Spotify´s contribution to the sharing economy

The
unstoppable emergence of digital platforms gives evidence of the increasing
weight that the sharing economy has in our current society. In fact, the
delicate position in which traditional businesses find themselves proves that our
global economy is making its way towards a brand new technological era, in
which decentralized sharing of assets is the key (Marshall, Van Alstyne,
Parker & Choudary, 2016). Spotify, one of the most used music streamers, gives
evidence of the advantage that digital sharing has over the conventional music
market (Swanson,
2013).
But, to what extent does its music-sharing
approach contribute to the global sharing economy?

Drawing
from the idea that the sharing economy of music represents the future
functioning of this industry (Kusek & Leonhard, 2005), the aim of this paper is
to deeply analyze whether Spotify´s digital platform contributes to the spread
of such way of transacting. The incentive to focus on this concrete firm relies
on the fact that it has been named after the ²largest and fastest
growing streaming music service company² (Pietrobon & Dai,
2012), and therefore has a large influence over the digital sharing of music.
Indeed, research carried out by Kreitz and Niemela (2010) has
shown that Spotify´s enterprise had been able to spread among millions of
individuals from multiple countries in Europe, only two years after it was
launched.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

However,
far from evidencing such success that the company has achieved, the following
sections are meant to analyze the relation between Spotify´s activity and the
concept of sharing economy, since this link has been the responsible for the
firm´s expansion. Hence, not only will it be necessary to dig into the
company´s sharing strategy, but also to point out the limitations that it faces
and the effects these limitations have on its sharing approach. In particular, regarding
such section, the study will focus on how Spotify´s largest restriction – the denial
of some celebrities to upload their tracks to the platform (Marshall,
2015)
– narrows its users´ network.

All of the
aforementioned content will be developed following a concrete structure that
will lead to an answer to the main research question: to what extent does Spotify´s music-sharing approach contribute to the
expansion of the global sharing economy? Firstly, the theoretical framework
will focus on descriptions and definitions of the basic concepts that need to
be understood:
what the sharing economy is defined as, what a digital platform is and the way
Spotify works. Then, the discussion part will relate all the previous concepts
to one another, in order to get an understanding of how Spotify´s activity
relates to the standards of the sharing economy. Finally, by gathering all the
information from previous sections, hypotheses on the different issues will be
formulated, and propositions for further research will be made.

1.    
Theoretical framework

2.1. Theoretical background

Before trying
to find an answer to the given research question, it is necessary to achieve a deep
understanding of the main concept on which the paper is based:
sharing economy. Although this definition is not part of the content that will
lead to an answer to the research question, knowing the way in which the
sharing economy works is essential to understand further steps in this study.
Namely, it is important to make sure that the chosen digital platform – Spotify
– can be applied to the idea of sharing economy.

Firstly,
Eisenmann, Parker and Van Alstyne (2006) provide a useful explanation of what the concept of
sharing economy is applied to, and the way that the businesses involved in it
work. According to them, the sharing economy is strictly related to the idea of
²two-sided
markets²,
that is, a concrete type of market in which two different sets of users in a
network, which require reciprocal cooperation, get connected. For instance, the
networked market of online recruitment associates job seekers and employees,
who can clearly satisfy each other´s necessities. This means that the essence
of the sharing economy – and therefore the essence of two-sided markets – is
that it automatically connects individuals who need each other´s services.

As it
is to be imagined, a third party that connects both ends of the network must be
involved:
digital platforms – the businesses that take part in two-sided markets. Eisenmann
et al. (2006)
define such platforms as the essential intermediaries, which make it possible
for the system to work. More specifically, digital platforms are the online
spaces through which the different transactions – mainly the exchange of goods
and services – take place, and in which ²the network of producers
and consumers is the chief asset² (Marshall et al., 2016). This means that,
although goods and services flow from owner to consumer, the principal asset
that the platform provides is the actual connection between both parts.
Therefore, the same way that ²asset-creating² businesses create value
by transforming raw materials, such digital platforms create value by making
the communication between supply and demand easier. They do not own the assets
that are exchanged.

Now
that the main basic concepts have been thoroughly described, a third conceptualization
needs to be looked at: the way in which Spotify works. This digital platform
was started in 2008 by Daniel Ek as an alternative to the increasing amount of
illegally downloaded tracks. It is based on an online space to which all users
have access and where musical tracks can be uploaded, being such tracks the
asset that individuals trade. The supply side is made up by the owners of the
uploaded music, and the demand side by the users who listen to such music (Swanson,
2013).
This way, the firm´s success is owned to the fact that it gives individuals the
possibility to have unlimited access to free music, without the necessity to
undergo any illegal process. In addition, it supposes a great advantage for
artists who want to share their music, since this way of displaying it is
faster and less costly (Hamari, Sjöklint & Ukkonen, 2015) than
traditional ways (namely
the sale of physical CDs) .

Spotify´s
community has raised up to more than 24 million users, being this the evidence
of the ingenuity of Ek´s idea. But the most surprising part about the way the
company works is that it becomes wealthier without owning any of the displayed
content, by applying two different systems. On one side, users can choose to
create a free account that is economically supported by advertisements, which
requires advertising companies to finance Spotify´s activity. Therefore, with
this option, users´ playlists get interrupted by streamed commercials. On the
other side, individuals can choose to pay an amount of 9.99 
each month, in order to obtain a premium account with several advantages in
relation to the free option (i.e. the absence of commercials) (Swanson, 2013).

Out of
the money that the service earns in these two different ways, a seventy percent
is handed out to the owners of the streamed music in terms of royalties.
Royalties refer to the concrete portion of the gains that belongs to a song´s
owner, and they are measured in reproductions per track. Therefore, the more
popular the song, the more royalties that its owner will receive, so the higher
the profit. Moreover, the corresponding royalty quantities for each track need to
be established in a contract between the owner of the track and Spotify.
Meanwhile, the remaining thirty percent of the overall income belongs to
Spotify (Swanson,
2013).
In short words, the company gets wealthier and creates value by increasing the
number of reproductions per track, or what is the same, by expanding the wideness
of its network.

All in all,
the chosen platform could be briefly described as an online space in which
musical tracks are traded. However, although the asset that users exchange is
merely the streamed music, the chief asset for the company is the network of
members, because the bigger this network grows, the wealthier the company
becomes.

2.2. Discussion

2.2.1. Spotify and the
sharing economy

The
next step is to find the relation between the three concepts that have been
analyzed, that is, to prove that Spotify´s enterprise can be applied to the
idea of digital platform, and therefore contributes to the sharing economy. As
has been described in the last part of the previous section, Spotify makes it
possible for music producers to indirectly come in touch with music listeners. This
means that it clearly has the power to connect individuals who need from each
other´s services, so it acts as the coordinator of musical supply and demand.

More
specifically, the company makes use of one of the strategies applicable to
two-sided networks described by Eisenmann et al. (2006).
According to their research, a common procedure among the most successful
platforms is to subsidize one of the two sides of the network, which implies
that the ²subsidy
side²
pays a lower price than the opposite group in order to take part in such
two-sided market. This strategy is specially used when the subsidy side is
highly valued by the users at the other end of the network, because the latter
will still pay an even higher price in order to obtain the highly-valued
services. In the case of Spotify, the music providers would be considered as
the subsidy side, since they even receive part of the gains, while the
listeners would be named after the ²money side², for they have to pay a higher price in order to enjoy
the service.

As can
be seen, Spotify´s enterprise can be related to the applications described by
researchers Eisenmann et al. (2006) and, therefore, to the concept of sharing economy. But
another important reason why the company is considered as a shared digital
platform is that it does not own the asset that is exchanged, but rather owes
its wealth to the network it creates among individuals. This idea is covered by
Marshall et al. (2016) and
mentioned in the previous section, which again proves that there is a relation
between the basic concepts and the chosen platform.

2.2.2. Extent of the company´s network

Once
having clear that Spotify definitely contributes to the expansion of the
sharing economy, the following step is to focus on the research question, which
alludes to the extent to which this happens. Thus, it is important to analyze the
platform´s power to connect the users in the market (that is, its network´s
extent),
in order to determine whether its contributions to the sharing society are
large or small.

First,
it should be clear that, from an economic point of view, the expansion of any
digital platform´s network relies on what is known as network effects. These
are the result of the power that the amount of users from one side of the
market exerts on potential users, either from the same side, or the opposite one.
The effects are commonly divided into two types: same-side and cross-side
network effects. The former occur when more users at one end of the network
encourage more users to join that same side. When the latter is applied, the
bigger the amount of users at one side (i.e. music supply), the
more users will be willing to join the other side (i.e. music demand) (Gawer,
2014).

Surprisingly,
Spotify´s network can be related to both of these. First, according to research
carried out by Goldmann and Kreitz (2011), Spotify´s community is largely based on a peer-to-peer
overlay, which means that its network is automatically built up by its users. These
can enjoy interactive services – such as the ability to create shareable
playlists or link their corresponding Facebook accounts – that get them
connected to one another. Thus, the more users using Spotify, the more
individuals will want to become members, because a bigger amount of peer-to-peer
opportunities will be available. This means that Spotify grows partially
because of a same-side network effect.

The
second type – cross-side network effect – is easier to observe in this case,
since it is to be expected that a larger amount of artists uploading their
tracks to the platform (being this the supply side of the network) will
result in more available content, which increases the music demanders´
willingness to join the network. Thus, the larger the supply is, the more
potential demanders too, that is, Spotify also owes its expansion to a
cross-side network effect.

With
all of this, as Kreitz and Niemela (2010) have agreed, Spotify´s network expansion is larger that
most other streaming services (i.e. Napster or Rhapsody), because it is boosted by
both network effects. So much so that it has been considered as the ²biggest
streaming platform in the world² since 2016, being such growth an ²indicator
of its economic and cultural relevance² (Vonderau, 2017). It
is therefore fair to conclude that Spotify has largely contributed to the
sharing economy of digital music, by setting an example of how ingenious
network-related strategies can lead to such a great success.

2.2.3. Spotify´s limitations

The last question in this discussion is whether Spotify´s
limitations – which are now to be mentioned – affect the platform´s success as
a contributor to the sharing economy. This section arises as a result of the current
debate about how the replacement of traditional album sales by digital music
streaming could be declining musicians´ gains (Keller,
2014).

Even though Spotify has succeeded to establish and follow
a legal framework so far, artists such as Taylor Swift still believe that its
royalty payback scheme is unfair. As Keller (2014) explains, the fact that musicians agree to upload their
music to Spotify´s service means that part of their revenues must be kept by
the company, which reduces the proportion destined to such artists. More
specifically, a 2010 study showed that the average distribution per song, out
of one stream, was $0.0016 for the corresponding label, and only $0.00029 for
the artist – meaning that 4 million streams equaled the minimum U.S. monthly
wage.

Therefore, Spotify´s content has been limited to the
contributions from artists who believe that these numbers are just an implicit
cost of their adaptation to the new technological era. The key for them is to
analyze whether their gains – in terms of a larger diffusion of their music and
greater adaptation to the current economy – are larger than the losses
resulting from lower album sales and higher digital streaming.

All of this could be affecting the server´s aforementioned
rapid expansion, and therefore limiting its value as a sharing economy, since
the absence of some artists implies their listeners´ absence as Spotify´s users
too. In other words, the network created among demanders could be expanded as
more artists decided to join the supply side. Nevertheless, a point needs to be
made: this may reduce Spotify´s
value as a sharing economy by limiting its network, but still does not restrict
the company´s gains. That is, the current dynamic might be beneficial for the
platform´s wealth, because it may result in higher gains than any other
alternative, but yet reduces its contributions to the sharing economy by
limiting its network´s expansion.

 

2.3. Hypotheses

Regarding the main research question (to what extent
does Spotify´s music-sharing approach contribute to the expansion of the global
sharing economy?), all
the previous sections have helped to construct a flexible but suitable answer,
that could be built up by the three following hypotheses. Firstly, it can be
stated that Spotify´s enterprise definitely applies to the idea of sharing
economy, because it follows a two-sided-market´s dynamic, by being merely a
digital platform that acts as an intermediary between musical demand and
supply.

Secondly, the company can be considered a large
contributor to such idea of sharing economy, because, unlike most other digital
platforms, it has developed a strategy through which it grows thanks to both
cross-side and same-side network effects. Therefore, it is an example of how
businesses can achieve a large and well-established network of users, reaching
a broad portion of the music market.

Lastly, Spotify´s low-royalty conditions are limiting its
value as a sharing economy, because they are depriving its network of becoming
even larger. However, although it is reducing its contributions to the sharing
of musical assets, the company might still be logic in terms of business
strategy to earn higher profits.

In the face of these assumptions, it is necessary to urge
that further research needs to be made in order to achieve a more complete
answer, but limitations in time and scope have made it hard to do. On one side,
the relation that Spotify establishes between users and supporting advertisers
– those that provide economic support for Spotify´s free version – is not
mentioned at all. Remarking this is important because such connection also
takes part in the company´s sharing-economy approach, by establishing a
parallel two-sided market between advertisers and music listeners.

On the other side, regarding the limitations´ section, it
is still unclear if the company´s gains thanks to its revenue distributions
compensate for the implicit costs that the absence of some artists generates. That
is, it has been assumed that, although it limits the network´s expansion, the company´s
distribution methods are the most suitable for its economic growth, but no
research or analysis has been made over such assumption.

 

 

2.     Conclusion

All the used information, as well as the self-made
opinions, lead this study to a clear conclusion: Spotify´s digital
platform plays an important role in the sharing economy of musical assets.
Through its two-sided-market architecture, the firm has been able to establish
a system that allows its users´ network to expand rapidly, by using both
same-side and cross-side network effects as boosters. Therefore, it breaks the
ground in terms of digital strategy and sets an example of how other businesses
can achieve such a high growth rate, by complementing different ways of
functioning. However, this does not mean that no improvements can be made,
since Spotify faces some limitations regarding its supply side. That is, some
artists refuse to provide their music through the platform because they believe
that its payment method is not fair.