Adding Ticket and Merchandise Selling Service to Spotify Current Business Model

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QQ Music is the music division product of Tencent corporation, a Chinese internet giant. Merged with China Music Corporation, QQ Music has become the absolutely dominant player in the Chinese digital music business that it grabs 70% market share. Interacting with Wechat and Wechat Pay, another two popular products from Tencent, QQ Music possesses numerous advantages that Spotify lacks. Wechat provides QQ Music an enormous potential user base, while Wechat Pay serves as an extremely convenient payment tool. Their interaction promotes users to involve with more music digital products, like concert tickets, merchandise, providing an extended line of revenue to its freemium model of advertisements and paid subscription (Ho, 2016).

Findings

Problem

As a newborn music provider based on internet, music streaming itself does not produce any music content but merely serves as a platform for exchange, which results in its weak ability to bargain with music content producers, such as Warner Music Group, Sony Corporation, and Universal Music Group. When Spotify deals with these major labels, the company has to pay a huge amount of advances just to access their song library, and pay heavy royalties when their songs are streamed. According to the contract signed between Spotify and Sony in 2011, a fixed 60% proportion of Spotify’s gross revenue was paid to royalties. The major music business of Spotify has severely narrow profitability. Apart from royalty, Spotify has to pay the other costs of management, infrastructure, and marketing activities, posing big threat to its profitability and sustainability (McDuling, 2015).

There are several possible solutions for Spotify to relief its pressure. First, it could reduce the royalty rate by growing big enough to enhance its ability to bargain. However, it seems unlikely that Spotify could against these major label companies in a short term. Second, Spotify could modify its freemium model and give artists the opportunity to exclusively offer their new releases to paid subscribers. This approach runs against the initial spirit of Spotify, so it might cause a loss of customers. The third solution is that Spotify could develop its subscription from a single offering into tiered pricing offerings based on access, thus leveraging unexplored variations and options (D. D. Ferrali et al., 2014).

Recommendations

Learning from QQ Music, Spotify should develop a sophisticated understanding of the role that music streaming platform should play in the future music business. Moving beyond streaming service, Spotify should position itself as a bigger marketplace for music business, as the other industry participants and consumers are more and more demanding. Currently, both music label companies and artists are looking for alternative methods to supplement the declining revenue gained from album selling. The industry has realized that ticket and merchandise selling is an ideal approach to monetize the relationship between artists and music fans. As live music ticket and merchandise are becoming more lucrative sources of income, Spotify should unlock the ticket and merchandise selling service.

As a digital music service with enormous users, Spotify possesses unique advantages comparing with other online ticket platform. It should leverage the power of algorithm and the valuable data that reflects users’ preferences to sell more music-related products. By acquiring or self-developing its tickets and music merchandise selling system, Spotify would accurately and automatically recommend concerts tickets and merchandises that best match users geographic location and music listening history. This feature could raise users’ awareness of music events that interest them and thus stimulate impulse purchases. The platform will advance the ticket and merchandise selling business and generate additional revenue for the industry, since it is making more and deeper connections between music lovers, music artists, and music label companies. In addition, Spotify should leverage the power of social media and establish firm partnership with Facebook, Twitter, and Tumblr. The partnership with social media allows users to see what their friends are listening and what concert they RSVP. According to Nielsen, these socially connected users are 90% more likely to spend money on music and 50% more likely on concert tickets. Connected with social media, Spotify would have a better performance on its ticket and merchandise business.

Spotify would benefit from ticket and merchandise selling, since it provides an additional line of revenue and helps to develop its own music ecosystem where consumers and artists can have a sustainable interaction. It would enhance Spotify’s ability to bargain with music labels companies and reduce the reliance on streaming service to generate profit. By earn extra profit with ticket and merchandise selling, Spotify would have a good chance to turn a profit.

Conclusion

The challenge for Spotify is how to counterbalance its heavy royalty fee. After conducting research on music industry and QQ Music, it comes to conclusion that moving beyond streaming service is crucial for Spotify to improve its profitability and sustainability. Selling ticket and merchandise as a viable and lucrative service should be added into Spotify’s current business model.

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References

Cordero, R. (2016, April 18). Concert ‘merch’ comes of age. Retrieved from https://www.businessoffashion.com/articles/intelligence/concert-tour-merchandise-justin-bieber-rihanna-kanye-west

Colletti, J. (2013, August 5). Merch table: Supplementing music income through T-Shirt sales. Retrieved from http://www.trustmeimascientist.com/2013/08/05/merch-table-the-math-behind-supplementing-creative-income-through-t-shirt-sales/

Ferrari, S. D., Ferrari, D. D., Simantel, B., & Osazuwa, C. (2014, August). Spotify and streaming music industry analysis. Retrieved from http://christineosazuwa.com/portfolio/spotify-and-streaming-music-industry-analysis/

Ho, V. (2016, July 29). Why QQ Music, China’s Spotify, is profitable while other streaming music providers aren’t. Retrieved from

IFPI. (2016, April). Global Music Report: State of the Industry. Retrieved fromhttp://www.ifpi.org/recording-industry-in-numbers.php

IFPI. Recorded music industry revenue in the United States from 2009 to 2014 (in billion