Network Economy

Normally, given the amount of free communication and transmission of information and electronic goods on the Internet, pirating music was a very simple thing to do. One is usually very easily able to download the music that they want. And with it being as easy as it is, plus DRM-free, and completely free, why not?

Spotify has clearly taken note of this. However, instead of trying to pre-emptively prevent the users doing anything illegal with provided music, by way of restricting what you can do with the files you downloaded and imposing DRM on it, they’ve had quite a different approach to tackling this problem.

Andres Sehr of Spotify has said:

“Spotify is a new way of enjoying music. We believe Spotify provides a viable alternative to music piracy. We think the way forward is to create a service better than piracy, thereby converting users into a legal, sustainable alternative which also enriches the total music experience.”

(Ernesto, 2009)

And Spotify definitely does show just how viable of an alternative they bring to the table. Instead of restrictions, there is freedom. Spotify offers users the ability to stream any piece of music they want from a massive database – all for free, at the simple click of a button!

Spotify’s Innovation

Spotify shows how innovation can take place within a network economy. In a network economy, the ability to access the latest goods and services in the short-term becomes more feasible; in fact, perhaps even more so than the alternative of purchasing and keeping ownership thereof in the long term. (Rifkin pp22-23)

Spotify’s basic function is a means by which many users can access and listen to the music that they want, for free if they so choose. However, this music has to be on Spotify’s servers, so no illegal music is available to listen to.

Although Spotify keeps all the available music on their servers, they also made use of the network of users who used their application, via a Peer-to-Peer network. Any music that a user listened to would be cached on their computer. Then, when others want to listen to that music, the first place they look is if it is cached on their computer. Then, the Peer network, fetching it from other users. If that is too slow or not found, they’d then resort to Spotify’s servers. (Afront, 2011)

Spotify Network

This allowed Spotify to push some of the burdens of the cost of communication onto the users, particularly because the more popular music would be cached on many users. Not only this, but it also allowed Spotify to more reliably supply music to those who are physically a larger distance away from Spotify’s servers. Otherwise, these users may have experienced latency which would cause stuttering in their music.

However, this is no longer done; as of April 2014, Spotify has shut down the Peer-to-Peer network, instead relying on their servers, because Spotify says they now have enough servers spread throughout the world. Plus, with all these servers, the Peer-to-Peer network becomes somewhat of a liability, another thing to keep updated. (Dillet, 2014)

At any rate, be it Spotify’s servers now or the earlier Peer network, this lent a very decentralized method of communication to Spotify, allowing it to provide music to millions of people all over the world. This could be delivered to users’ desktops, or their mobile device. (Rifkin pp17)

With this electronic medium, geography of the world itself doesn’t mean much anymore, for the purposes of streaming music. Spotify’s commerce takes place in the realm of cyberspace, wherein the exchange of information is much, much easier, and much cheaper than more traditional methods as well, making it feasible for Spotify to deliver music to as many consumers as it does. This can allow Spotify’s consumers to rely on Spotify as their main source of music, wherever they go.

Commerce and Spotify

Spotify makes a stellar example of how the network economy brings about a noticeable change in the way which we perceive or do business in the realm thereof. Even using e-commerce as it is, we were more used to buying pieces of music or albums, then downloading them, taking ownership of them, instead of being given access to this music by a supplier.

This changes drastically when you use Spotify; instead of becoming a buyer of music from Spotify, you become a user of Spotify, one who has the privilege to listen to all the music that they will. Of course, Spotify has to make money somehow; if you use a free account, you have to endure advertisements between songs. (pp5 Rifkin, age of access)

What is interesting to note is that the advertisements which Spotify uses are reportedly very cheap, and therefore do not earn the company much revenue. Instead, they are primarily there to try and coerce users into buying a subscription. Purchasing a subscription also affords to you many more ways access to Spotify’s music, plus more exclusive pieces of music, which in particular embraces the concept of marketing access to cultural experiences rather than selling music. (Gobry, 2011)

Even if you don’t buy a subscription, Spotify still earns a portion of their profits just from users streaming music; despite this though, they have to pay around 70% in royalties to artists, and each individual stream earns very little money. Reportedly, it’s between 0.006 and 0.0084 cents per stream, with streams made by paid users tending towards the higher end. (Youorski, 2014)

So, although Spotify does earn some money from advertisements and streaming music, the bulk of it comes from subscription fees. However, given the aforementioned high cost of sales in royalties, Spotify has been consistently losing money. Although their revenue is growing quickly – from approximately a mere $20 million in 2009, to $115 million in 2010. (Gobry, 2011)

spotify rev

Note that amounts are in GBP (Business Insider, 2014)

However, net losses for those years were about $24 million and $40 million, respectively. This trend has carried on into the years 2011 and 2012, both revenue and losses growing. (Reuters, 2013)

Although the profitability of Spotify’s business model as shown itself to be somewhat dubious in its viability, the manifestation of a new, instantaneous, and innovative method of providing access to music to people all across the globe has definitely proven itself otherwise.

 

References:

Afront. 2011. Spotify Technology: How Spotify Works, retreived 18th July, 2014, from http://pansentient.com/2011/04/spotify-technology-some-stats-and-how-spotify-works/

Business Insider, (2014). Spotify Statement. [image] Available at: http://www.businessinsider.com.au/how-spotifys-business-works-2011-10 [Accessed 31 Jul. 2014].

Dillet, R. April 2014. Spotify Removes Peer-To-Peer Technology From Its Desktop Client, retrieved 17th July 2014, from http://techcrunch.com/2014/04/17/spotify-removes-peer-to-peer-technology-from-its-desktop-client/

Ernesto. January 2009. Spotify, An Alternative to Music Piracy, retrieved 24th July 2014, from http://torrentfreak.com/spotify-an-alternative-to-music-piracy-090102/

Pascal-Emmanuel Gobry. October 2011. How Spotify’s Business Works, retrieved 23rd July 2014, from http://www.businessinsider.com.au/how-spotifys-business-works-2011-10

Reuters. July 2013. Music streamer Spotify doubles 2012 revenues after expansion, retrieved 24th July 2014, from http://www.reuters.com/article/2013/07/31/us-spotify-results-idUSBRE96U0QZ20130731

Rifkin, J. 2001. Age of access: new politics of hypercapitalism where all of life is a paid for experience. Retrieved from Curtin e-Reserve.

Youorski, J. June 2014. Six Things You Should Know About Spotify: The Good, The Bad and The Underpaid, retreived 18th July 2014, from http://www.pastemagazine.com/articles/2014/06/6-things-you-should-know-about-spotify-the-good-th.html

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