Platforms are becoming more popular and widely used in our society. We specifically focus on platforms in the music industry as this is very familiar to us and we use them on a daily basis.
In this blog, we would like to elaborate on the business model of Spotify and SoundCloud. You might not see them as direct competitors as we all know Spotify has a mono-homing structure, which is true as both platforms address different customer segments and attract different suppliers. Nevertheless, a change has occurred as of March this year, namely SoundCloud has introduced a similar revenue model as Spotify; a subscription model. If we would place the two models on the long tail graph, Spotify would be placed on the upper right corner and SoundCloud can be placed towards the end of the tail, however, moving towards the right side of the tail due to the implemented revenue model. This positioning can be explained, as Spotify has 75 million users and SoundCloud 175 million users on a monthly basis. Moreover, the difference in type of music offered is significantly diverse among the two. This is partly caused by the content based license model of Spotify in comparison to the ‘more open’ content generation of SoundCloud.
Interesting for Spotify and SoundCloud is that, aside from the suppliers of music and the users of the platform, a third party is involved. These so-called three-sided networks provide a three dimensional network in which all parties benefit from each other’s existence. The third party in this case consists of the advertisers. Three-sided networks have different effects on its parties, positive as well as negative. These are known as same-side network effects and cross-side network effects. Below we will elaborate on two examples of these effects.
Most of you know the advertisements on Spotify. Although advertisers on Spotify reach an enormous number of users, they also face negative same-side network effects. When the number of users grows, more advertisers are willing to pay for an advertisement on Spotify, resulting in a raise of advertisement prices. Moreover, a cross-side network will arise now that advertisers have joined the platform. A positive cross-side effect is that the supply of songs increases, when the number of users increases. However, when the number of listeners grows, the number of advertisements will also grow, as this is more interesting for advertisers. This is annoying for the listeners, thus forming a negative cross-side effect.
To conclude, the current business models in the music industry are experimenting a lot, but none of them are profitable. Therefore, a strong profit driven focus is expected in the future. Moreover, the topic of intellectual property will be interesting, as the trade-off between network value and privacy information is an continuous occurring dilemma, which will be important in future decision-making for the platforms.
This blog is written by team 63; Annemiek van der Sluijs (369253), Bernice Hiltrop (354824), Eda Yurdakul (348993) and Sanne Wijnands (371387).
Check out our video: https://www.youtube.com/watch?v=FmMt03ZjRb0
References:
http://www.sciencedirect.com/science/article/pii/S0024630109000569
http://www.thesearchparty.com/blog/three-sided-network/
http://www.businessmodelsinc.com/free-drives-paid-the-business-model-of-spotify/
