spotify business case

TheCaseCrackers1

CarolineGhazzaoui SebastianSpittler MichaelFehlmann DavidGorgan

TheBeatleswouldberatherconfusedandunhappyabouttheirrevenueslivingintoday’sworldofstreamingproviders

2

Challenge Solution Result

StreamingserviceproviderTheBeatles

Spotifydoesnotcompensateusappropriately…

Howcanwegetprofitableinthefuture?

3



SpotifyMemberships

SpotifyTicketing

SpotifySessions

ConvertSpotify’susersintopayingmembers

Eitherpaying1€ toextendtrialperiodorpaying10€ tosubscribe

Thepremiumservicedoesnotaddenoughvalue

Spotify isnotappealingenough forrightholders

Offeraticketsellingservicewithbenefits forsubscribersandartist

Offerlivestreamsoffestivals/sessionsonlyforsubscribers

Executivesummary

• 5,5mnewpremiumsubs• 32mnewbasicmembers• generating€365,2m

• 2,8mnewpremiumsubs• generating€184,29m


Althoughstreamingdoesnotholdthelargestshareamongthemusicindustry’srevenueyet,itcatchesupwithgrowthratesof50%p.a.

4

• Musicdownloadsstillbiggest share• Streamingonlymakesup27%ofthecurrent

digitalmusicrevenues• BUT:Growthof51.3%inonly1year


Fortier(2014), http://www.stat.gouv.qc.ca/statistiques/culture/optique-culture_an.htmlIFPI(2014),http://www.ifpi.org/downloads/Digital-Music-Report-2014.pdf

Sharefromdigitalmusicinglobalmarket

• Digitalmusicrevenuesgrowingheavily(by48%since2008)

• Accounting for€5.31bnin2013

Globalrevenueindigitalmusic

67%

27%

6%

downloadingmusicfiles streaming other

Revenuesinthemusicindustryhavedecreasedoverallsince1997,however,digitalmusicrevenuesdidpartiallybalancethelosses

5

• Digitalmusicrevenuestakingoverphysicalsalesrevenues(by48%since2008)

• Accounting for€5.31bnin2013

• Ingeneraldecreasingrevenuesfromthemusicindustry

• However,digitalrevenuesdonotoutweighlossesofphysicalsalesyet


King(2013),http://qz.com/56998/the-music-industry-grew-last-year-for-the-first-time-since-1998/

Developmentofrevenueinmusicindustry[in€M]Compositionofglobalmusicsales

1997 2001 2005 2011

6

WhatdoesittakeforSpotifytoachievebreakeven?

NetincomeofSpotifyhascontinuouslybeennegativeinitshistory


-2000

-1600

-1200

-800

-400

0

400

800

1200

1600

2000

2008 2009 2010 2011 2012 2013 2014 2015 2018

millioneuros

revenue operatingcosts netincome

• Currentnetloss:€179,1m

• Spotifymustpay70%ofrevenues torightholders

• Consequence:Spotifydoesnotonlyneedtomakeadditional €179mbut€597m

Statista(2015), http://www.statista.com/statistics/244990/spotifys-revenue-and-net-income/

7

162,3ml€ lossesin2014à 541ml€ additional revenues- 378ml€ additionalexpenses(70%)=+162ml€ netincome

-2000

-1600

-1200

-800

-400

0

400

800

1200

1600

2000

2008 2009 2010 2011 2012 2013 2014 2015 2018

millioneuros

revenue operatingcosts netincome

IttakesSpotifyadditional€597mofrevenuesinordertoreachbreak-even


Statista(2015), http://www.statista.com/statistics/244990/spotifys-revenue-and-net-income/

• Currentnetloss:€179,1m

• Spotifymustpay70%ofrevenues torightholders

• Consequence:Spotifydoesnotonlyneedtomakeadditional €179mbut€597m

NetincomeofSpotifyhascontinuouslybeennegativeinitshistory

ThemajorweaknessofSpotifyisthatithasinallitshistoryalwaysfacednegativenetincome

8

• Paymentstorightholdersmakeupapprox.62% ofSpotify’s expenses

• 70%oftotalrevenuesgotorightholders

• 74%offreeusersonlycontribute to10% ofSpotify’s revenue in2014

• 26%Premiumuserscontribute to90%ofSpotify’s revenues in2014


TheGuardian(2015), http://www.theguardian.com/technology/2015/may/11/spotify-financial-results-streaming-music-profitable

756

486

Paymentstorightholders Fixedcosts

0%

20%

40%

60%

80%

100%

Shareoffree/Premiumsubscribers Shareofrevenue theycontribute

Premiumusers FreeUsers

Numberofcustomertypesandtheiraccordingrevenuegeneratedin2015

CoststructureofSpotify in2015[in€M]

9



SpotifyMemberships

SpotifyTicketing

SpotifySessions







Executivesummary




Spotifymustimproveitspricingstructureaswellasincreaseitsattractivenessinordertoreachthemainobjective;break-even

Change pricing structure

Increase of attractiveness Livestreams

Ticketing solution

Free version

Premium version

Break Even Partnering

Joint-Ventures

M&A


Organizing own festivals

IPO

Adding videos

• AdifferentpricingstructurewillallowSpotifytoincreasethesubscriptions

• Increasing subscriptionprice istoorisky

• Decreasing subscriptionprice doesnotmeetourgoal

• Partnering (joint-ventures,M&AorIPO)doesnot solveprofitabilityproblem

• Spotifymustworkonitsattractivenessforrightholdersandsubscribers

• Organizingownfestivals andaddingmusicvideoswouldbetooexpensive (hugeservercosts)

VALUATION

10

• AdifferentpricingstructurewillallowSpotifytoincreasethesubscriptions

• Increasing subscriptionprice istoorisky

• Decreasing subscriptionprice doesnotmeetourgoal

• Partnering (joint-ventures,M&AorIPO)doesnot solveprofitabilityproblem

• Spotifymustworkonitsattractivenessforrightholdersandsubscribers

• Organizingownfestivals andaddingmusicvideoswouldbetooexpensive (hugeservercosts)

11

Change pricing structure

Increase of attractiveness Livestreams

Ticketing solution

Free version

Premium version

Break Even Partnering

Joint-Ventures

M&A

VALUATION


Organizing own festivals

IPO

Adding videos

Spotifymustimproveitspricingstructureaswellasincreaseitsattractivenessinordertoreachthemainobjective;break-even

12

VISIONChallenge Solution Result

Changing thepricestructurewillhelptoincreaseSpotify’srevenues

Spotifystillpayssmallpay-outstorightholderscomparedwithotherstreamingplatforms

13


Statusquo:

• Spotify spending 70%ofitsgrossincome

• RightholdersDecember2013:• Spotify paysbetween

€0,0057- €0,0079perstream• iTunes pays €0,65pertrack

HowwillSpotifycompensaterightholdersbetterwhileaimingforprofitability?

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

Per-stream

payou

t(€)

Averageper-streampayouts

TheminorityofpremiumuserscontributespracticallyalltherevenuesofSpotify

14

0%

20%

40%

60%

80%

100%

Shareoffree/Premiumsubscribers

Shareofrevenue theycontribute




26% ofpremiumuserscontributed90%ofSpotify’srevenues in2015

Inordertobeprofitabletherearetwosolutionstogeneraterevenue:

• Generatemorerevenuebyads• Increaseannualsubscriptions

Premium

14

Wecreatedanonlinesurveyinordertofindoutthewillingness topayofSpotifycustomers,iftherewouldnotbeafreemembershipanymore

15

Questionsasked:

1) WouldyoupayCHF12.95/€9.99forSpotifyifyoucouldnotuseitforfree anymore?

2)Ifnot,whatotherchannelwouldyouusetolistentomusic?

Results:(217participants)


71% 29%No

Yes

Youtube AppleMusic iTunes

Soundcloud Torrents Other

NewpricingstrategywillhelpSpotifytogetextrarevenues

16

Premiummembership:

€10everymonth

Basicmembership:

€1every3monthFreeaccount


• Basicmembershipwithlowfeereplacingfreeaccount

• Basicfeesshalloutweighlossesfromlessad-revenues

• Incentive tosubscribeforpremium ishigher

Newpricingstrategywillrequireatleast30millionbasicmembershipsinordertooutweighlossesfromlessad-revenue

17


75millionusers

20millionpremiumsubs

55millionfreeusers

Assumption:Spotify’srevenuein2015:€1.428bn

• Revenuefrompremiumsubs:€1.296bn• Revenuefromfreeusers:€132m

Oldpricingstrategy Newpricingstrategy

?millionusers

?millionpremiumsubs

?millionbasicmembers

Basicfeesshalloutweighlossesfromlessad-revenues:

• 30mbasicmembershipusersrequired toachievebreakeven(outweighlosses)

Tenpercentofthecurrentfreeuserssubscribing forSpotifywillincreaseitsrevenuesby358,4ml€ withinthenext3year

18


75millionusers

20millionpremiumsubs

55millionfreeusers


• Revenuefrompremiumsubs:€1.296bn• Revenuefromfreeusers:€132m

Oldpricingstrategy Newpricingstrategy

55,5millionusers

25,5millionpremiumsubs

32millionbasicmembers


• Revenuefromsubscriptions:€1.6524bn• Revenuefrombasicmembers:€140,8m

+€365,2m

1919

ThepricingstrategyincreasesSpotify’srevenueby€365,2m


5,5mnewpremiumsubs &32millionbasicmembers

throughSpotifyMemberships

€356,4mrevenues+€140,8mrevenues

€132mrevenues(noadsforfreeusers)

€365,2mnetrevenue

In3years,Spotifywillbecomeoneofthebiggestonlinetourticketresellers

20


SPOTIFYOFFERSTHETICKET

PLATFORMATALOWPROFITMARGIN

ITISCONVENIENTFORALLTHE

ARTISTSTOSELLTHROUGHSPOTIFY

OTHERCOMPETITORS

CANNOTAFFORDSUCHALOWCOMMISSION

THISWILLGIVESPOTIFYLEVERAGETONEGOTIATE

THATTHETICKETSAREAVAILABLE ONSPOTIFYEARLIER

INCENTIVEFORUSERSTOBECOME

SUBSCRIBERS


20

SpotifyTicketingwillgainleveragebyrequiringalowprofitmarginfortheserviceandthenuseitnegotiateticketsavailableearlieronSpotify

SPOTIFYTICKETSELLING

PLATFORM

RIGHTHOLDERS PREMIUMUSERS

SavemoneyReachalotoffansThemoreticketssoldthroughSpotify thebetter

GetticketsinadvanceFeedsaboutthetoursIntegratedcalendarDirectpayment

üüüü

üü

SpotifybecomesthefirstticketplatformTheuserswillhaveanincentivetobecomepremiumMoreappealing forrightholders/artistsbecauseofa“self-marketing”function

üüü

ü


ArtistscanselltheirticketswithlesscostsandpremiumuserscanpurchaseticketsinadvancewhileSpotifygainsmoresubscriptions

22

*11%forthefirst50’000,andthen6%

Generalidea• Possibility fortheartiststosellticketsviaSpotify• Spotifywilloffertheservicefora7%profitmargin• Negotiation(ticketsavailabletwodaysinadvance)


23https://seatgeek.com/tba/music/concert-ticket-fees/

Spotifyisabletopositionitselfasacheapandsmartsolutionforartiststoselltheirconcerttickets– givinganincentiveforuserstosubscribe

0

5

10

15

Ebay*

Spotify

TicketNetwork

TicketLiquidator

Vividseats

StubHub

Ticketsnow

Razogator

Profitmargin ofvarious onlineticketing providers

Detailedconcept• Everyone isabletobuyticketsthrough theplatform• Onlysubscriberswillhaveaccesstothepre-sale

Consequence• Incentive foruserstobecomesubscribers

Spotifywillintegratetheticketingintoitsplatform– user-friendly ticketing

24

WhatSpotifyoffers…• Promotion ofWorldTours• Ticketselling• Spotifyexclusivefeeds


Howuserswillproceed…• Acquiredviaplatform• Buyersreceiveelectronicticket

Spotifycanimplementtheticketingwithoutincurring highcosts

25


Softwaredevelopment*§ Focusthedevelopment taskforceonthesoftware

Sales§ Adding ticketpossibility inpre-existingcontracts*§ Creationofticketingdepartments

Marketing*§ Marketing through socialmediaandpressreleases

Expensesandresources

allocationforSpotifyTicketing

Totalcostperyear=€1,225,760

*Thesetasksaregoingtobeimplementedbyalreadyexistingemployees – thereforethereisnoadditional costs

Thefinancialgoaloftheticketingplatformistobebreak-even

26


Revenuepossibilityfromticketing

• Averageseatsperconcerts:13’000

• Averageticketpriceformainartists:78€

• Byselling10% oftheticketsthroughSpotifytherevenueis7’098€ forasingleconcerts

• Inorder tocoveritscostsSpotifyhastobeabletosell10%of theticketsfor575concertsaround theworld

10%oftheticketsof575concertssuccessfullysoldtoreachthebreakevenpoint

KeyMessage

TheticketingwillmakeSpotifyattractiveforallstakeholders

27


Benefitforartists Benefitforpremiumsubscribers

• Promotion ofthetourthroughSpotify

• Advantagerateof7%

• Possibility tosaveupto3’194’919€ pertour

• Exclusiveinsightsfeedsfromtheartists

• Possibilityofpurchasing theticketstwodaysinadvance

• Directpaymentpossibility

• E-ticketsdirectlyonyoure-mail

Premium

2828

Throughticketing,Spotifywillgenerate€184,29mnetrevenue


2,8mnewsubscribers throughSpotifyTicketing €181,44mrevenues

€1,225mimplementationcosts

€184,29mnetrevenue

€4,083m(margin575concerts)

Spotifyimplementationisbasedonconvincingartistsanddevelopthesoftware

29


Addclausestocontract

Developthesoftware

CreateticketSalesDepartment

Instructionofexistingemployees

Startofferingtheservice

1

2

3

4

5


Spotifycangreatlybenefitbybecomingamajorfestivalhub

30

Spotifyneedsmoreuniquepremium-onlyfeatures

31

• Pricing structuredtoenableprofitability,butimportant togrowpremiumbase

• Sofaronlyad-free,offlinemode,enhancedsoundqualityandconnectivityfeaturesonlyforpremium

• Morefeaturesneededthataren‘ttotallyfocusedonsound


Spotifypremiumwilloffermorebenefitstocustomers,suchasSpotifyTicketingandSpotifySessions

32

Nomoreads.Youwon’tbeinterrupted.

Tonsofmusic,instantly.Hearanysongyouwant.

Takeyourcollectionoffline.Listentosongsanywhere.

Easyontheears.Evenmoresoundquality.

SpotifyTicketing.Comeevenclosertotheartists.

SpotifySessions.Getexclusiveinsights.


Spotify (2015), https://www.spotify.com/us/student/

33


• Whilerecordedmusicrevenuesaregoingdown, livemusicrevenuesaregrowing

• Risingnumberoffestivalsandconcertswithbettertechnologyandnewformats

Livemusicrevenueishugelygrowing,soareconcertsandfestivals

Trojan360(2014), http://www.trojan360.com/the-power-of-live-music-2/

Growinglivemusicrevenues

34

• Tomorrowland biggestelectronicmusicfestivalintheworld

• Grew4500%inattendancesinceitsinceptionin2005

• Veryyoungaudience,sameasSpotify

• Onlinelivestreamssofarforfree

Electronic musicfestivalssuchasTomorrowland areasuccessstory

34


0

50.000

100.000

150.000

200.000

250.000

300.000

350.000

400.000

450.000

+4500%

20152014201320122010 20112007 2008 20092006

AttendanceGrowthTomorrowland

DancingAstronaut(2013),http://www.dancingastronaut.com/2013/07/through-the-looking-glass-the-history-of-tomorrowland/YourEDM (2015), http://www.youredm.com/2015/07/16/tomorrowland-past-present-future/

3535

SpotifySessionsisthewaytointegratefestivalexperiencesintoSpotify


• Ownsubpageonthemobileanddesktopapp

• Promoting upcomingfestivals andnearbyconcerts (directlinktobuyfestivalticketsandtoSpotifyTickets)

• Liveeventsonsoundlessauto-play

• Audio(listen)feature

3636

AllsessionswillbeSpotify-exclusive


LiveSessionswithartists

• Ingeneralthelivestreams onSpotifyareliveandshouldbeexclusive

• Thegoalistomakeusersfeellikethey‘remissingoutonsomethingiftheydon‘tregister


37


Softwaredevelopment*• Formingadeveloper squadtodeveloplivestreaming

software

Sales• Hiringnewsalespeople• Negotiateexclusivelivestreamdeals

Marketing*• Marketing through socialmediaandpressreleases

Totalcostperyear=€5.184m

Expensesandresources

allocationforSpotifySessions

*Thesetasksaregoingtobeimplementedbyalreadyexistingemployees – thereforetherearenoadditionalcosts

3838

Wewillacquirebigfestivalsfirstandthenimplementourownsolution


Hiresalespeople forpartnerships

Acquire exclusive partnershipswithfestivals/artists(withalreadyexistinglivestreams)

Establish Spotifyasknownlivestream partner

Finishdevelopmentofownlivestreamsoftware

Offeringsoftwareandexpandingtofestivals/artistswithoutexisting livestreams

1

2

3

4

5

3939

SpotifySessionswillgenerate€65,448mnetrevenue


1,09mnewsubscribersthroughSpotifySessions €70,632mrevenues

€5,184mcosts forSpotifySessions


Spotifywillachievebreakevenbygenerating€597mofadditionalrevenue

40


FinancialImpact

Additional€365,2m

Additional€184,29m(2,8madditionalsubscribers)

Additional€65,448m(1,09madditionalsubscribers)

€597m

41



SpotifyMemberships

SpotifyTicketing

SpotifySessions







Executivesummary




Weidentifiedtherisksofmainlyhavingtoolittleimpactthathavetobetakenintoaccount

Risk Probability Impact Mitigation

• Toofewfreeuserssubscribing

• Usersgoingtothecompetitors

• Furtherimprovement ofPremiumversion

• Stillofferingfunctions andservicesthatcompetitorsdonot

• Customers donotbuyticketsviaSpotify

• ArtistdonotwanttoselltheirticketsviaSpotify

• Theplatform isuser-friendly andtheycanbuyticketsinadvance

• ProfitmarginislowerandSpotify alsoofferspromotion throughtheplatform(feeds)

• Usersprefertowatchconcertslive

• Artistswon’trisktolooseincomefromconcerts

• Premiumoffer– evenifusersdidn’twanttouseit– willstillbuyit

• Installedmeasureswillgive additionalincentives andspecialdealstoartists

Low Medium High

SpotifyMemberships

SpotifyTicketing

SpotifySessions


42

Oursolutionwillachieveabreak-evenuntiltheendof2018

43

CorporateP&L(million €) 2015 2016 2017 2018

RevenueBase revenueExtrarevenuefromSpotifyMembershipsExtrarevenuefromSpotifyTicketing

ExtrarevenuethroughmarginExtrarevenuefromSpotifySessions

1428-----

1682,7831428146,0890,724,08313,09

1888,7481682,783127,8254,4324,08319,63

2053,1391888,74891,336,2884,08332,72

(Cost)FixedCostsRoyaltiesExtraLabourPartnerships

(1607,1)(607,5)(996,6)

--

(1791,85786)(607,5)

(1177,9481)(1,40976)

(5)

(1936,0336)(607,5)

(1322,1236)(1,40976)

(5)

(2051,10706)(607,5)

(1437,1973)(1,40976)

(5)

Operatingincome (179,1) (109,0786) (47,2856) 2,03194

(CorporateTaxof22%) - - - 0,4470268

Netincome (179,1) (109,0786) (47,2856) 1,5849132

Netincomemargin (12,5%) 0,077%


TradingEconomics, http://www.tradingeconomics.com/sweden/corporate-tax-rate

ArtistbenefitfromSpotify’soverallsolutionsasrevenueisgenerallyincreasing

44


Artistbenefitfromextra€597mrevenuescausedbythepricing

• 70%*€597m=€418,6madditionallypaidforroyalties• €1,4146bninsteadof€996mforroyalties

756

523

301131

996

20182015

Moneysp

end

onro

yalties(inm€)

+40%

2011 2012 20142013

1 415

45

Action 2016 2017 2018

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

ChangeSoftware

Communication

Contractscreation

Software development

SalesDepartment

Instructemployees

Partnerships

Establishthebrand

SoftwareDevelopment

ContractsCreation

Expansion

Spotify

Mem

berships

Spotify

Tickets

Spotify

Sessions

Preparation/Planning

Implementation

OurimplementationstartsinQ12016andwillbemainlyfinishedafterQ22017


Q&A

46


????Questions&Answers

BACKUP

ANALYSIS

CDsalesinNorthAmericahavedeclinedsignificantlyduring thelast15years

49

• CDsalesdroppedby73%inNorthAmericasince2000

• Physicalmusicisloosingrelevance• Musicindustryfacingproblemswithmonetizing

CDsalesinNorthAmerica

AminorityofPremiumuserscontributespracticallyallofSpotify’s revenues

50

SpotifycomprisesmostPremiumusersincomparisontoitscompetitors

26%ofPremiumuserscontributed90%ofSpotify’srevenuesin2014

0 100 200 300

# countries

#songs [inmio]

#Premiumusers[inmio]

#Totalusers[inmio]

Deezer

Pandora

Spotify0%

20%

40%

60%

80%

100%

Shareoffree/Premiumsubscribers Shareofrevenue theycontribute



Spotify doesnotonlygeneratessignificantlymorerevenuesbutalsobyfarthehighestnetlosscomparedtoitsmostrelevantcompetitors

51

However,Spotifybyfarhasthelargestnetlosscomparedtocompetitors

Spotifygeneratedmostrevenuesincomparisontoitscompetitorsin2014

Netprofit(loss)2014[in€M]

2

-165

-9

Sourceshttp://www.finanzen.net/bilanz_guv/Pandorahttp://winfuture.de/news,87040.htmlhttp://www.nzz.ch/finanzen/aktien/deezer-will-bis-ende-oktober-an-die-boerse-1.18630132

Revenue2014[in€M]

920.8

143

1,080

Analysisofmusicstreamingmarketshowsthatthestreamingmarketitselfisalreadyhighlyconsolidatedbutmajorthreatcomesfromillegalplatforms

52

Threat of Substitute Products

Music streaming is the cheapest legal source of music for customers

Bargaining power (suppliers) Doesn’t depend on retailers and programmers are easily available

Threat of new entrants

Entrants must take lots of legal issues into

account; existing firms already well established

Industry rivalry Music streaming market is still growing

Bargaining power (buyers) Customers have a lot of legal and illegal alternatives to Spotify

Analysisofonlineticketsalesmarketshowsthatitholdsnumerousadvantagescomparedtothemusicstreamingmarket

53

Threat of Substitute Products

Music streaming is the cheapest legal source of music for customers

Bargaining power (suppliers) No dependence on retailers and programmers are easily available

Threat of new entrants

Limited since conclusion of contracts

with right holders is complicated

Industry rivalry Comparably few providers of services

the like

Bargaining power (buyers) Hardly organized customers and

TheUSPofSpotifyisitslargeuserbaseaswellasnewopportunitiesinthesaleofconcertticketsonline

54

▪ Userbasecomprises75Mpeople

▪ Contractswithmultiple rightholdersonglobal scale

▪ Technologyenablinginstantmusicexperienceasifsavedonhard-drive

▪ Potentanddedicatedinvestors

▪ Brandpartnerships

Strenghts Weaknesses Threats Opportunities

▪ Spotify hasnevergeneratedanetprofitsofar

▪ Freecustomerscontribute lessthan10%p.a.ofrevenues

▪ Only25%ofPremiumusersgenerate90%ofrevenues

▪ Artistsarewithdrawing theirsongs fromstreamingplatformsduetolowpayment

▪ Development ofSpotify hinderedduetocompulsorycontractswithrightholders

▪ Musicstreamingoutperformsdownloadofsongsandalbums

▪ Inparallel,theconcertmarket&thusalsotheonlinesaleofticketsisbooming

Copyrightissuesprovideaneffectiveentrybarrierfornewcompetitorsonthemusicstreamingmarket

55

▪ Venture-capitalistsarenumerous andwilledtoinvestinstart-upslikeSpotifyallovertheworld

Economicimplications Socialimplications Technological implications Legalimplications

▪ Spotify’s usersareratheryoungwhiledemography tendstomoreelderlypeople

▪ Programmers cannowadaysbefoundallovertheworld

▪ Internettechnologiesdevelop furtherrapidly&Spotifymustbecapableofadapting

▪ Spotify mustalwaysconsider thereactionofrightholders inallwhatitdoesduetocopyright law

▪ Inparallel,itconstitutesentrybarriersfornewcompetitors

Backup- ComparisonoftheMainMusicStreamingServices

56

Percentageofpayingsubscribersontoal users

• Spotify 27,0%• Deezer 38,0%• Pandora 1,2%• Beatsmusic 100,0%• Kkbox 20,0%• Wiwmp 100,0%

-2.000.000

0

2.000.000

4.000.000

6.000.000

8.000.000

10.000.000

12.000.000

14.000.000

16.000.000

18.000.000

20.000.000

22.000.000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Kkbox

BeatsmusicWiMp

CostPremiumservice

Subscribers

Pandora

Spotify

Deezer

BACKUP

57

PRICING

Dataoncustomers/revenueorigin(I/II)

59

• 2013: 747million€ revenuesin2013(24mlactiveusers)• 91%fromsubscriptions• 9%fromadvertisement

• 2014:1.08billion€ revenuesin2014(60millionusers,15milsubscriber)• 1.08bn€ x0,9=972mlfromsubscriptions

à1.08bn€ x0,9/15ml/10€ =6,48monthofsubscriptions• 1.08bn€ x0,1=108mlfromads

à108ml€ /45ml=2,4€

• 2015:75millionusers(20millionsubscribers)• 20ml(subscribers)x10€ x6,48=1.29bn€• 55ml(freeusers)x2,4€ =132ml€

Revenuesin2015:1.296bn+132ml=1.428bn€


Dataoncustomers/revenueorigin(II/II)

60

• Basicfeesshalloutweigh lossesfrom lessad-revenues

• X*2,4€ +x*1€*2=132ml€ (2*3monthusage)• X=30ml

(30ml*2,4€ +30ml*1€*2=132ml€)

• 2015:55,5millionusers(25,5millionsubscribers) (55ml*0,1=+5,5ml)• 25,5ml (subscribers)x10€ x6,48=1.6524bn€• 32ml(basicmembers)=132ml€

Revenuesin2015:1.6524bn€ +132ml€ =1.7864bn€


WhatdoesittakeSpotifytoachieveabreakeven?

61


• 2014:162,3mllosses• Weneed541’000’000additional revenuesin

2015sothat70%ofthisnumber goestoartistsand30%ofthisrevenue(162,3ml) willstaywithSpotify

Royaltiesindetail

62


TICKETING

Backup– Ticketingimplementationplan

64


Offertheservicetomajorartistsfirst

• Ownworld tours– atleast60Stops• MusicAwardNomination• Strongly followedonsocialmedia• Strongly followedonSpotify• Bigprofitfromalbum

• Sincespotify isabletosegmentitscustomers,whenaworldtourisup,theservicewillbeabletoadvertisetheeventinthecountry/area

• Majorartistusuallyfillupbigconcertshall,thereforewecanprofitmore- havinga7%profitmargin

BackUp– Implementationofthetwonewoffices

65


CreationofoneofficesintheUSAandEurope:

- Twopartner implementatoion projectmanager 105’208€ /year- 18externalrelationsandsales 56’400€ /year

- Support isgoing togothrough Spotify- Alreadyexistingproductdevelopment departmentisgoing toworkonthis

Totalcostperyear=1’225’760€

Benefitsfortheartist

66


Revenuebenefitfortheartist

• Spotifyhasaprofitmarginof7%insteadoftheaverage11,5%intheticketing industry

• 4%additionalprofitmarginforartists• Averageseatsperconcerts:13’000• Averageticketpriceformainartists:83$• 173concertsminimumperyear

13’000*0,1*83$*0,04= 4316$

4316$/0,0052=828’406additionalstreams

4316$*173=764’668$=additional1’066’669$ofrevenuesifonlymadebyspotify

BackUp- Spotifyhastomakeitsserviceappealingforrightholders

67

Streaming service payout Urgent needsStreaming platforms are not profitable for right holders

• Between0.006and0.0084eachtimeasong isplayed

• Between6and8whenatitleisheard1000times

• Royalities paidbySpotify areverylow

• Toequal1iTunespurchase,135playsinSpotifyareneeded

• Toequalthesellingofanalbum,asongneedstobepalyed 47’680timesonSpotify

• Since2013piracyhasstartedtodecline

• Maketheservicemoreappealingforrightholders

• Offerbettercompensation

• Offernewservicesfromwhichtheartistcangain


Backup– Whatdoartistsgain

68


ComparisonBetweenSpotifyandotherstreamingservices

Spotifyprofitmargin:7%

Totalrevenueperconcert*:1’014’260€

Artistrevenueafterticketcosts:943’261€

Ticketingexpenses:70’998€

Averagecompetitorsprofitmargin:11,5%

Totalrevenueperconcert*:1’014’260€

Artistrevenueafterticketingcosts:897’620€

Ticketingexpenses:116’639€

*Aconcertwith13’000ticketssold atapriceof83USD

Differenceinexpenses=45’695€

Assumingthataworldtourhas70stopsanartistcouldsaveupto3’194’919€

6969

BackUp– TicketImplementation


Contracts SoftwareDevelopment

NewDepartment

Instruction ofExisting

Employees

StartOfferingthe Service

• Thepossibility oftheticketingserviceisaddedtotheexistingcontracts

• Thetermswillinclude7%profitmarginandthepossibility fortheartisttotargetpotentialpurchasers

• Thetaskofintegratingthisfeatureinthealreadyexistingsoftars isgiventoprogrammersalreadyworkingforSpotify

• 20peoplearehiredtosupport therelationswiththeartistsinthissense

• TheDepartmentwillbeinNewYork

• Alreadyexistingemployees–especiallyfromtheclientsupportdeparment areinstructedonhowtosolvecertainissues

Spotifyhastomakeitsserviceappealingforrightholders

70

Spotify payoutsare too low

Streaming platforms are less profitable that downloading platforms for right

holders


Make the service more appealing for right holders


71


• Contractsrelatedexpenses• Softwarerelatedexpenses• Marketing relatedexpenses

Expensesoftheticketingimplementation Type ofcost LevelAdding ticketpossibility inpre-existingcontracts LowFocusthedevelopment taskforce onthesoftware LowMarketing through socialmediaandpressreleases LowCreationofticketing departments inUSAandEurope Medium

-High

Mainexpenses:Creationofoneofficeof20peopleintheUS

Totalcostperyear=1’304’000

7272

Impact


2,8mnewsubscribers throughSpotifyTicketing €181,44mrevenues

€1,225mimplementationcosts


€4,083m(margin575concerts)

7373

UnderstandingtheTicketingRevenues…


€1,225m €1,225m

+70%ofrevenues

€1,225m €2,0825m

X €1,225m+0,7*X

€4,083m €1,225m+0,7*4,084m

Revenue Expenses

€4,083m €4,083m

SESSIONS

Backup- Whynovideos

75


• Hugestoringcosts(livestreamsarenotstoredafter– another reasonwhyyouhavetobepremium)

• Wedon‘twantvideosthatotherplatformshave

• VEVOwon‘tallowexclusivevideosoutsideoftheirplatform

7676

Backup- Impact


- OnlyAxwell ΛIngrosso LivestreamfromTomorrowland 2015:2‘000‘000 livestreamviewers

- With2otherbig festivalsperyear+arangeofexclusiveartistsessions:

- 6’000’000*0.1+3’300’000 *0.09=about 1,09mnew subscribers

Estimated1,09mnewsubscribersafterthefirstyear, growing togetherwithnumber ofnewexclusivefestivalsandgrowthof festivals

Backup- SpotifySessionsCosts

77


Hiringnewsalespeople:

• 1US,1Europe around92’000$each/year

Livestreampartnerships:

• Twobig, rangeofsmallones around5mio.$/year

Totalcostperyear=5’184’000$

->However,thesecostsareshrinkingafterthelivestream softwareisfinished, sinceitwillbecheapertomakeexclusivepartnershipsbecauseweofferwaymore.

7878

Backup- Implementation


Livestreamsoftware and

brandawareness

Acquiring fastand big

partnerships

Broadexpansion

• Firstintegrating festivalsandsessionswithalreadyexistinglivestreamstokeepcostslowandmakelivestreampartnerships

• Developownlivestreamsoftwarethrough developersquadandriseasmusiclivestreambrandthroughexistingpartnerships

• Thenexpandingontofestivalsandbigconcertswithoutanylivestreams

Backup– Benefitsforfestivals

79


Betterquality(example:Tomorrowland)

Addedaudienceforfestivals(bignumberofSpotifypremiumsubscribers)

Audienceisexactlytheonethatwantstobereachedby

festivals

Alreadypayingsubscribers:chanceshigherthattheycouldalsobuyaticketfor

thenextfestival

AssociationtobrandofSpotify

8080

Backup– SessionsPricing


• Salesandmarketingexpenses• Softwaredevelopment

ExpensesofSpotifySessions Type ofcost LevelFormingadeveloper squadfor Spotify Sessions LowMarketing through socialmediaandpressreleases LowHiringnewsalespeople tonegotiateexclusivelivestream dealswithbiggest festivalsusingexistingsalespeople

Medium-High

Mainexpenses:Hiringnewlabourandexclusivelivestream deals

Totalcostperyear=5’184’000

8181

Impact


1,09mnewsubscribersthroughSpotifySessions €70,632mrevenues

€5,184mcosts forSpotifySessions


8282

UnderstandingtheSessionsRevenues…


€5,184m €5,184m

+70%ofrevenues

€5,184m €8,8128m

X €5,184m+0,7*X

€17,28m €5,184m+0,7*17,28m

Revenue Expenses

€17,28m €17,28m

IMPACT

Bachup CalculationonSubscribersrequired

84


541ml€ inordertoachievebreakeven

358,4ml€ frompricediscrimination+129ml€ fromSpotifyticketing+53,136ml€ fromSpotifystreaming=541ml€

spotify business case

Business