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Valuable Lessons From Spotify’s Business Model

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Spotify has been on my business model watch list for some years. They constantly leverage partnerships to build next steps for developing their business model and achieving growth. In this article, I wanted to take a closer look at some of the partnerships that Spotify has created. How does the business utilize these partnerships? To what extent are these partnerships successful? Do they contribute to a cohesive user/customer experience, or is Spotify turning its product into an attribute soup?

Many people, including myself, know and love Spotify, the online music streaming service from Sweden. Initially Spotify was only available in Scandinavia. They expanded to more countries whenever they could obtain licenses for streaming music. These licenses are terribly laborious to obtain, as each country has its own systems and process for agreeing on the terms for broadcasting.

In the early days of the company, Spotify’s priority appeared to be to get enough coverage geographically, working hard to obtain license deals. But now that they have achieved coverage, they’re dealing with other growing pains. Spotify has a sizable body of listeners, about 50 million. Of those 50 million, 12,5 million are paid subscribers. These are also the company’s main source of revenue. But with increasing competition from services like Apple’s upcoming Apple Music platform, Rhapsody, Rdio, and even Youtube, Spotify is on a mission to onboard more users, and to increase the rate at which they can convince free users to convert to a paid premium subscription to the service.

Within this business landscape, Spotify is clearly opting for the partnership model to compete. Just a sample from the list shows partnership collaborations ranging from Coca-Cola, to Bang & Olufsen, to Uber. However, these partnerships are strikingly diverse. You wonder what the overall strategic rationale would be.

To better understand Spotify’s partnership-driven strategy, I’ve selected a couple of interesting partnerships for closer examination. Firstly we’ll look at Spotify’s deal with Facebook, because Spotify utilized this partnership to enter the US market (where it was completely unknown, before entry). Secondly, we’ll have a look at Spotify’s deal with Bandpage, a social media integration site for artists to engage more with their fans. Lastly, I’ll speculate about the recently announced partnership with Starbucks, a very interesting move, blending value from 2 seemingly disparate industries, each operating with their own clock speed.

I will use The Partnership Canvas in combination with the Business Model Canvas to examine these partnerships. For each case I’ll reflect on 2 critical questions to assess the robustness of the partnership rationale:

  1. Does the partnership contribute to Spotify’s current strategic challenge to on-board more users, and increase the rate of conversion to premium subscriptions?
  2. Are these partnerships an equally compelling proposition to Spotify’s partners?

Spotify and Facebook
As I mentioned in the beginning of this article, Spotify was initially active in the European markets. However, they didn’t have any directly addressable market in the US. Nobody knew them when they wanted to enter the US in 2011. Instead of going for a widespread advertising campaign, Spotify opted for a leaner approach by using Facebook’s channels to land in the US.

-Partnership design-
The design of this partnership is as follows. Spotify has its eyes on Facebook’s main asset: Facebook.com and its users. Spotify’s offer is to leverage this channel with shareable streaming music content. This way, Spotify offers its unique resource of music licenses, which were painstakingly won on a country-by-country expansion basis, as a proposition to leverage Facebook’s social networking proposition to its customers.

To ensure mutual accessibility to these value elements, Spotify and Facebook have jointly created a music streaming API to stream, and share Spotify-powered tunes within Facebook.

This value exchange creates a new channel for Spotify, where its app is displayed prominently on the Facebook user’s dashboard. For Facebook this exchange creates an addition to its value proposition by offering legally shareable music on the social network, something that would have taken them ages to attain by themselves. This sharability additionally boosts Spotify’s presence by creating viral network effects to expand its reach to new users.

The complete setup of the partnership, and the contribution to each partner’s business model is shown below:

Fig 1. The Spotify-Facebook partnership visualized using the Partnership Canvas v2.x
Fig 1. The Spotify-Facebook partnership visualized using the Partnership Canvas v2.x (Click to enlarge)

-Partnership Hypotheses-
The hypothesis for Spotify is that the Facebook channel, in combination with the network sharing effects, will provide it with exposure in the US, and lead to new sign-ups. The focus is mostly on acquiring new users. The partnership design doesn’t address the deepening of engagement with these users to increase the likelihood that they will convert to a premium subscription.

For Facebook the hypothesis is more complex. The music streaming service value proposition firstly has to increase user engagement with the platform. In turn, this engagement must then lead to new user behavior data, which would increase granularity for targeting advertisement campaigns for Facebook’s main source of income: advertisers. 

As for the objective on obtaining more users, this partnership was a very successful partnership for Spotify, because they successfully entered a new market in the quickest way possible. Their current presence in the US market validates their partnership hypothesis. The fact the partnership is still active to date, is an indication that it is also creating value for Facebook.

Spotify and Bandpage
The context for this partnership is compelling. Spotify has been under fire from several artists like Radiohead’s Thom Yorke, and Taylor Swift about the rewards they obtain from providing their work on the Spotify platform. As a response, Spotify was compelled to search for new opportunities to add more value to their relation with music “suppliers”. They saw an opportunity to make this happen in a partnership with Bandpage. Bandpage is an online service that integrates an artist’s social media presence. Artists are able to integrally update news on their tours, and availability of merchandise from their sites, to a wide range of media channels, like Facebook, Twitter, Xbox, and in turn increase engagement with their fans. Could this partnership solve Spotify’s issues with artists, and at the same time increase user engagement with its platform?

-Partnership Design-
What Spotify desires from Bandpage is the convenient link it provides to the artist’s own media campaigns. Spotify would be able obtain all their artists’ campaign content through a single aggregator, instead of having to source it from each artist individually. To leverage this asset, Spotify offers the artist’s Spotify profile page, and their (playable) discography (again employing the licenses it has to artists’ music content) as a means of targeting promotional campaigns.

To ensure mutual access to the value that these partners bring to the table, Spotify has created the ability to integrate Bandpage’s content stream into the artist’s Spotify profile. Artists can opt-in to this feature by linking their Bandpage and Spotify accounts.

The value this creates for Spotify is the ability to offer instant updates to a highly targeted audience of artist fans. This is a value proposition to both fans using Spotify, as well as to artists. Interestingly this expands the role of the artists in Spotify’s business model. They move from being a supplier at first, to also being a customer to the Spotify platform through the partnership. For Bandpage, this partnership fits into their overall partnership strategy to link up with as many relevant social media channels as possible. The added benefit in partnering with Spotify is the highly targeted channel to fans.

The complete setup of the partnership, and the contribution to each partner’s business model is shown below:

Fig 2 The Spotify-Bandpage partnership visualized using the Partnership Canvas v2.x
Fig 2 The Spotify-Bandpage partnership visualized using the Partnership Canvas v2.x (Click to enlarge)

– Partnership Hypotheses-
For Spotify the partnership creates a new value proposition for a new customer segment, namely artists. To find out how this proposition would play out, Spotify would need to test the hypothesis that this campaign positioning will convert to a significant increase in traffic to the artist’s site, thereby stifling their criticism on the lack of value Spotify creates for them.

For Bandpage this partnership will create a new channel via the Spotify platform. The main hypothesis I would test, is whether this very targeted channel to fans leads to a higher conversion rate in sales of the artists’ merchandise. The reason is that Bandpage’s revenue stream depends on sales taking place on the merchandise sold through the leads it creates with fans.

Whether the partnership was able to validate these hypotheses is still not clear. From my own experience in using Spotify (a lot) and listening to a broad range of artists, I haven’t seen any artists that have used the Bandpage integration yet. If artists aren’t making use of the possibility to link their Spotify and Bandpage presence, it will also not create any additional engagement with fans.

It’s thus likely that the partnership isn’t creating the value hoped for. On the other hand, the partnership doesn’t conflict with either of the partners’ business models, and it doesn’t cost either business anything. So it is could be that this partnership will be continued and improved upon.

Spotify and Starbucks
Yes, you read it right! Spotify and Starbucks recently announced a partnership. A music platform, and a coffee house are joining hands. This is a seemingly unlikely combination, but Starbucks does have a track record in providing music as part of its value proposition with its range of CD collections, and until recently its partnership with Apple’s iTunes. Although the partnership with Spotify is yet to be implemented, and both companies are secretive as to what their proposition will actually look like when they launch, we can speculate how it might play out for both partners by filling in some of the blanks from their press release.

-Partnership Design-
Spotify has some Starbucks assets on its list that it desires to have access to. Firstly, Starbucks has over 7.000 physical coffee shops, and 150.000 staffers on the ground. This is something Spotify doesn’t have. Secondly, Starbucks has a very successful loyalty program, which hosts about 10 million active members.

To leverage these assets, Spotify can offer its streaming music service, to be used in the context of Starbucks’ physical stores. This is very interesting to Starbucks as they have no presence yet in the growing music streaming market. Secondly, Spotify has a group of premium subscribers of comparable size and geography to Starbucks’. Together, this could create an interesting community.

To provide mutual access to these value elements, the partnership would create 2 types of transfer activities. Firstly, the partnership will integrate a Starbucks staff playlist feature into the Spotify app, so Starbucks staff can stream music in-store. Customers will also be able to vote/comment on these tracks to influence the music that is played. Secondly, Spotify and Starbucks will couple their respective premium accounts, and loyalty program. This creates the opportunity for combining forces to deepen customer relationships.

For Spotify the partnership will create a new channel, where their platform is used in-store to provide for music. Also staff will be actively promoting their brand. Secondly, Spotify could offer Starbucks rewards for every increment in duration of a user’s premium membership with Spotify (but this is speculation).

For Starbucks the partnership will mean that they’ll gain a prominent position on Spotify’s categories of playlists. This could give a significant boost to Starbucks’ online presence, and opportunities for people to engage more with the Starbucks’ brand. Secondly, the coupling of membership/subscriber accounts would enable Starbucks to hand out tokens for Spotify membership discounts in combination with their loyalty program points (again speculation).

The complete setup of the partnership, and the contribution to each partner’s business model is shown below:

Fig 3. The Spotify-Starbucks partnership visualized using the Partnership Canvas v2.x
Fig 3. The Spotify-Starbucks partnership visualized using the Partnership Canvas v2.x (Click to enlarge)

-Partnership Hypotheses-
Of all the three cases, this partnership is the only one that has the potential for meeting both facets of Spotify’s strategic challenge. By having an in-store presence Spotify could expect more people to sign up for their service. On top of that, the link with the Starbucks loyalty program could incentivize these sign-ups to a premium membership, resulting in an improved rate of conversion!

For Starbucks, the main hypothesis is that providing streaming music will enhance engagement with their existing loyalty program members, as well as increase the number of loyalty program members, by onboarding people from the Spotify platform.

We’ll have to see if this partnership design will actually be implemented as described. But in any case, the combination of values between these two companies has great innovation potential to boost the customer experience.

Spotify’s full partnership portfolio
Now that the partnerships have been presented separately, the question remains whether Spotify’s business model is still cohesive.

The portfolio overview of these selected partnerships is presented below. Overall they don’t overlap in terms of their market space. Also the partners don’t interfere with eachother in terms of brand identities. Spotify has figured out a way of positioning their partnerships discretely enough, so that they don’t interfere with user segments that don’t care for making use of what the partnerships have to offer. This is a good indication that the partnerships can co-exist within Spotify’s business model.

Fig 4. Spotify’s partnerships with Facebook, Bandpage, and Starbucks.
Fig 4. Spotify’s partnerships with Facebook, Bandpage, and Starbucks.

What’s also striking is that Spotify is very consistent in their partnership design. In each case, they seek for an opportunity to leverage their key resources: the music licenses. Even though Spotify might be dwarfed by the size of some of their partners, the asset of having these licenses brings enough to the table to be an equal partner in negotiations with the likes of Facebook and Starbucks.

Final thoughts
The Spotify partnership cases have been instrumental to show how the company experiments with partnerships to evolve its business model to compete. The $64.000 question remains what business model will prevail in the space of music streaming. Yes, Spotify and its streaming competitors might draw in a lot of free users, successfully pulling them from the paid downloads market. But the streaming industry is still struggling to find the business model to pull of the job of converting people to paid subscriptions. The key will be to keep experimenting with the value proposition and the customer experience.

Spotify stands out in this respect. They’re approach to experiment through partnerships to find the right business model pattern stands out. Not only because they amplify their existing business model, but even more so because they are willing to utilise partnerships to reshape the building blocks in their business model.  Spotify takes partnering to a whole new level.

Aside from the case specific insights of this article, the Spotify partnerships also reveal some generalities about partnerships and business model design. I would like to close off this post with these insights:

  1. Money is not the critical factor in designing partnerships. A partnership is built on the combinations of value from both businesses, which don’t depend on paying each other for a service. As soon as money enters the discussion, you might be moving towards setting up a transaction, or to an investment relation. Those relations are very distinct from the partnership relation.
  2. The realm of partnership enables you and your partner to create value. The realm of your respective business models will determine whether you’re able to deliver and capture that value.
  3. A partnership only really works when the hypotheses for value creation (in the partnership) and capture (in the business model) are validated for both partners.
  4. Every partnership is only a hypothesis upon conception. Partnership hypotheses need to be tested, and most likely iterated. Therefore it makes a lot of sense to apply the lean startup build-measure-learn cycles to developing partnerships. A tool like the partnership canvas can help to communicate and consciously design experiments for testing together with your partner.
  5. Use the partnership canvas for partnership portfolio design. Avoid loosing overview what partnerships contribute to your business model by being explicit about what each partnership contributes, how you test and monitor whether that works. Also prevent partners from getting into each other’s space by partnering with you, and make sure that you don’t mash up conflicting brand identities in your partnership portfolio.

If you’re interested to learn more about the partnership canvas, and interact with me to further develop it as an add-on to the business model canvas, then sign-up to the blog below, or get notified for the upcoming webinar with the lowdown on the tool.

[I owe a truck load of gratitude to some people who provided me with the feedback on this post. Firstly there’s my wife, Anne Bruinsma, an leader on open innovation in agriculture. Then there’s Mike Lachapelle who is a very experienced business model consulting practitioner. And Syamant Sandhir, who is an expert on designing customer experience for the web.]

Callum Connects

Malcolm Tan, Founder of Gravitas Holdings

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Malcolm Tan is an ICO/ITO and Cryptocurrency advisor. He sees this new era as similar to when the internet launched.

What’s your story?
I’m a lawyer entrepreneur who owns multiple businesses, and who is now stepping into the Initial Coin Offering/Initial Token Offering/Cryptocurrency space to be a thought leader, writer (How to ICO/ITO in Singapore – A Regulatory and Compliance Viewpoint on Initial Coin Offering and Initial Token Offering in Singapore), and advisor through Gravitas Holdings – an ICO Advisory company. We are also running our own ICO campaign called AEXON, and advising 2 other ICO’s on their projects.

What excites you most about your industry?
It is the start of a whole new paradigm, and it is like being at the start of the internet era all over again. We have a chance to influence and shape the industry over the next decade and beyond and lead the paradigm shift.

What’s your connection to Asia?
I’m Singaporean and most of my business revolves around the ASEAN region. Our new ICO advisory company specialises in Singaporean ICO’s and we are now building partnerships around the region as well. One of the core business offerings of our AEXON ICO/ITO is to open up co-working spaces around the region, with a target to open 25 outlets, and perhaps more thereafter.

Favourite city in Asia for business and why?
Singapore, since it is my hometown and most of my business contacts originate from or are located in Singapore. It is also a very open and easy place to do business.

What’s the best piece of advice you ever received?
Be careful of your clients – sometimes they can be your worst enemies. This is very true and you have to always be careful about whom you deal with. The closest people are the ones that you trust and sometimes they have other agendas or simply don’t tell you the truth or whole story and that can easily put one in a very disadvantageous position.

Who inspires you?
Leonardo Da Vinci as a polymath and genius and leader in many fields, and in today’s world, Elon Musk for being a polymath and risk taker and energetic business leader.

What have you just learnt recently that blew you away?
Early stage bitcoin investors would have made 1,000,000 times profit if they had held onto their bitcoins from the start to today – in the short space of 7 years.

If you had your time again, what would you do differently?
Seek out good partnerships and networks from day one, and use the power of the group to grow and do things together, instead of being bogged down by operations and going it alone from start.

How do you unwind?
I hardly have any time for relaxation right now. I used to have very intense hobbies, chess when I was younger, bridge, bowling, some online real time strategy games and poker. All mentally stimulating games and requiring focus – I did all these at competitive levels and participated in national and international tournaments, winning multiple trophies, medals and awards in most of these fields.

Favourite Asian destination for relaxation? Why?
Phuket – nature, resort life, beaches, good food and a vibrant crowd.

Everyone in business should read this book:
Rich Dad Poor Dad by Richard Kiyosaki

Shameless plug for your business:
Gravitas Holdings (Pte) Limited is the premier ICO Advisory company and we can do a full service for entrepreneurs, including legal and compliance, smart contracts and token creation, marketing and PR, and business advisory and white paper writing/planning.

How can people connect with you?
Write emails to [email protected], or [email protected]

Twitter handle?
@malcolmABM

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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Entrepreneurship

Women on Top in Tech – Pam Weber, Chief Marketing Officer at 99Designs

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(Women on Top in Tech is a series about Women Founders, CEOs, and Leaders in technology. It aims to amplify and bring to the fore diversity in leadership in technology.)

Pam Webber is Chief Marketing Officer at 99designs, where she heads up the global marketing team responsible for acquisition, through growth marketing and traditional marketing levers, and increasing lifetime value of customers. She is passionate about using data to derive customer insights and finding “aha moments” that impact strategic direction. Pam brings a host of first-hand startup marketing experiences as an e-commerce entrepreneur herself and as the first marketing leader for many fast-growing startups. Prior to joining 99designs, she founded weeDECOR, an e-commerce company selling custom wall decals for kids’ rooms. She also worked as an executive marketing consultant at notable startups including True&Co, an e-commerce startup specializing in women’s lingerie. Earlier in her career, Pam served in various business and marketing positions with eBay and its subsidiary, PayPal, Inc. A resident of San Francisco, Pam received her BA from the University of Pennsylvania and MBA from Harvard Business School. Pam is a notable guest speaker for Venture Beat, The Next Web, Lean Startup, and Growth Hacking Forum, as well as an industry expert regularly quoted in Inc., CIO, Business News Daily, CMSwire, Smart Hustle, DIY Marketer, and various podcast and radio shows. You can follow her on Twitter at @pamwebber_sf.

What makes you do what you do?
My dad always told me make sure you choose a job you like because you’ll be doing it for a long time. I took that advice to heart and as I explored various roles over my career, I always stopped to check whether I was happy going to work every day – or at least most days :). That has guided me to the career I have in marketing today. I’m genuinely excited to go to work every day. I get to create, to analyze, to see the impact of my work. It’s very fulfilling.

How did you rise in the industry you are in?
I had a penchant for numbers and it helped me stand out in my field. This penchant became even more powerful when the Internet and digital marketing started to explode. There was a great need for marketers whose skills could span both the creative and the analytic aspects of marketing. I capitalized on that growth by bringing unique insight to the companies I worked with, well-supported with thoughtful analysis.

Why did you take on this role/start this startup?
I’m not sure this is relevant to my situation as I had been a marketing leader in various start-ups and companies. I took on the role at 99designs because I was excited by the global reach of the brand and the opportunity the company had to own the online design space. I especially liked the team as I felt they were good at heart.

The challenge I’ve faced in my time at 99designs is how do I evolve the team quickly and nimbly to address new challenges. The work we do now, is very different than the work we did a year ago and even the year before that. There is a fine line between staying focused on the goal ahead and being able to move quickly should that goal shift.

Do you have a mentor that you look up to in your industry or did you look for one or how did that work?
There is no one I’ve sought out or worked with over my entire career as my “mentee” needs have changed so much over the years. There are many people who have helped me along the way. For example, one of my peers at eBay, who was quite experienced and skilled in marketing strategy and creative execution, taught me what was in a marketing plan and how to evaluate marketing assets. As I have risen to leadership positions over the years, I often reach out to similarly experienced colleagues for advice on how they handle situations.

How did you make a match if you and how did you end up being mentored by him?
I learned early in my career that it rarely hurts to ask for advice. So that is what I have done. Additionally, there are people that are known to be quite helpful and build a reputation for giving back to others in advisory work. Michael Dearing, of Harrison Metal and ex-eBay, is one of those people. I, as well as countless others, have asked him for advice and guidance through the years and he does his best to oblige. Finding mentorship is about intuiting who in your universe might be willing and whether you are up for asking for help.

That being said, generally, I have found, if you are eager to learn and be guided, people will respond to the outreach.

Now as a leader how do you spot, develop, keep, grow and support your talent?
I generally look for a good attitude and inherent “smarts”. A good attitude can encompass anything from being willing to take on many different types of challenges to working well amongst differing personalities and perspectives. Smarts can be seen through how well someone’s done in their “passion areas” (i.e. areas where they have a keen interest in pursuing).

I try to hire those types of people because in smaller, fast-growing companies like many of the ones I’ve worked in, it’s more often than not about hiring flexible people as things move and change fast.

Once those people are on my team, I try to keep them challenged and engaged by making sure they have varying responsibilities. If I can’t give them growth in their current job or in the current company, I encourage them to seek growth opportunities elsewhere. I’d rather have one of my stars leave for a better growth opportunity than keep them in a role where they might grow stale.

Do you consciously or unconsciously support diversity and why?
I consciously support diversity. When I am hiring, I am constantly thinking about how to balance the team with as broad a range as possible of skill sets, perspectives, etc. to ensure we can take on whatever is thrown at us, or whatever we want to go after.

What is your take on what it takes to be a great leader in your industry and as a general rule of thumb?
I’m going to assume a great leader in my industry to mean a marketing leader in a technology company. I think a great leader in this industry is not afraid to learn new tricks no matter their age – it’s the growth mindset you may have heard about. I have a friend who inspires me to do this – she purchased the Apple Watch as soon as it was available, and was one of the first people I knew to use the Nest heating/cooling system. She’s not an early adopter by most definitions, but she adopts the growth mindset. This is the mindset I, too, have sought to adopt. In my field of marketing, it most recently has meant learning about Growth Marketing and how to apply this methodology to enhance growth. Independent of your industry, I think a growth mindset serves you well.

Advice for others?
I have been at 99designs for 3.5 years. During that time we’ve invested in elevating the skills and quality of our designer community, we’ve rebranded to reflect this higher level of quality, and have improved the satisfaction of our customers. Our next phase of growth will come from better matching clients to the right designer and expanding the ability to work with a designer one-on-one. We have the best platform to find, collaborate, and pay professional designers who deliver high quality design at an affordable price, and it’s only going to get better. I’m excited to deliver on that vision.

Pam Webber
Chief Marketing Officer of 99designs
Twitter: @pamwebber_sf

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