This partnership also benefits Facebook, because exchanges increase when music is shared, as Daniel Ek points out: Facebook is the largest distribution platform in the world today. What Facebook enables is content sharing. Mark Zuckerberg realized that Facebooks value lies in interactions between people. And music is one of the most social things there is (Beuth, 2011). Music is also closely tied to identity. People can express who they are by letting others know what they are listening to, whether by wearing a T-shirt or a hat with the name of a band or artist or by sharing music on Facebook. To get the greatest benefit from integrating music to its site, Facebook did not offer Spotify exclusive access to the some 900 million users it had at the time; the popular social network has many other music partners that are Spotifys competitors. But Spotify seems to have made its presence felt. According to Facebook vice-president Dan Rose, it has two advantages over other services. The first is that the platform has taken the social network aspect the furthest, starting from its initial design. Sharing music between users is encouraged in any form. The second is that the company has a business model that fits perfectly with the sort of discovery that Facebook was designed to enable. If Facebook users see through their news feed that a friend is listening to a song, an album or an artist and they want to listen, they can easily do so by going straight to Spotify. The site, with its free access to a catalogue of over 30 million titles, is designed to enable exploration, showcasing the repertoire and the discoveries users can make. At the same time, its free offer is a catalyst for these discoveries, because unlike platforms such as iTunes, where you have to pay to listen to a whole song, there are no barriers of cost or access to the music experience of Spotifys free offer. In November 2011, two months into the partnership between the two companies, some sources suggested that Spotify had gained some four million users in countries where both services are available. In 2012, Spotify announced that users who link their Spotify account to their Facebook account are three times more likely to become paying subscribers. 4.3 Creating value jointly with consumers The social networks of Spotify, Facebook and Twitter are places for sharing many playlists created by the companys employees or users, based on a theme, genre or emotion. For example, when spring arrived in 2014, Spotify asked its some 829,000 subscribers via Twitter what they were listening to and encouraged them to share their current playlist, offering the incentive that this list could then be promoted by the company. Spotify does the same thing on Mothers Day, Valentines Day, Halloween, on a sunny or rainy day any occasion that presents itself. Spotify users share playlists every day on Twitter. The company even opened a Twitter account with the name @SpotifyPlaylists, where it shares its playlists and where users can share theirs. A group of those users, which adopted this company-initiated practice, even created the hashtag #thursplay to encourage other users to publish playlists every Thursday. These compilations give users the chance to discover new songs and share their tastes. They also ensure that less explored parts of the repertoire are promoted, because with a repertoire of over 30 million songs to choose from, users can have a hard time figuring out what to listen to. It lets them discover other peoples recommendations, based on criteria that appeal to the user, and to make their own recommendations, making them feel as though they are playing a role with other Spotify users, while asserting their tastes, and, in turn, their identity. For Spotify, this has reduced some of its operating costs, because the company does not have to promote its repertoire on its own, and it also builds customer loyalty and commitment. Spotify goes even farther in getting customers involved. In 2011, the company launched a development platform that allows professional and amateur developers to create applications for Spotify. Spotify already has a team of developers for such applications, but they thought it was a good idea to get outside developers involved to generate new ideas and respond to needs that users have identified, which the company never could have. Developers have access to a platform for designing applications without worrying about getting the licences to access music repertoires. With this obstacle out of the way, they can let their imagination run wild, to everyones benefit. TuneWiki and MusixMatch, for example, provide users with lyrics to the songs available on Spotify. Songkick creates a calendar of concerts likely to be of interest to users based on the music they listen to on Spotify. MoodAgent offers instant access to playlists that match the users mood. The Complete Collection displays album covers for music played on Spotify. Classify allows users to explore classical music. These applications add to the value the company creates, because they are made available to other users, once the company has approved them. They promote even more widespread use of the music available on Spotify and a more thorough exploration of repertoires. A sure sign that they add to the value created by Spotify, in their first four months of existence, Spotify applications were used for 13 million hours. For example, the playlist generator MoodAgent generated on average some 3.5 million playlists per week. On social networks, specifically Facebook and Twitter, users share opinions about these applications. Spotify encourages these discussions about applications, occasionally asking users for their favourite application. In being asked to share their opinion, users help build the popularity of applications and even create value for the company. Spotify therefore plays the role of facilitator for these activities and instigator for its customers, who are immediately inclined to help create value for the company. It creates the mechanism, such as the platform for developers or the use of social media, harnessing customer willingness to get involved in activities that create value. These activities help Spotify improve, extend its reach, increase its popularity and promote its music repertoire. 4.4 Brand partnerships To increase revenue, Spotify also partners with companies that will pay for access to its consumers and their attention. First, advertisers can disseminate messages via the service, in a number of audio and visual formats.1 In addition to offering an environment that is advertising friendly, Spotify offers advertisers the ability to target their potential consumers from data the company has collected (demographic and geographical data, and data on their musical tastes). The company also provides advertisers tracking functionality and detailed reports on how their ad was used. Second, sometimes Spotify has closer and more intimate relationships with brands, as is the case with Lucozade, CocaCola, Reebok, Volvo and Ford (see exhibit 2: Spotifys Commercial Partnerships). In such cases, both the partner brand and Spotify benefit from the others audience. Spotify has gained many customers through these partnerships that it wouldnt have reached otherwise. 5. A Meteoric Rise Spotify has had a meteoric rise since it was founded thanks to its functionality and partnerships. From the end of 2012 to the middle of 2015, the company expanded its network from 13 to 58 markets, including Germany, France, the U.K. and the U.S. four of the largest music markets along with the Scandinavian countries, Turkey, Taiwan and Australia. In 2015, it had 75 million active users, including 20 million paying subscribers. The company, with headquarters in the U.K. and Sweden, and offices in 18 countries, had 300 employees in 2012 and now has over 1200. 5.1 A strong influence: from ownership to access This meteoric rise is proof that the company has effectively responded to the needs of online music consumers. Spotifys rapid adoption by millions of Internet users has had an impact on the entire music industry. In fact, Spotify offers a different approach to consuming music that is gradually taking over. With services like iTunes, people acquire ownership of a piece of music, while with Spotify, people acquire access to a song, a bit like renting it. In the U.S., in 2010, before Spotify came on the scene, almost 80% of music industry revenue from the digital market came from the sale of songs and albums, mainly from iTunes. In comparison, in Sweden, two years after Spotify was launched, the sale of songs and albums represented only 20% of digital music revenues, while 60% came from on-demand music streaming, mainly from Spotify. In 2013, 94% of digital music revenue came from music streaming services in Sweden. With the popularity of this approach to consumption, digital music now accounts for 70% of music industry revenue, and Spotify has become the leading source of music revenue in this country (physical and digital media combined). Clearly this approach to consuming music is a better fit for the expectations and needs of online music consumers. In Sweden, apparently no one brings a computer or hard drive to a party anymore. They just connect to Spotify from any terminal with Internet access. The Scandinavian countries (Denmark, Norway and Sweden) have demonstrated the streaming models potential to revitalize the music industry. In 2013, the Swedish music market saw growth of 5.7% attributable to streaming revenue, Denmarks grew 4.7% and Norways grew 2.4% (IFPI, 2014). 6. The Problem of Monetizing Music While Spotify has grown since it was founded, particularly since entering the U.S. and striking up its partnership with Facebook, and while it plays a decisive role in the entire music industry, the company is not yet profitable. It does create value for over 75 million online music consumers in 58 countries, but its costs still exceed revenues. 6.1 Spotifys net revenue Spotify reported earnings of 747 million euros in 2013, an increase of 73.6% compared with the 430 million euros earned in 2012. However, its losses also increased by 16.4%, rising from 80 million euros in 2012 to 93 million euros in 2013, according to Spotifys most recent consolidated financial statements. Its net losses can be represented in the following graph (figure 4) as declining from 87 million euros in 2012 to 58 million euros in 2013, but this is largely attributable to its 39 million euros in stock options. According to experts, operating losses, which were 93 million euros in 2013, are a better indicator of Spotifys performance (Dredge, 2014). In other words, Spotify had a deficit of 93 million euros in 2013. 6.2 Capital investments and cumulative losses Since its beginnings, Spotify has accepted close to $300 million in outside capital from investors such as Horizon Ventures, Li Ka-Shing, Northzone, Creandum, Wellington Partners, Sean Parker, Founders Fund, Goldman Sachs and Coca-Cola. However, it has accumulated losses of over $200 million, according to the firm PrivCo, which studies the performance of private companies. Its losses are indeed growing and accumulating, but there is also growth in revenue, and investors continue to believe and invest in the project. In an industry as early in its development as music streaming, some experts are even talking about progress (Brustein, 2014). 6.3 Spotifys revenue and cost structure To understand Spotifys inability to reach profitability and the losses that are piling up year after year, one needs to understand its revenue and cost structure. Of the 747 million euros in revenue in 2013, 91%, or 679 million euros, came from subscriptions to the Premium service. The remaining 68 million euros are from advertising revenue attributable to users of Spotifys free service. Given that the company ended 2013 with 36 million active users, 8 million of whom subscribed to the Premium service and 28 million of whom subscribed to the free offer, 91% of the companys revenue comes from 22% of users who pay for the service. On the cost side, to legally offer such a vast repertoire of music to Internet users, Spotify must pay rights holders of this music: lyricists, composers and other intermediaries involved in creating, producing and promoting musical works. According to Spotify, 70% of its gross revenue goes directly to rights holders. This has amounted to $3 billion since the service was launched (including $500 million in 2013 alone). Spotifys other most significant costs are technology related, i.e., the cost of hosting and storing data and the cost of the bandwidth required to stream such a large volume of music on demand. These costs vary depending on the number of users, and fortunately they increase in line with revenue growth. This is in addition to the fixed costs of developing the on-demand music streaming service and the underlying infrastructure. These are expenses related to programming and maintaining the streaming platform, the database of over 30 million songs and the companys websites, as well as costs related to its offices in 18 countries and salaries for 1200 employees. 6.4 Streaming versus downloading: the rights holders cut Despite the fact that Spotify hands over a seemingly generous 70% of gross income to music rights holders, what ends up in their pockets each time a song is heard is a micro payment. It is hard to accurately establish the amount distributed to rights holders when their songs are used by Spotify. In December 2013, the company announced that it had paid music rights holders between $0.006 and $0.0084 every time a song was heard, or between $6 and $8 when a title was heard 1000 times, depending on the country where the Internet user listened to the music, the type of subscription (free or paying) as well as Spotifys sales figures. How this amount is distributed among the rights holders of the title in question (the producer, lyricist, composer and performer) and other intermediaries varies according to commercial practices in each country and the contracts signed between the lyricist, composer, producer and/or record company. The amounts paid by Spotify are similar to, and even higher than, the royalties paid by comparable music streaming services, such as Rdio, Pandora and Deezer (see exhibit 1: Comparison Table of the Main Music Streaming Services). In 2013, Pandora paid 48% of its $600 million in net income to rights holders, with an estimated rate of $0.0011 each time a song was streamed. Like Spotify, Pandora is not profitable. While competitive, the royalties paid by Spotify are very low compared with those paid by certain local services, as shown in figure 5, which was prepared by an independent record company to show what it earns from music streaming.

What is your assessment of Spotifys chances of success?