Spotify´s contribution to the sharing economy

Theunstoppable emergence of digital platforms gives evidence of the increasingweight that the sharing economy has in our current society. In fact, thedelicate position in which traditional businesses find themselves proves that ourglobal economy is making its way towards a brand new technological era, inwhich decentralized sharing of assets is the key (Marshall, Van Alstyne,Parker & Choudary, 2016). Spotify, one of the most used music streamers, givesevidence of the advantage that digital sharing has over the conventional musicmarket (Swanson,2013).

But, to what extent does its music-sharingapproach contribute to the global sharing economy?Drawingfrom the idea that the sharing economy of music represents the futurefunctioning of this industry (Kusek & Leonhard, 2005), the aim of this paper isto deeply analyze whether Spotify´s digital platform contributes to the spreadof such way of transacting. The incentive to focus on this concrete firm relieson the fact that it has been named after the ²largest and fastestgrowing 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) hasshown that Spotify´s enterprise had been able to spread among millions ofindividuals from multiple countries in Europe, only two years after it waslaunched.

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However,far from evidencing such success that the company has achieved, the followingsections are meant to analyze the relation between Spotify´s activity and theconcept of sharing economy, since this link has been the responsible for thefirm´s expansion. Hence, not only will it be necessary to dig into thecompany´s sharing strategy, but also to point out the limitations that it facesand the effects these limitations have on its sharing approach. In particular, regardingsuch section, the study will focus on how Spotify´s largest restriction – the denialof some celebrities to upload their tracks to the platform (Marshall,2015)– narrows its users´ network. All of theaforementioned content will be developed following a concrete structure thatwill lead to an answer to the main research question: to what extent does Spotify´s music-sharing approach contribute to theexpansion of the global sharing economy? Firstly, the theoretical frameworkwill focus on descriptions and definitions of the basic concepts that need tobe understood:what the sharing economy is defined as, what a digital platform is and the waySpotify works. Then, the discussion part will relate all the previous conceptsto one another, in order to get an understanding of how Spotify´s activityrelates to the standards of the sharing economy. Finally, by gathering all theinformation from previous sections, hypotheses on the different issues will beformulated, and propositions for further research will be made. 1.    Theoretical framework2.

1. Theoretical backgroundBefore tryingto find an answer to the given research question, it is necessary to achieve a deepunderstanding of the main concept on which the paper is based:sharing economy. Although this definition is not part of the content that willlead to an answer to the research question, knowing the way in which thesharing 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 ofsharing economy is applied to, and the way that the businesses involved in itwork. According to them, the sharing economy is strictly related to the idea of²two-sidedmarkets²,that is, a concrete type of market in which two different sets of users in anetwork, which require reciprocal cooperation, get connected. For instance, thenetworked market of online recruitment associates job seekers and employees,who can clearly satisfy each other´s necessities. This means that the essenceof the sharing economy – and therefore the essence of two-sided markets – isthat it automatically connects individuals who need each other´s services.

As itis to be imagined, a third party that connects both ends of the network must beinvolved:digital platforms – the businesses that take part in two-sided markets. Eisenmannet al. (2006)define such platforms as the essential intermediaries, which make it possiblefor the system to work. More specifically, digital platforms are the onlinespaces through which the different transactions – mainly the exchange of goodsand services – take place, and in which ²the network of producersand consumers is the chief asset² (Marshall et al., 2016). This means that,although goods and services flow from owner to consumer, the principal assetthat the platform provides is the actual connection between both parts.Therefore, the same way that ²asset-creating² businesses create valueby transforming raw materials, such digital platforms create value by makingthe communication between supply and demand easier.

They do not own the assetsthat are exchanged. Nowthat the main basic concepts have been thoroughly described, a third conceptualizationneeds to be looked at: the way in which Spotify works. This digital platformwas started in 2008 by Daniel Ek as an alternative to the increasing amount ofillegally downloaded tracks. It is based on an online space to which all usershave access and where musical tracks can be uploaded, being such tracks theasset that individuals trade. The supply side is made up by the owners of theuploaded 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 thepossibility to have unlimited access to free music, without the necessity toundergo any illegal process. In addition, it supposes a great advantage forartists who want to share their music, since this way of displaying it isfaster and less costly (Hamari, Sjöklint & Ukkonen, 2015) thantraditional ways (namelythe sale of physical CDs) .Spotify´scommunity has raised up to more than 24 million users, being this the evidenceof the ingenuity of Ek´s idea. But the most surprising part about the way thecompany works is that it becomes wealthier without owning any of the displayedcontent, by applying two different systems.

On one side, users can choose tocreate a free account that is economically supported by advertisements, whichrequires advertising companies to finance Spotify´s activity. Therefore, withthis option, users´ playlists get interrupted by streamed commercials. On theother side, individuals can choose to pay an amount of 9.99 each month, in order to obtain a premium account with several advantages inrelation to the free option (i.

e. the absence of commercials) (Swanson, 2013).Out ofthe money that the service earns in these two different ways, a seventy percentis 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´sowner, and they are measured in reproductions per track. Therefore, the morepopular the song, the more royalties that its owner will receive, so the higherthe profit. Moreover, the corresponding royalty quantities for each track need tobe established in a contract between the owner of the track and Spotify.Meanwhile, the remaining thirty percent of the overall income belongs toSpotify (Swanson,2013).In short words, the company gets wealthier and creates value by increasing thenumber of reproductions per track, or what is the same, by expanding the widenessof its network. All in all,the chosen platform could be briefly described as an online space in whichmusical tracks are traded. However, although the asset that users exchange ismerely the streamed music, the chief asset for the company is the network ofmembers, because the bigger this network grows, the wealthier the companybecomes. 2.

2. Discussion2.2.1. Spotify and thesharing economyThenext step is to find the relation between the three concepts that have beenanalyzed, that is, to prove that Spotify´s enterprise can be applied to theidea of digital platform, and therefore contributes to the sharing economy. Ashas been described in the last part of the previous section, Spotify makes itpossible for music producers to indirectly come in touch with music listeners.

Thismeans that it clearly has the power to connect individuals who need from eachother´s services, so it acts as the coordinator of musical supply and demand. Morespecifically, the company makes use of one of the strategies applicable totwo-sided networks described by Eisenmann et al. (2006).According to their research, a common procedure among the most successfulplatforms is to subsidize one of the two sides of the network, which impliesthat the ²subsidyside²pays a lower price than the opposite group in order to take part in suchtwo-sided market. This strategy is specially used when the subsidy side ishighly valued by the users at the other end of the network, because the latterwill still pay an even higher price in order to obtain the highly-valuedservices.

In the case of Spotify, the music providers would be considered asthe subsidy side, since they even receive part of the gains, while thelisteners would be named after the ²money side², for they have to pay a higher price in order to enjoythe service.As canbe seen, Spotify´s enterprise can be related to the applications described byresearchers Eisenmann et al. (2006) and, therefore, to the concept of sharing economy.

Butanother important reason why the company is considered as a shared digitalplatform is that it does not own the asset that is exchanged, but rather owesits wealth to the network it creates among individuals. This idea is covered byMarshall et al. (2016) andmentioned in the previous section, which again proves that there is a relationbetween the basic concepts and the chosen platform. 2.2.

2. Extent of the company´s networkOncehaving clear that Spotify definitely contributes to the expansion of thesharing economy, the following step is to focus on the research question, whichalludes to the extent to which this happens. Thus, it is important to analyze theplatform´s power to connect the users in the market (that is, its network´sextent),in order to determine whether its contributions to the sharing society arelarge or small.First,it should be clear that, from an economic point of view, the expansion of anydigital platform´s network relies on what is known as network effects. Theseare the result of the power that the amount of users from one side of themarket 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-sidenetwork effects. The former occur when more users at one end of the networkencourage more users to join that same side. When the latter is applied, thebigger the amount of users at one side (i.e. music supply), themore 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 researchcarried out by Goldmann and Kreitz (2011), Spotify´s community is largely based on a peer-to-peeroverlay, which means that its network is automatically built up by its users. Thesecan enjoy interactive services – such as the ability to create shareableplaylists or link their corresponding Facebook accounts – that get themconnected to one another. Thus, the more users using Spotify, the moreindividuals will want to become members, because a bigger amount of peer-to-peeropportunities will be available.

This means that Spotify grows partiallybecause of a same-side network effect.Thesecond 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 theirtracks to the platform (being this the supply side of the network) willresult in more available content, which increases the music demanders´willingness to join the network. Thus, the larger the supply is, the morepotential demanders too, that is, Spotify also owes its expansion to across-side network effect.

Withall of this, as Kreitz and Niemela (2010) have agreed, Spotify´s network expansion is larger thatmost other streaming services (i.e. Napster or Rhapsody), because it is boosted byboth network effects. So much so that it has been considered as the ²biggeststreaming platform in the world² since 2016, being such growth an ²indicatorof its economic and cultural relevance² (Vonderau, 2017).

Itis therefore fair to conclude that Spotify has largely contributed to thesharing economy of digital music, by setting an example of how ingeniousnetwork-related strategies can lead to such a great success. 2.2.3. Spotify´s limitationsThe last question in this discussion is whether Spotify´slimitations – which are now to be mentioned – affect the platform´s success asa contributor to the sharing economy. This section arises as a result of the currentdebate about how the replacement of traditional album sales by digital musicstreaming could be declining musicians´ gains (Keller,2014). Even though Spotify has succeeded to establish and followa legal framework so far, artists such as Taylor Swift still believe that itsroyalty payback scheme is unfair. As Keller (2014) explains, the fact that musicians agree to upload theirmusic to Spotify´s service means that part of their revenues must be kept bythe company, which reduces the proportion destined to such artists.

Morespecifically, a 2010 study showed that the average distribution per song, outof one stream, was $0.0016 for the corresponding label, and only $0.00029 forthe artist – meaning that 4 million streams equaled the minimum U.S. monthlywage.Therefore, Spotify´s content has been limited to thecontributions from artists who believe that these numbers are just an implicitcost of their adaptation to the new technological era. The key for them is toanalyze whether their gains – in terms of a larger diffusion of their music andgreater adaptation to the current economy – are larger than the lossesresulting from lower album sales and higher digital streaming.

All of this could be affecting the server´s aforementionedrapid expansion, and therefore limiting its value as a sharing economy, sincethe absence of some artists implies their listeners´ absence as Spotify´s userstoo. In other words, the network created among demanders could be expanded asmore artists decided to join the supply side. Nevertheless, a point needs to bemade: this may reduce Spotify´svalue as a sharing economy by limiting its network, but still does not restrictthe company´s gains.

That is, the current dynamic might be beneficial for theplatform´s wealth, because it may result in higher gains than any otheralternative, but yet reduces its contributions to the sharing economy bylimiting its network´s expansion. 2.3.

HypothesesRegarding the main research question (to what extentdoes Spotify´s music-sharing approach contribute to the expansion of the globalsharing economy?), allthe previous sections have helped to construct a flexible but suitable answer,that could be built up by the three following hypotheses. Firstly, it can bestated that Spotify´s enterprise definitely applies to the idea of sharingeconomy, because it follows a two-sided-market´s dynamic, by being merely adigital platform that acts as an intermediary between musical demand andsupply. Secondly, the company can be considered a largecontributor to such idea of sharing economy, because, unlike most other digitalplatforms, it has developed a strategy through which it grows thanks to bothcross-side and same-side network effects. Therefore, it is an example of howbusinesses can achieve a large and well-established network of users, reachinga broad portion of the music market.

Lastly, Spotify´s low-royalty conditions are limiting itsvalue as a sharing economy, because they are depriving its network of becomingeven larger. However, although it is reducing its contributions to the sharingof musical assets, the company might still be logic in terms of businessstrategy to earn higher profits.In the face of these assumptions, it is necessary to urgethat further research needs to be made in order to achieve a more completeanswer, 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 notmentioned at all. Remarking this is important because such connection alsotakes part in the company´s sharing-economy approach, by establishing aparallel two-sided market between advertisers and music listeners. On the other side, regarding the limitations´ section, itis still unclear if the company´s gains thanks to its revenue distributionscompensate for the implicit costs that the absence of some artists generates.

Thatis, it has been assumed that, although it limits the network´s expansion, the company´sdistribution methods are the most suitable for its economic growth, but noresearch or analysis has been made over such assumption.  2.     ConclusionAll the used information, as well as the self-madeopinions, lead this study to a clear conclusion: Spotify´s digitalplatform plays an important role in the sharing economy of musical assets.

Through its two-sided-market architecture, the firm has been able to establisha system that allows its users´ network to expand rapidly, by using bothsame-side and cross-side network effects as boosters. Therefore, it breaks theground in terms of digital strategy and sets an example of how other businessescan achieve such a high growth rate, by complementing different ways offunctioning. However, this does not mean that no improvements can be made,since Spotify faces some limitations regarding its supply side. That is, someartists refuse to provide their music through the platform because they believethat its payment method is not fair.