid version. Yet, it faces tough competition from rivals like
Spotify and Apple Music and hasn't been as successful outside the US. As its primary income
source is advertising, Pandora needs to improve user experience to encourage consumers to
commit to the paid subscription tier. Despite its vast user base and global availability, Pandora
struggles to compete with Spotify's extensive content library, pricing discounts, and aggressive
user acquisition strategies.

Tencent
Tencent Music is a Chinese company that was founded in 2016 and provides music streaming
services through QQ Music and KuGou apps. The company has a total of 567 million subscribers
as of 2022, which was a decrease from the previous year. Additionally, it is a part of a larger
corporation that offers various services, including messaging apps, online games, and mobile
payment services. Tencent Music dominates around 60% of the digital music market in China
and 13.4% outside China. As it reported $33,384.67 million cash on hand in quarter four of
2022, it has the required resources to grow its company. Since the company has already acquired
a large portion of the Chinese market, it may look to expand into the international market in the
near future.

Internal Environment Analysis

Resource Analysis

Tangible Resources

In terms of tangible resources, Spotify has two main components, being financial and human.
Since its origination, Spotify has never been profitable, as indicated by a negative net profit
margin. Even more than that, the company's gross profit margin has decreased slightly over the
past five years. The return on equity has also been negative since 2018, with a significant
increase in 2021 but followed by a sharp decrease in 2022. Moreover, Spotify's negative return
on assets over the past five years implies that it is not effectively using its assets to generate
profitable income. Because Spotify has relied more on short-term debt than shareholder equity
for funding since 2018, this issue has led to an increase in its debt-to-equity ratio. Despite
generating enough funds to cover all liabilities, the company's unprofitability is causing it to lose
billions of dollars on a consistent basis. Furthermore, free cash flow has been highly
unpredictable over the past five years. While Spotify is financially secure in the short term, it
must focus on increasing profits, shareholder value, and reducing debt to remain financially
stable in the long term.

Ratios 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022

Gross Profit Margin 25.7273 25.4583 25.5711 26.7998 24.951
Net Profit Margin -1.4832 -2.7499 -7.3731 -0.3517 -3.6668
Return on Equity -3.7249 -9.1311 -20.713 -1.6045 -17.9092
Return on Assets -1.7989 -3.6314 -9.1843 -0.4742 -5.6321
Current 1.0461 0.9147 0.8159 1.3552 1.2378
Cash 84% 72% 60% 108% 95%
Debt to Equity 1.07 1.51 1.26 2.38 2.18
Current Liabilities to 1.0253 1.1197 1.0338 1.5224 1.4644
Equity
Asset Turnover 1.2129 1.3206 1.2457 1.3484 1.5358
Receivable Turnover 13.0821 16.6601 16.8376 15.4441 16.8734
Free Cash Flow $258.64 mil $490.56 mil $206.76 mil $326.54 mil $22.13 mil
Sources: https://www.macrotrends.net/stocks/charts/SPOT/spotify-technology/financial-ratios and
https://www.nasdaq.com/market-activity/stocks/spot/financials (cash ratio)

Turning to human resources, in January of 2023, Spotify stated that it is reducing its staff
worldwide by 6%, laying off approximately 600 employees. This event is due to the economic
downturn resulting from the pandemic, which has compelled many to tighten their budgets. After
the announcement, investors' interest spiked, shown by the 3% increase in stock now that the
company will have decreased expenses (Browne, 2023). According to employee ratings on
Comparably, the average happiness score at Spotify is a "B," based on factors such as
“workplace positivity, growth opportunities, and satisfaction with compensation and benefits.”
As stated in the article, the human resources and product development departments are rated as
the happiest divisions in the company; however, the finance and marketing departments are the
lowest rated. Another interesting finding is that less experienced employees are more content
than those with higher experience. Against its competition, the organization has outweighed both
Apple Music and YouTube in terms of perceived employee happiness according to the rating
system. Generally, Spotify’s tangible resources are somewhat strained due to the insecure long-
term financial situation and the recent significant layoff of workers.

Intangible Resources

For intangible resources, Spotify is focused on legal, innovation, and reputation. First, Spotify
has a total of 752 patents in different countries, representing 275 patent families. Amongst these,
614 are currently active (GreyB, 2022). According to the article, the United States Patent and
Trademark Office has used 82 of Spotify's patents to reject 403 patent applications based on
sections 35 USC § 102 or 35 USC § 103, suggesting that Spotify's patents may be relevant to a
variety of other companies and technologies in the music streaming industry. Thus, the
organization’s resources are benefitting from the investment in legal protection.

For innovation, Spotify recognizes the "calibration problem" in recommender systems, which
refers to the need to represent various aspects of a user's interests to provide accurate and diverse
recommendations. To address this, the passage proposes a new approach using AI to generate
better-informed calibrated recommendations. The current system focuses solely on accuracy,
which can lead to a list of recommendations dominated by a user's main interests or popular
items that may not be helpful. Instead, the proposed approach aims to improve the proportions of
consumers' interests, which is an essential characteristic of a good recommendation algorithm.
For the most part, this new system is superior to previous algorithms because it is able to produce
pertinent and improved user recommendations (Engineering, 2023).

On the topic of reputation, Spotify is well-versed in the eyes of the consumer; however, there
have been challenges in relationships with suppliers. Since Spotify has over 80 million songs in
its collection and can be accessed on desktop, mobile, and smart devices through its apps, the
majority of widely available music can be reached through the platform, which is a benefit to
consumers. In comparison to its competitors like Amazon Music and Pandora, Spotify provides
superior streaming quality, with a maximum bitrate of 320kbps. Besides its wide-ranging music
library, Spotify also offers podcasts and social integration features, allowing users to connect
with friends and view their current listening selections. Although other streaming platforms are
now beginning to adopt similar features, Spotify has had social capabilities integrated into its
platform for several years. These features include the popular annual summary called "Spotify
Wrapped" and the ability to add friends and view their current playing track, making it the most
socially integrated service currently available. Spotify is recognized for its adaptability and
compatibility, as it can be used with any connected device and voice assistant. With Spotify
Connect, users can combine multiple devices and play music through compatible speakers,
soundbars, and AV receivers. Spotify regularly introduces new features, such as audiobooks, to
improve user experience (Pendlebury, 2022). All in all, Spotify is a comprehensive music
streaming platform with a vast assortment of music, podcasts, and social features that
differentiate it from its competitors, creating a strong brand in the industry.

On the other hand, the company has not experienced the same level of success with suppliers,
otherwise known as music distributors. According to the article, Spotify’s Challenging
Relationship with Artists, Spotify has faced criticism from artists for not providing adequate
royalties. For example, Taylor Swift disassociated from the platform in 2014 due to a decline in
album sales caused by increased online streaming. Other artists, such as Coldplay, Kanye West,
and Beyonce have also waited to upload their new albums to the organization in hopes to
increase sales; however, the platform still remains the industry leader because of the strong user
base. To combat the insufficient royalties for artists, Jay-Z created TIDAL to compete with
Spotify by distributing higher wages, but it failed to challenge the company and was taken over
by a Norwegian company (Gbogbo, 2022). Despite criticism, Spotify is the most widely used in
its category with over 381 million users. Majorly, the company is recognized as the most popular
music streaming platform partly due to its success in legal resources, innovations, and brand
reputation.

Imitability and Capabilities

As Spotify is a large firm with major competitors and various resources, it has significant
possibilities for imitation and ability. Discussing imitability, there is a potential weakness in
Spotify's business model. Due to the ease with which other companies can develop similar music
streaming services, Spotify faces vast competition, which can be seen by the numerous platforms
in the same industry. To counteract this vulnerability, Spotify should concentrate on enhancing
its brand and service to continue to differentiate itself from the competition (Garcia, 2019).
Despite this weakness, Spotify's strong brand recognition and extensive music library are
strengths that help maintain the company’s status and reduce risks of imitation. As for
capabilities, Spotify’s different abilities contribute to its competitive edge in the online music
streaming sector, which makes up its core competence. Specifically, innovation, user experience,
marketing, and global reach are major factors for the company's success. Following, the
importance of understanding user preferences is a critical role of AI-based recommendations in
driving user engagement and loyalty. Additionally, the use of data and technology in creating
personalized experiences for users is the primary source of the company's competitive advantage.
Finally, the company's reasonable pricing strategy and successful global expansion, despite its
failure to generate positive net income contribute to its success (Abhijeet, 2023). Generally
speaking, Spotify's leadership in the industry is a result of its commitment to innovation, user
experience, marketing, and strong brand awareness. Overall, the organization faces threats from
imitation yet thrives due to its core competencies.

Value Chain Analysis

Primary Activities
Throughout primary company activities, Spotify has significant findings in inbound logistics,
operations, outbound logistics, marketing and sales, and service. To begin, the organization’s
inbound logistics activities are average to the industry. To obtain music licensing, Spotify uses
an industry standard process that involves music distribution companies. According to
digitalmusicnews.com, Spotify recently expanded its "Preferred Distributor" List, which now
includes 23 companies that artists can use to upload their music directly through Spotify For
Artists. Previously, the list of recommended distributors was limited, but now artists and labels
have the flexibility to choose their preferred distributor from an extensive list that is already
vetted and approved. Although the list of "preferred" Spotify artist distributors remains at five
companies, they have significantly increased their recommendations, which benefits artists.
These companies distribute and license music to various streaming services, not just Spotify, and
they pay artists for their music streams. In addition, all preapproved distributors give consumers
access to Spotify For Artists (King, 2023). All in all, Spotify's distributor system gives artists and
labels more options to upload their music and reach a wider audience, yet it uses a standardized
process making it average in its industry.

As for operations, the model organization employed by Spotify to manage its vast user base and
playlists across numerous markets strays from the norm, which results in above-average industry
standing. Rather than relying on a centralized operational team, the company has adopted an
approach based on autonomous squads, tribes, chapters, and guilds. For instance, Spotify divided
its engineering team into squads of eight, each with special functions and autonomous-managing
abilities. This decentralized model offers flexibility, rapid decision-making, and adaptability
while remaining aligned with Spotify's business model. The company continuously reviews and
improves its working model to achieve high autonomy and alignment, and communication
between teams is facilitated by chapters and guilds without sacrificing autonomy (Clamor, 2015).
Overall, this approach allows the firm to manage its global operations effectively and cater to the
distinct needs of its users which account for its above-average status.

Next, Spotify’s outbound logistics are considered below average in the industry due to its
common practices. The company generates revenue through its two primary sources, advertising
and subscriptions, with Premium subscriptions accounting for the majority of its earnings. With
these earnings, Spotify distributes a small portion to the different stakeholders in the creative
process, such as artists, songwriters, publishers, and record labels. The company pays artists
approximately $0.00348 per song stream, but the actual payout can vary based on various factors
such as existing payout agreements, the country where the song is streamed, and the listener's
subscription service. Spotify calculates the total revenue earned for a song and then distributes it
as royalties, with the leftover sent to the artists and their teams (Ong, 2021). As this payout is
less than major competitors and has caused issues for the company, it is below average for the
industry.

For marketing, Spotify has been above average in the industry for its creativity and
personalization. The organization's freemium business model is beneficial for both the company
and its users because it allows users to access free music by listening to ads and enables the
platform to generate income from the advertisements; this is a successful way to build brand
loyalty with the target audience and increase its reach. Beyond that, the company makes it simple
for artists and labels to ensure that the platform's content stays fresh and personalized for users
by encouraging streams with their curated playlists. Furthermore, Spotify's straightforward and
user-centric AI interface plays a vital role in personalizing the user experience. The article also
highlights Spotify's efficient use of data for user retention, such as the “Wrapped” feature, which
provides users with personalized insights about their music preferences throughout the year
(Maiorca, 2021). Majorly, the firm stresses the significance of creativity and personalization with
analytics to increase user retention and brand awareness, resulting in its above-average rating.

Lastly, Spotify has above-average after-subscribing services. According to credera.com, the

company has developed a personalized music recommendation system by utilizing three
different methods. The first method, collaborative filtering, compares a user's music preferences
with those of other users to suggest similar songs and artists that they may enjoy. The second
method is natural language processing, which examines online content like blogs and articles to
identify similarities between songs and artists. The third approach is audio analysis, which
assesses various data points such as tempo and loudness to group similar music styles and artists
together. By combining these three techniques, Spotify can offer an engaging and personalized
experience for its users. The paragraph also suggests that this approach may become more
widespread in other industries as technology and data analysis methods improve. This highly
impactful recommendation system is beneficial to the after-subscribing services because it is
more advanced than competitors' systems; thus, the company’s service is above average. Overall,
Spotify’s primary activities range from below average to above average, with more categories on
the higher range on the scale, which is likely a cause for their success in the industry.

Secondary Activities

As for secondary activities, there are interesting discoveries in firm infrastructure, human
resources, technology development, and procurement. To start, the organization’s N-form
organizational structure focuses on teamwork and peer review throughout the organization,
accounting for its above-average rating. The structure involves grouping employees into
"squads" and "tribes" to cluster related knowledge and skills and generate new insights, as
discussed above. "Guilds" are also used to promote operational development and improvement.
According to rancrod.com., the structure differs from hierarchical structures used by other
multinational corporations, allowing Spotify to adjust to the constantly evolving needs of the
international on-demand digital content market. Additionally, the N-form structure's flexibility is
vital in the company’s ability to expand strategies with specifics of the music streaming industry,
which is recognized as a competitive advantage. Moreover, the flexibility enables Spotify
to quickly integrate software developments within the streaming service, further contributing to
the company's success and above-average position in the industry.

On to human resources, Spotify is considered average because of its unique task system and
decreased employee turnover. According to Business Insider, Spotify's CEO, Daniel Ek, sees
jobs at the company as "tours of duty", meaning that employees will rotate job functions despite
having the same job title. Because employees' tasks and responsibilities can change over time,
this leads to high-level staff turnover, as employees may not be able to contribute to projects that
fulfill them. Although associates typically resign after a few rotations, Ek clarifies that turnover
is typically not due to poor performance. On the other hand, Spotify's "Work From Anywhere"
policy, implemented in February 2021, allows employees to choose their work location and
schedule, leading to lower turnover rates and increased diversity. The company has also
expanded in Europe and the US, meeting its diversity, equity, and inclusion goals through
location flexibility. Following this, Spotify credits its return-to-office initiative after the
pandemic for the increases in global expansion. Because these factors work against each other,
Spotify has an average ranking in the industry.

In terms of technology development, Spotify is above average within the industry. As discussed
above, Spotify determines its users' music preferences by using a combination of NLP, content-
based filtering, and collaborative filtering. The process involves analyzing a large amount of data
with sophisticated technology. However, as technology advances, Spotify needs to put more
effort into analyzing audio data, which is more complicated and requires more computational
power than collaborative filtering. Despite the complexity of the process, all three types of
filtering are necessary for accurately predicting users' music preferences. Spotify's
recommendation system offers personalized content like personalized playlists, the mix of the
week, and “Wrapped” year-in-review mixes. Providing high-quality recommendations is
essential for user satisfaction, and Spotify's clear strategy and commitment to improving its
system give them an advantage over other music streaming services (Marius, 2021). Thus, the
organization is above average in technology development.

Lastly, Spotify is ranked average for its procurement systems. Following, the company has two
processes by which it obtains licenses for millions of songs. The first type of agreement is the
sound recording license, which grants rights to the recording of the song. Spotify negotiates with
major recording companies such as Warner Music Group as well as smaller groups for
independent labels. The second type of agreement is the composition license, which involves
securing mechanical royalties and performance rights. The owner of the composition copyright
receives mechanical royalties, which are usually distributed through The Mechanical Licensing
Collective. These performance royalties are paid to songwriters and publishers every time their
songs are displayed in a public manner, and organizations such as the American Society of
Composers, Authors, and Publishers manage these payouts. Despite efforts to make the licensing
process more efficient, there are still challenges that may result in legal disputes concerning
copyright infringement and payment. (Jolt 2022). As these practices are industry standard, this
leads to Spotify’s average status in procurement.

Business-level Strategy

Differentiation

Spotify focuses on differentiating itself from the competition to maintain its position as the most
popular music streaming service in the world. Accordingly, Spotify Premium offers more than
just an ad-free experience, which is a reason why consumers continue to subscribe. Firstly, there
are no advertisements, so users can enjoy all services without being interrupted. Additionally, the
audio quality is significantly improved, with a jump from 160kbit/s to 320kbit/s, and users can
download saved music to their devices while their subscription is active. Another benefit is
unrestricted song switching and the ability to listen in any order at any time, while the free
version of Spotify always forces shuffling and only allows six skips per hour. Furthermore, if
you live in the US, you can access ad-supported Hulu and Showtime for free with a student
account (Android Authority, 2023). Additionally, the article Spotify Generic and Intensive
Strategies mentions that Spotify stands out from the competition by utilizing technology to
improve the user experience. Spotify provides free access to numerous podcasts to differentiate
its content and employs machine learning, data analytics, and start-up acquisitions to enhance the
user experience and cultivate customer loyalty. Through personalized recommendations and
playlists, Spotify has managed to stay ahead of competitors despite appearing similar to other
music streaming platforms. Consequently, the use of AI and machine learning is a significant
contributor to Spotify's brand awareness. Despite these successes, the organization still faces stiff
competition in the industry from major players such as Apple, Amazon, and Google. Given the
other major players, it is difficult to differentiate from rivals. Nonetheless, the brand has
leveraged technology development and pricing strategy within its differentiation strategy to
facilitate its popularity.

Corporate Directional Strategy

Growth

As Spotify is the leading company in the music streaming industry, its corporate directional
strategy is growth, which is confirmed in a statement by the CFO. According to Vogel, Spotify
has emerged as a major player in the music streaming market, and it has devised a strategy for
growth that involves multiple revenue streams, research and development, and strategic
acquisitions. The company has found success in its freemium model and premium subscriptions,
with more than 60% of its subscribers joining through free subscriptions. To enhance user
experience, Spotify invests heavily in research and development, using smart algorithms to
create customized playlists and introducing new features like lyrics for songs. The company has
also ventured into the podcasting sector through the acquisition of Gimlet and Anchor, which has
led to higher engagement and increased margins. In order to sustain its achievement, Spotify
recognizes that it cannot adhere to outdated patterns to shape innovative business models. The
company acknowledges its rivals, such as Apple, Google, and Amazon, and understands that it
must provide something significantly superior to distinguish itself in the saturated market.
Spotify acknowledges that there is still potential for growth in the streaming sector and is
committed to exploring these possibilities. The company plans to sustain its leadership position
in the music-streaming industry by pursuing diverse revenue streams, funding research and
development initiatives, and executing strategic acquisitions (Vereckey, 2021). In line with the
CFO statement, Spotify is focusing on a growth strategy, as exhibited by the consistent
technological developments and marketing.

Corporate Diversification Strategy

Dominant Business

Although Spotify has acquired several organizations, they contribute to the company as a whole
instead of maintaining their original positions; thus, the corporate diversification strategy is
dominant business. In 2022, Spotify acquired several companies to expand its business offerings,
including Podsights and Chartable, two podcast technology companies that specialize in podcast
advertising measurement and analytics. These acquisitions enabled Spotify to improve
measurement for podcast advertising, provide publishers with insights and promotions, and
accelerate its entry into the audiobook market by acquiring Findaway, a digital audiobook
distribution company. Additionally, Spotify acquired Heardle, an interactive music game, and
Kinzen, a company that protects online communities from harmful content, to enhance its
approach to platform safety (Naomi, 2022). The company's past acquisitions have played a
significant role in developing its recommendation system. For instance, the company acquired
Echonest, a music intelligence start-up in 2014, which had vast amounts of data about songs and
artists, allowing Spotify to analyze what was trending in the music market. In 2015, Spotify
acquired Seed Scientific, a data science and analytics consultancy, to gain in-house expertise.
Then, the firm incorporated Sonalytic, an audio detection start-up, in 2017 which enabled the
company to personalize playlists and songs and improve its publishing data system. Spotify's
acquisitions have mainly focused on expanding its offerings in the music and podcast streaming
industry (Marius, 2021). Although the company's revenue mostly comes from its music
streaming service, it aims to diversify its revenue streams by investing in these businesses and
leveraging the Spotify platform. By maintaining and growing these businesses, Spotify can
benefit from economies of scale and its monthly average users. Predominantly, Spotify is a
dominant business because its main focus is its music streaming platform despite its investments
in other organizations.

International Strategy

Global

As Spotify’s services are standardized across the globe, it is demonstrating a global strategy.
Following, the company uses two different methods to enter foreign markets, being foreign
direct investment and exportation. By incorporating these strategies and the digital format of the
firm, it has be able to integrate into the global market and release its content at an expedited rate
eliminating the shipment, tariff, or physical operations costs. As of 2021, the music streaming
platform is available in 92 markets worldwide, with plans to integrate into South Korea.
Although Spotify has yet to make a significant impact in Africa, the continent is currently
dominated by Boomplay, which is operated by the Chinese music streaming company NetEase.
Furthermore, Tencent, one of Spotify’s major global competitors, also intends to grow its
position in Africa through the company Joox. This indicates that the music streaming industry in
Africa is predicted to experience fierce competition. Spotify has also utilized foreign direct
investment by acquiring stock in Tencent Music at 21.1%. While this investment has granted
Spotify access to the challenging Chinese market due to its dominant position, it has also
required significant capital investment and increased bureaucracy. The organization's investment
in Tencent could lead to success from the involvement in growth throughout Africa with Joox,
but Spotify could also choose to launch its service across the continent. In summary, Spotify's
expansion into foreign markets via exporting and FDI is part of a broader strategy to grow its
user base and increase revenue streams in new markets. (Chablani, 2022). Overall, Spotify has
taken a common approach to globalization by utilizing foreign direct investment and exporting,
which has been highly successful for the corporation.

Problem Statement
Although Spotify is the leading player in the music streaming industry, it faces a major concern

for the well-being of the company. Specifically, the organization has never been profitable since

its foundation; this is affecting its position in the market because it does not have comparable

financial resources to maintain its status, especially in the instance of a worst-case scenario.

Factors affecting profitability include but are not limited to major competition, inflation, and

high-value employee turnover. Initially, the organization is constantly challenged by significant

competitors in the market, such as Apple, YouTube, Amazon, Tencent, etc. This is enhanced by

the fact that these major players have superior financial positions and more resources, meaning

that they have the capability to imitate Spotify. Next, inflation has been rising since the COVID-

19 pandemic, leaving consumers with less purchasing power. If consumers' finances are

impacted, they may be forced to reduce expenses, leading to a decrease in sales for Spotify.

Lastly, the company faces a high turnover of experienced workers. Because of the job rotation

strategy, high-value employees are less committed to the organization, which results in frequent

changes in management. Due to this instability in key associates, Spotify is challenged by

increased expenses from transitions. Overall, Spotify must focus on solving these issues to

improve its major problem of unprofitability because its long-term position is at risk.

Summary Analysis

External Factor Analysis Summary

Table 1

External Strategic Weight Rating Weighted Comments

Factors Score
Opportunities
Growing Millennial 0.1 4 0.4 Largest age bracket for Spotify
Population
AI Technologies 0.15 5 0.75 Advancements could benefit the
algorithm
Global Expansion 0.05 3 0.15 Europe, India, and China are
projected to grow
 High Perceived Quality 0.05 2 0.1 Outflanking position /
differentiation
High Market Share 0.1 4 0.4 First to release on-demand music /
current stronghold
Increased E-commerce 0.05 1 0.05 Consumers spend more time
online
Threats
Competition 0.15 5 0.75 Apple, YouTube, Amazon, etc. are
major players in the industry
Buyer Power 0.1 4 0.4 Low switching cost / difficult to
achieve differentiation
Inflation 0.1 3 0.3 Consumers have reduced
purchasing power
Competitors with Deep 0.1 3 0.3 Competitors have significantly
Pockets higher cash on hand
Higher Unemployment in 0.05 1 0.05 56% of users are women
Women
Total 1.0 3.65

Internal Factor Analysis Summary

Table 2

Internal Strategic Factors Weigh Rating Weighted Comments

t Score
Strengths
AI/Recommendation 0.2 5 1 Improved algorithm leads to
System/Personalization better recommendations /
Consumers prefer experiences
catered to them
Consumer Reputation 0.1 4 0.4 Most popular platform
Decentralized Operations 0.05 1 0.05 Offers flexibility and autonomy
in teams
Vast Music Library and High 0.05 2 0.1 One of the largest libraries in
Quality the industry with the highest
music quality
FDI and Exportation 0.1 3 0.3 Largest global player in industry
Weaknesses
Profitability 0.15 4 0.6 Never been profitable/Not
financially stable long-term
Employee Layoffs 0.05 1 0.05 Forced to reduced associates by
6% due to pandemic
Supplier Reputation 0.1 3 0.3 Lowest royalties paid to artists
Imitability 0.15 5 0.75 Easy for competition to imitate
Higher Turnover with 0.05 2 0.1 Harder to keep high value
 Experienced Workers workers committed
Total 1.0 3.65

Strategic Factor Analysis Summary

Table 3

Strategic Factor Weight Rating Weighted Duration Comments

Analysis Summary Score
Opportunities/
Threats
O1 AI Technologies 0.1 5 0.5 Long-term Advancements could benefit
the algorithm
O2 Growing Millennial 0.05 4 0.2 Intermediate Largest age bracket for
Population Spotify
O3 High Market Share 0.1 4 0.4 Long-term First to release on-demand
music / current stronghold
T1 Competition 0.15 5 0.75 Long-term Apple, YouTube, Amazon,
etc. are major players in the
industry
T2 Buyer Power 0.05 4 0.2 Long-term Low switching cost /
difficult to achieve
differentiation
T3 Inflation 0.05 4 0.2 Intermediate Consumers have reduced
purchasing power
Strengths/Weaknesses
S1 0.2 5 1 Intermediate Improved algorithm leads to
AI/Recommendation better recommendations /
System/Personalization Consumers prefer
experiences catered to them
S2 Consumer 0.05 4 0.2 Long-term Most popular platform
Reputation
S3 FDI and Exportation 0.05 3 0.15 Intermediate Largest global player in
industry
W1 Imitability 0.1 5 0.5 Long-term Easy for competition to
imitate
W2 Profitability 0.1 4 0.4 Long-term Never been profitable/Not
financially stable long-term
Total 1.0 4.5

SWOT Analysis

Strengths
To start, Spotify’s highest weighted strength is its AI algorithm to personalize consumers’
experiences and make recommendations. Because consumers prefer to have a unique experience
on the platform that is catered to the individual, Spotify’s algorithm has become a focal point for
the organization. Thus, the company invests heavily in research and development to continue
improving its recommendation system to differentiate itself from the competition and satisfy
consumers, as can be seen recently in the updated system. Additionally, the firm’s consumer
reputation has made a significant impact on the success of the platform. As Spotify is the most
popular music streaming platform worldwide, it strives to maintain its subscribers by updating its
algorithm as mentioned before. Following, the organization has experienced success in the global
market due to strategies such as foreign direct investment and exportation; these have lower risk
and expenses than other options which have eased the paths into these markets. Another strong
factor contributing to the company’s position is its vast music library and high music quality.
Compared to other players in the industry, Spotify has the highest sound quality and one of the
largest collections. As anyone that works with a distributor can upload their music, the platform
contains obscure, top hits, and anything in between. Lastly, Spotify has an interesting company
structure; this decentralized operational strategy leads to high autonomy and flexibility within
divisions. Due to these core strengths, Spotify has become a key player in the music streaming
industry.

Weaknesses

Although Spotify is the leading company in the industry, it also has a few significant
weaknesses. Mainly, the organization has a high risk of imitation from competitors. This is
especially true because key players such as Apple, YouTube, Amazon, etc. have more resources
than Spotify; thus, they are able to spend more on R&D to improve their platforms, creating a
major weakness for Spotify. Also important, the company has struggled with profitability since
its foundation, as it has never been profitable; this has led to the firm losing billions of dollars.
Despite the fact that it generates enough cash to cover its short-term cost, the company will not
be able to cover its expenses in a worst-case scenario, most likely leading to bankruptcy. Another
issue with the firm is its reputation with suppliers. As the company offers the least amount of
royalties to artists within the industry, this has formed issues with creators’ leading to some
removing their content from the platform or founding their own organization. Even though
Spotify’s decentralized operational structure is a strength for the company, it has also led to some
problems, such as the high turnover of experienced workers. Because the company employs a job
rotation strategy, associates switch positions frequently which has made it difficult to keep high-
value employees committed to the job. Similarly, Spotify recently enacted a cost-reducing
strategy that involved decreasing the workforce by 6%, affecting 600 associates. Generally
speaking, Spotify has experienced some weaknesses that affect its position in the music
streaming market.

Opportunities

To secure its position in the industry, there are several opportunities that Spotify could pursue.
Most importantly, AI technologies have been improving every year. Specifically, quantum
computing has been invested in by government and private organizations, such as $500 billion
from the US government. Since this is one of the company’s core competencies, this is a high-
impact factor that could help differentiate the firm from competitors. Additionally, the millennial
population has been increasing in the US due to immigration. By 2052, the US is expected to
grow by thirty-seven million people, with 75% of that growth from immigration. As Spotify’s
main age bracket consists of millennials at 29%, this creates a major opportunity for the
company. Moreover, the organization has the highest market share in the music-streaming
industry at 30.5% globally. As it has captured the majority of the audience, consumers are more
aware of Spotify’s offerings. With word of mouth and other forms of marketing, information
about the company will spread to a wider audience than other platforms. Following this, global
expansion could be one of the company’s objectives in the near future. Because India and China
are projected to be the global leaders in growth, these countries may be a source of relief from
other markets experiencing inflation and reduced growth, such as the US. While Europe does not
have the same expected growth increase, it is still a viable option as it is improving. Furthermore,
the company’s perceived high quality increases its outlook on consumers. If the organization is
known to be the best in the industry, a higher rate of consumers will subscribe to its services,
creating an opportunity to increase marketing to capture on-the-fence buyers. Finally, the
COVID-19 pandemic forced people to increase their time at home, consequently affecting e-
commerce and time online; since there of higher rates of time spent online, Spotify could
leverage this to increase its usage. All in all, Spotify has many opportunities within the external
environment due to advances in technology, millennial growth, global growth, etc.

Threats

Despite Spotify’s many opportunities, there are several threats to the company’s position that
could make a high impact. First of all, competitors such as Apple, YouTube, Amazon, and
Tencent hold significant status in the music streaming market. Each has an extensive music
library comparable to Spotify’s and holds a noteworthy market share percentage. Next, buyers
hold high power in the music streaming industry. This is due to the low-switching costs and
difficulty to achieve differentiation. Additionally, competitors have “deep pockets”, as
mentioned above. Following, each of these organizations have more resources than Spotify,
leaving them in a better financial position. Thus, in a worst-case scenario, they would most likely
be able to secure their businesses, unlike Spotify which faces long-term uncertainty. Another
crucial threat is the rising inflation rates. This means that consumers will have less value per
dollar, which may create financial strains and lead to unsubscribers. Moreover, the pandemic has
increased unemployment within the US, especially among women. This is a concern for Spotify,
as women account for 56% of its user base. If women continue to experience this impact, this
could lead to reduced sales. Overall, Spotify had credible threats that could negatively affect
business for the company.

TOWS Matrix Analysis

Table 4

Internal Strategic Factors Strengths Weaknesses

S1 AI/Recommendation/ W1 Profitability
System/Personalization W2 Employee Layoffs
 S2 Consumer Reputation W3 Supplier Reputation
S3 Decentralized Operations W4 Imitability
External Strategic S4 Music Library and W5 Higher Turnover with
Factors Quality Experienced Workers
S5 FDI and Exportation
Opportunities SO Strategies WO Strategies
O1 Growing Millennial 1. Use personalization to 1. Use AI to differentiate and
Population target millennials increase perceived quality to
O2 AI Technologies 2. Increase expansion into reduce imitability
O3 Global Expansion Europe and India / Increase 2. Leverage high market share
O4 High Perceived stake in Tencent (China into global expansion to
Quality and Africa) increase profitability and
O5 High Market Share reduce employee layoffs
O6 Increased E-
commerce
Threats ST Strategies WT Strategies
T1 Competition 1. Use AI to increase 1. Reduce expenses to improve
T2 Buyer Power differentiation and combat profitability and increase free
T3 Inflation competition and buyer cash flow
T4 Competitors with Deep power 2. Improve job structure of high
Pockets 2. Increase FDI and experience positions and to
T5 Higher Unemployment exportation to reduce risk reduce turnover and impact
in Women of US inflation of high unemployment

Recommendations

Competition

Because Spotify faces major competition in the music streaming industry from Apple Music,
Amazon Music, YouTube Music, and Tencent, it must increase brand loyalty with consumers.
To do this, the company will need to continue to differentiate itself by offering features
competitors lack. As Spotify is already adept in personalization, it should capitalize on this
aspect and dive deeper into creating unique experiences for the consumer. One way this
organization already accomplishes this is through AI; however, if it focuses on research and
development for this feature, the algorithm could grow due to the recent advances in AI
technology. Since the organization already invests in R&D activities, this will not significantly
impact its budget; thus, there is not much associated risk with this route. On the other hand, the
organization could focus on the social function of the platform to increase consumer-to-
consumer engagement. Specifically, if consumers could create profiles similar to Instagram or
Facebook, they could share content such as songs, playlists, podcasts, etc. with friends, which
could lead to increased time and commitment to the platform. Because Spotify already has some
social features on the platform, such as the popular “wrapped” music review, this strategy would
not be completely new to consumers’ allowing for more acceptance. However, this would
require research like regional testing before a complete launch, which would increase budgeting
for R&D activities.
Inflation

Since inflation has increased in the US, Spotify’s position in the market is at risk. As consumers
may be forced to decrease spending due to reduced purchasing power, the company may face a
reduction in sales. To combat this, Spotify should increase exportation and foreign direct
investment in regions that are not as heavily impacted such as China, India, and Europe. As the
firm is already involved in the European market, it should increase marketing tactics to capture
any on-the-fence consumers and new adapters. As for the Chinese market, Spotify holds a stake
in the major player, Tencent. As this company is also looking to invest in Africa, it would be a
good opportunity for Spotify to increase its investment in this organization, so that it can reap
any benefits from this strategic move. However, this increases risk because of the expansion into
a new region with established competitors. Alternatively, the Indian market would be a higher
risk for the company as they are not previously involved; thus, this would require research to
determine whether this market would be receptive to the company’s platform, increasing the
budget. Although there are no shipping costs, Spotify would need to obtain financing for this
expansion to receive proper licensing and distribution rights if the research proves workable. All
in all, Spotify should consider expanding into more foreign markets because of the increased
inflation across the globe.

Employee Turnover

As employee turnover causes noteworthy issues for organizations, Spotify needs to increase
employee commitment to reduce expenses. With high-level associates experiencing the highest
unhappiness in the company, this should be the focus of Spotify's role development because this
creates instability in the work environment. Although the organization utilizes a job rotation
strategy to decrease stagnation, it increases turnover because employees do not have adequate
time to learn their position before they must transition into a new role; this is especially crucial in
managerial associates because it is necessary for them to learn their position so that they can lead
effectively. Thus, Spotify should implement more stable job descriptions for high-value
employees to build their skills in their areas of expertise. By improving the position structure,
managers will have increased commitment to their roles, decreasing turnover and costs. To
incorporate this, Spotify should first obtain feedback from top-level associates to learn from the
source how their roles can be more efficient. Then, the organization can make decisions on what
will work best for each department. Overall, this should decrease costs, as onboarding is a
significant expense for companies.

Action Plan

Functions Stage III Actions

Major Problems Profitability, competition, inflation, and high
employee turnover
Objectives Increase brand loyalty, decrease the risk of
decreased sales, retain high-level employees
Strategy Increase differentiation, increase exportation
and FDI, improve managerial job structure
Organization: Major characteristic of Multiunit for each global department with
 structure decentralized operating divisions
Measurement and control Formal system to measure how each quarter
compares to each other, managers can note
how changes have affected their working
environments, surveys, etc.
Key performance indicators Profitability, market share, productivity,
employee happiness, ROI, sales
Reward–punishment system Reward divisions that meet their goals,
encourage and provide assistance/training for
struggling divisions, reevaluate after each
quarter

Conclusion

Ultimately, Spotify must improve differentiation from competition, risk of inflation, and high
employee turnover to increase profitability, which is the major problem affecting the company.
Although there are associated risks for each strategy including imitation, the company would fare
better in the long term than if it ignored these serious issues. By utilizing the strategies discussed
previously and gaining an edge on the competition, the organization can increase brand loyalty,
decrease the risk of a decline in sales, retain high-level employees, and most importantly reduce
costs, leaving a positive effect on profitability.

Analysis Summary

Overview

Spotify, the top player in the music streaming industry, faces a significant challenge as it has
never been profitable since its inception, and this is affecting its market position. Factors
contributing to this problem include competition, inflation, and high employee turnover. Spotify
is constantly challenged by major competitors with superior financial positions, and inflation
caused by the COVID-19 pandemic has led to reduced purchasing power among consumers. The
company's job rotation strategy results in high employee turnover, causing instability in
management and increased expenses. Spotify must address these issues to improve its
unprofitability and secure its long-term position.

Major Problems

Competition

To start, Apple Music has a smaller market share than Spotify; however, it generates significant
revenue and brand loyalty through efficient marketing and supporting products. As this is
Spotify’s main rival, this company creates a sizable risk to Spotify’s position in the market,
especially since it offers similar features to consumers. Next, Amazon Music has a 13.3% share
of the online music streaming market, making it the third-largest player in the industry. Although
it experiences weak differentiation and limited growth, the brand is widely known and
acknowledged due to the popularity of its e-commerce platform. This could create issues if
Spotify wished to expand into physical music sales and merch. Moreover, YouTube Music,
holding 8.9% of the market share, allows users to access content for free with advertisements,
much like Spotify. Because YouTube is one of the most used websites globally, this creates
major competition for Spotify’s freemium model. Across the globe, Tencent Music dominates
around 60% of the digital music market in China and may expand into the international market in
the future. As the Chinese market has been captured, there is little growth opportunity for Spotify
in this region. Generally speaking, Spotify faces tough competition from major competitors with
immense resources, resulting in major risks to its financial, brand loyalty, and growth potential.

Inflation

In February 2023, Forbes' reported on the US inflation rate which shows it has risen to levels
unwitnessed since the 1980s due to pandemic-related economic decisions and geopolitical
tensions. However, the Federal Reserve's efforts to raise interest rates have resulted in a
reduction in inflation rates, leading to a brief rise in the stock market and temporarily easing
concerns about a recession. Even though, additional measures are needed to meet the 2%
inflation target from the Federal Reserve. The US federal budget deficit is expected to reach $1.4
trillion in 2023 and $2.7 trillion in 2033, with a 5.3% GDP deficit in 2023, rising to 6.9% in
2033, the highest ever recorded. This may cause consumers to reduce spending, but with an
expected decline in inflation, their financial challenges will not be significantly extended. While
global inflation has improved, over 80% of countries are expected to experience higher inflation
rates by 2024. Thus, Spotify is at risk of reduced sales from the decrease in consumer purchasing
power and leftover financial strains resulting from the 2020 pandemic. Accordingly, this is a
notable issue for the company as it is already unprofitable. If it is not able to generate enough
revenue to cover its costs, then it will face major long-term complications, including bankruptcy.

Employee Turnover

According to Business Insider, some companies are struggling to combat inflation and are
resorting to reducing work hours instead of offering higher wages. However, this has caused a
strain on employers due to reduced social connections and increased employee turnover caused
by hybrid and remote work. As Spotify has always been unprofitable, it will not be able to
compete with other companies that can provide additional compensation to employees,
decreasing its job desirability. If the company aims to remain in the competition for high-value
workers, it may have to take this approach. Yet, this is not an optimal solution for the company
because it already faces high turnover. Because Spotify's CEO Daniel Ek believes in rotating job
functions to avoid stagnation, the company experiences high-level staff turnover, as described
previously. This leads to instability within the company, especially since the majority of
employee unhappiness is within top roles. With turnover, the firm also faces increased expenses
in transition and training costs. Thus, Spotify must strategize to decrease the high risk of
employee turnover, specifically in managerial positions because this is a significant factor in
increasing the organization’s costs.

Risk Analysis

Overview
Spotify should enact changes to increase profitability, which is the company's most significant
liability. These changes include: using AI to increase differentiation and challenge competition;
increasing social capabilities to increase consumer-to-consumer engagement; increasing foreign
direct investment and exportation to reduce the risk of US inflation; and improving the job
structure of high-experience positions to reduce employee turnover. After implementing these
new initiatives, Spotify should experience an improvement in the company’s long-term
profitability. However, there are some associated risks with each new procedure.

AI

Although AI is one of Spotify’s best competitive advantages, the company could face challenges
with bugs in the algorithm or consumer dissatisfaction. In the event that there are issues in the
program, research and development would need to delay the launch of the new algorithm to
ensure that the user experience is seamless. Extending the timeline would increase R&D costs,
but this is preferable to losing brand loyalty. Additionally, consumers could respond negatively
to the new recommendation system. This would most likely be discovered during regional testing
before the global launch; thus, R&D would need to conduct further testing to determine what is
impacting consumers negatively. Then, they would need to revise the algorithm and restart the
testing process. All in all, these associated risks could extend the timeline and increase costs.

Social

Because Spotify needs to differentiate itself from the competition, it should capitalize on the
success of the current social features of the platform and dive deeper. However, consumers may
not respond well to the new social capabilities, or the competition could imitate this idea. In the
case that consumers do not like the social functions of the platform, R&D would realize this
during testing. They could create a survey or focus group to find the exact issues that consumers
are experiencing. Then, they would need to revise the social functionalities and begin testing
again. If it is still unsuccessful, the idea would need to be scrapped. If the competition imitates
these features, Spotify would need to extend the marketing campaign the keep its platform at the
top of consumers' minds, increasing expenses. Moreover, they could encourage usage with free
trials, discounts, or partner with another company to offer a gift with a subscription. Generally
speaking, the main challenge Spotify faces in this endeavor is increased expenses.

FDI/Exportation

To expand its user base, Spotify will need to enter new markets as it has captured the majority of
consumers in the markets it has already breached. The risks concerning this strategy involve the
failure or underperformance of the new market and unforeseeable legal barriers. If the new
market fails or underperforms, Spotify would need to create an aggressive marketing campaign
to capture an acceptable portion of the market share, increasing costs. If this remains
unsuccessful, it would either need to sell its shares of the foreign company or retract from the
market. In the circumstance that the company faces legal barriers, it should begin research for a
method to overcome this barrier. In a last resort effort, it would have to leave the market.

Job Structure
Spotify may experience increased turnover or increased labor costs as it reorganizes job
functions. If turnover or dissatisfaction rises, the company would need to start a research project
to determine why the quality of the job structure declined, and then implement new procedures,
which would lead to employee instability. In a worst-case scenario, labor costs could become too
great, and Spotify could enact voluntary or temporary layoffs until the job structure is finalized.
Overall, the main concern with this project is increased job instability.

Action Plan

Program Objective
Increase profitability by adding new features, increasing market output, and
improving employee happiness.
Program Activities

1. Use AI to increase differentiation and combat competition and buyer power

2. Increase social capabilities to increase consumer-to-consumer engagement
3. Increase FDI and exportation to reduce the risk of US inflation
4. Improve job structure of high-experience positions to reduce employee
turnover and impact of high unemployment
Action Steps Responsibility Timeline
1. a. R&D a. 5/1 – 7/1
a. Research new AI technologies b. R&D b. 7/1 – 8/1
b. Review current algorithm to find c. R&D c. 8/1 – 10/1
weaknesses d. R&D d. 10/1
c. Revise weaknesses and improve e. R&D e. 10/1 – 12/1
functionality of recommendation f. R&D f. 12/1
system g. Marketing g. 12/1 – 1/1
d. Present to management
e. Test new algorithm in a few regional
markets
f. If successful, launch globally
g. Create awareness of new algorithm
features
2. a. R&D a. 5/1 - 7/1
a. Create profile functionality b. R&D b. 7/1
b. Present to management c. R&D c. 7/1 - 9/1
c. Test in a few regional markets d. R&D d. 9/1
d. If successful, launch globally e. Marketing e. 9/1 – 12/1
e. Run marketing campaign
3. a. Marketing & a. 5/1 – 6/1
a. Research possible new markets and Operations b. 6/1
any limitations b. Operations c. 6/1 – 6/15
b. Discuss with management c. Operations d. 7/1
c. Decide which market(s) to pursue d. Operations
d. Launch exportation or FDI process
 4. a. Marketing & HR a. 5/1 – 6/1
a. Conduct survey to gain feedback on b. Marketing & HR b. 6/1 – 6/15
job structure c. HR c. 6/15
b. Analysis survey results d. HR d. 6/15 – 7/1
c. Share data with top management e. HR e. 7/1
d. Use data to decide how to improve job
structures
e. Implement new initiatives

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