The Benefits Of Being Agile

There are five items in the top menu of Starbucks mobile app. Four of those allow you to place the order, reload your Starbucks card and find nearby shops. The last and the most noticeable one, however, has nothing to do with coffee. Instead, it allows Starbucks customers to connect their Spotify accounts into Starbucks app in order to be able to track music played at local Starbucks stores, listen to it from their smartphones and organize their favorite songs into playlists. The integration is done in both directions, which means that the users can not only enjoy the music through their Starbucks app, but also access Starbucks playlists from Spotify application.

Spotify struck a deal with Starbucks in 2015, making it public just a month before the launch of Apple Music. The timing was rather peculiar considering that Starbucks has already had an exclusive partnership with iTunes for almost 8 years by then. Still, Starbucks chose to go with an independent player rather than expand further expand its long-existing partnership with arguably the most influential company in the music industry in the U.S. Starbucks and Spotify announced that the roll-out of the service was to start in the U.S. in the fall of 2015, followed by Canada and the United Kingdom.

Spotify Rise to Dominance

Today, Spotify is the largest music streaming service in the world, sporting over 100 million active users and 30 million users on its monthly subscription plans as of June 2016. This is a pretty impressive result for 10-year old company that was started in 2006 in Stockholm, and until 2011 wasn’t even present in the U.S. market.

Those numbers didn’t come easy, though. Over its history, Spotify has raised over $2.5 billion in funding, including $1 billion in convertible debt from TPG, Dragoneer, and clients of Goldman Sachs in a round closed in March this year. While Spotify sported a huge valuation of $8.5 billion in that round, the funding came with a number of quite strict terms allowing the investors to hedge their bet on the company in case it starts underperforming. This, coupled with the fact that Spotify net loss reached almost $200 million even though its revenues topped $2 billion in 2015, clearly demostrates that it’s not a easy business to run, especially under constant pressure to support existing growth rates from the investors (to be fair, in 2015 Spotify saw revenues growing by 80%, while losses rose only by 10%, which means the company is moving towards profitability, even though it would likely take quite some time to reach that goal).

Still, unlike most of its competitors, Spotify has been doing surprisingly well. Why was that the case? It hard to tell for sure. The company built a superior product, was one of the first to start in the field, and also proved to be able to raise huge amounts of capital necessary to support its growth. If there is one thing that clearly distinguishes Spotify from its competitors, though, it is its ability to strike partnerships with a wide range of companies across different industries and markets.

The list of Spotify partners and the types of deals it has with those companies is astonishing. In addition to striking deals with dozens of telecom operators to exempt Spotify traffic from mobile network quotas and in some cases to bundle Spotify with mobile plans (e.g. Red Value Bundle from Vodafone in the U.K. and the deal with Telia Sonera in Sweden), Spotify has partnered with Uber, Bose, Bang & Olufsen, Coca-Cola, Facebook, Bandpage and many others.

The nature of these partnerships differs significantly from case to case.With Uber, Spotify went with two-way app integration, allowing users to control the music being played from both Uber and Spotify apps. For Coca-Cola, Spotify powers Coca-Cola Music service and provides API for Coca-Cola to use in their various apps. In case of Bose, the companies again chose to do two-way app integration, providing users with opportunity to control Bose speakers from Spotify app and engage with Spotify from Bose SoundTouch application. The same goes for Bang & Olufsen. In Bandpage case, Spotify integrated with Bandpage in order to allow Spotify to offer instant updates to a highly targeted audience of artist fans.

One partner that was particularly important to Spotify was Facebook. The companies signed partnership in 2011 when Spotify was preparing for the launch in the U.S. This deal allowed Spotify to get a huge amount of attention at a time when it still remained virtually unknown to the general public in the U.S. Under the initial terms of the deal between Spotify and Facebook, users got the opportunity to post the music they listen to on the streaming platform to their profiles, with the tracks getting play buttons, allowing users to listen to those without leaving Facebook. Artists and bands also got the opportunity to put “Listen” button right next to the “Like” button on their pages. Over the years, some other things were added: for example, in March 2016 Facebook Messenger allowed users to share songs directly from Spotify app, instead of having to rely on screenshots or typing out song names in order to share those with a friend.

Granted, not all deals Spotify secured were necessarily successful. Partnership with Uber caused a fair amount of frustration from the drivers back in the day, and never got to be particularly popular among users (it’s unclear if the deal is still in place, especially considering the fact that Uber has recently partnered with Pandora to offer its drivers access to the internet radio). Likewise, on Facebook, a lot of popular artists still don’t have “Listen” button on their pages, and the same is true for Bandpage (most artists are yet to start using the integration).

Still, even if most of those partnerships are only moderately successful or ultimately fail, they help to create significant buzz around Spotify, boosting the level of recognition of the service among existing users, and attracting new ones. The mega-deals, such as the one with Starbucks, can prove to be particularly valuable, as every user of Starbucks mobile app today is being reminded of Spotify everytime she opens an app. And this is the type of visibility one can’t get elsewhere.

The Quest To Build Netflix For Books

With Spotify and its peers offering unlimited access to a vast collection of music under inexpensive monthly subscription, and Netflix doing the same things for movies, books seemed to be the next obvious frontier to bring this model to. Still, for years nobody was willing to try and conquer this field.

Then, Oyster was launched in 2012, followed by Scribd in 2013 (the company itself was started in 2007, however, ebook subscription service was launched in 2013 when Scribd managed to sign its first major publisher). Those were independent startups, and while they attracted significant attention and got to raise some funding, they remained relatively small. Then, in 2014 Amazon launched its Kindle Unlimited service, which was seemingly destined to beat its smaller peers and become the undisputed leader in the space, given Amazon’s huge resources and long-standing relationships with the publishers. However, things turned out quite differently.

Scribd went on to raise $48 million in funding and to sign 3 out of 5 major publishers (HarperCollins, Simon & Schuster and Macmillan). Oyster got acquired by Google in 2015 in what presumably was a firesale, and was subsequently shut down. As for Kindle Unlimited, today it sports the largest library out of 3 services, offering its users over a million books. There is a catch with Kindle Unlimited, though: it doesn’t have books from any of top 5 publishers on its platform, and is unlikely to get those anytime soon. While it was able to get a few major titles under its belt (the most famous one being Harry Potter series), most of the books it offers were self-published on Amazon platform, and are arguably less interesting to most users compared to the more popular titles offered by the largest publishers.

On the surface, this situation seems absurd. Why would HarperCollins, Simon & Schuster and Macmillan partner with Scribd and Oyster, before it went bust, but not with Amazon, even though Amazon would be able to get their content to a much larger number of users in a short time frame? The question, however, already contains the answer.

The truth is that Amazon is already too big and has too much leverage against the publishers. Amazon has also proved that it is not afraid to use that leverage in order to force publishers to succumb to its demands. For example, in 2014 Amazon was involved in a long and highly publicized conflict with the publishers, with Amazon trying to make publishers set lower prices for their ebooks. When HarperCollins refused, Amazon spent months discouraging sales of their books through its online store (using its recommendation engine, as well as other tools), causing huge outrage from the publisher and its authors. Ultimately, HarperCollins won that fight, signing a contract with Amazon that allowed it to set its own prices for ebooks, with Amazon providing incentives to price those cheaper. By the end of 2014, Amazon also signed similar contracts with other major publishers.

This conflict has uncovered an interesting fact. While publishers find themselves doing more and more of their sales through Amazon, their relationship with the online retailer remains cautious. If the major publishers had provided Kindle Unlimited with access to their content, they would have been likely to find themselves in a very unfortunate position down the road, being left essentially no negotiation power against Amazon. Considering that the switch to subscription model is highly unlikely to increase publishers’ revenues, there is no incentive whatsoever for them to prompt the adoption of this model.

Unlike Kindle Unlimited, Scribd and Oyster didn’t represent a threat to the publishers. Given their (relatively) small size, they had to prioritize the interests of the publishers if they wanted to sign those. And, if one believes that the switch to subscription model is imminent, it’s better to partner with an independent startup that in the future might be able to weaken the dominance of Amazon, rather than providing Amazon with the means to become even powerful than it already is today.

The Ultimate Competitive Advantage

The common belief is that startups are often better at innovating compared to the incumbents. While this might often be the case, a lot of startups that manage to build great products still fail. The product is indeed crucial, but it is not the only thing that matters. One still needs to find a way to put the product in front of the users, and big tech companies often have much more options to do that. It’s just so much easier to roll out a new product when you already have millions of loyal users at your disposal. Granted, for the managers of the product it probably means going through much bureaucracy in order to secure the resources and support for the product internally, but at least it eliminates the need to compete in a (ridiculously) overheated advertising market for installs/registrations, or to go inventing creative but largely unscalable ways to market your product without spending a ton of money through social media or other channels. Incumbents also typically have a lot more resources at their disposal to compete on other fronts, be it partnerships, exclusive distribution deals or anything else.

However, what constitutes the biggest advantage the incumbents typically have — be it the abundance of resources, or a widely recognized brand — can sometimes be their biggest weakness as well. Being the most influencial company in the industry could be great, but then you might find that your natural partners are more inclined to go with independent startups instead of signing with a company whose brand tends to dominate over everyone else’s. Same goes with being the undisputed market leader — it might turn out that your interests are no longer aligned with those of your partners and suppliers. And that’s when your smaller and more agile peers come into play and get their chance to change the space. Spotify and Scribd are just two examples of the success one might come to enjoy if she is able to execute on this competitive advantage, but there are many more.