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Business Modeling

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pAssignment: Business Modeling

Business Modeling

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

Table of Contents
1. 2. Introduction .......................................................................................................................................... 4 Story ...................................................................................................................................................... 5 2.1. 2.2. The case (spotify) .......................................................................................................................... 5 The business model canvas........................................................................................................... 6 Customer segments (CS) ....................................................................................................... 7 Value Propositions (VP)......................................................................................................... 9 Channels (S)......................................................................................................................... 10 Customer Relationships (CR)............................................................................................... 11 Revenue Streams (R$) ......................................................................................................... 12 Key Resources (KR) .............................................................................................................. 12 Key Activities (KA) ............................................................................................................... 12 Key Partnerships (KP) .......................................................................................................... 13 Cost Structure (C$) .............................................................................................................. 13

2.2.1. 2.2.2. 2.2.3. 2.2.4. 2.2.5. 2.2.6. 2.2.7. 2.2.8. 2.2.9. 2.3. 2.4. 3.

The Essence of the Business Model ............................................................................................ 14 Tangible business model ............................................................................................................. 15

Process ................................................................................................................................................ 16 3.1. 3.2. 3.3. Canvas ......................................................................................................................................... 16 Translation .................................................................................................................................. 18 Tangible Model ........................................................................................................................... 19

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

1. Introduction
The assignment started with drawing up a business model canvas and ended up with presenting a selfmade tangible business model of Spotify. The goals were to obtain more knowledge about business in a playfull and creative way and being able to use the knowledge that was obtained. This report will show you the story of spotify, the business model canvas of spotify with elaboration, the essence of spotify, the tangible business model and the process of making the tangible model.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

2. Story
2.1. The case (spotify)

First of all a short introduction of Spotify was made. Spotify provides music through streaming to everyone who downloads their application. Both the application and listening to the music is completely free. The user just needs to create an account, and have access to the internet in order to stream the music. Most importantly is that this way of listening to music is entirely legal. However, the user can in return not access the music file and can thus only listen to it within Spotify’s application. In the free version, the user will also get audio advertisements between the songs they are listening. This can however be avoided by paying a small subscription fee.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

2.2. The business model canvas

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

2.2.1. Customer segments (CS)
After analysing one particular customer the customer segments that are targeted by Spotify were defined. Spotify aims for the mass market and for a multi sided platform. There are three segments in the mass market: Premium Listeners, who are able to use Spotify mobile and offline; Unlimited Listeners, who pay a small amount for more time to use Spotify; and the Open Listeners, these customers have limited access, do not have to pay but have to listen to commercials and have a limited listening time of max. 20 hours. The multi sided platform works together with one of the segments of the mass market, the Open Listeners. Advertisers get a specific value for their money which means they are also a customer. The Advertisers and Open Listeners need each other because Spotify needs listening customers to be able to promise value to the Advertisers and the Open Listeners need the Advertisers to be able to get a free of charge Spotify service.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

Customer Empathy map The customer that has been worked out in the empathy map is a young professional. This customer has thoughts, feelings, pains, gains, sees things, hears things and says and does certain things. These segments were defined for this customer, related to music. The young professional, let’s call him John, has just landed a busy job. He has to travel a lot and therefore has not a lot of leisure time because of his demanding job. During his travel he likes to kill time by listening to music. Also music makes him relax. He earns more money nowadays and therefore feels bad about piracy because he is now able to buy music. He buys almost everything he needs on the internet while he has no time to go to an actual store. He sees there are a lot of easy ways to get music. But he does not have a lot of money to spend because he just bought an apartment. A lot of information is shared through social media he notices. His friends tell him he has to look well after himself now he is getting exhausted by work. His boss on the other hand demands that he has to make his deadlines. Society tells him, now he is no longer a student, he has to be mature. To mature his taste in music he is busy exploring new music styles. He would like more leisure time, less pressure and less stress. Also he wants to listen to music, anyplace, anytime, anywhere.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

2.2.2. Value Propositions (VP)
Because there are two customer groups, the listeners and the advertisers, the values can be separated into two parts as well. In the first part, the value propositions for the listeners, Spotify offers basically the opportunity to legally listen an large amount of music for free of for minimum payment. This means that you can listen over 15 million songs, while paying with either time or little money. The fact that this system is completely legal, makes it even more attractive for the customers. In addition to these values, personal playlists can be created and accessed on any pc. For the premium listeners, Spotify also offers the possibility to listen via a Smartphone and even listen offline. No storage space on the hard disk is needed (except for the offline listening), because the music is streamed from the internet. And because of the streaming, there is no loading time before listening a song. Another value that is offered by Spotify, is that there is an possibility to share music. And because everyone can share music, it is easy to find new music. Also there is a function to find new songs by similar music genres and artists.

For the second group, Spotify offers an attractive way of advertising. Because Spotify is linked to social media, such as Facebook, it can gather information about specific users. This information combined with the information Spotify gathers directly from the user, targeted commercials are possible. Different users get different commercials. The listener group is a mass market. So advertisers have the opportunity to aim at a very large target group, but also to aim at a smaller target group, but still have a large amount of people that notice the advertisement. Another thing Spotify offers, is that when people are listening to music, while paying with time, people have to listen to commercials in between songs. These commercials can’t be skipped or muted, so advertisers can be sure that the commercial is being heard. Also statistics about how many see or hear an advertisement are really simple to find out.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

2.2.3. Channels (S)
Spotify reaches its customers, and delivers its value through different channel phases. 1. Awareness First of all, they need to create awareness about who they are and what they deliver. Spotify has done this primarily by relying on media attention and friend to friend promotion. Lately, with the coming of new social media partners (such as Facebook, Twitter and MSN), this has become an even stronger channel to create awareness on their service. In this same way, advertisers become aware of Spotify’s existence and the possibility to advertise through it. Strikingly, Spotify seems to have chosen not to promote themselves by means of advertisements, thus saving money their promotion. 2. Evaluation The second step in reaching customers is to evaluate and promote the organizations value proposition. Spotify does this again by friend to friend communication. Once arrived at Spotify’s website, potential customers (both music listeners as Advertisers) are elaborately informed about the different features (values) Spotify has to offer. 3. Purchase When customers are convinced of the value of Spotify, they are only a few simple steps away from actually using (or buying) Spotify’s services. Spotify only enables users to do this by means of their website. Listeners download the application from here, while advertisers contact a Spotify correspondent via email or a form. 4. Delivery The delivery of Spotify its entire value proposition (for both music listeners as advertisers) is done by means of their music streaming application on both computer and smartphone. 5. After sales The after sales of Spotify are rather limited. This however means they again save money in their overall cost structure. For music listeners Spotify provides a self-service online help section (FAQ based help). Next to this, there is a community based support forum where customers (as well as Spotify employees) help other customers out. Finally there is the option to send an email contact form to the customer support department of Spotify. For Advertisers, Spotify ensures detailed tracking & reporting and enables advertisers to contact them through email.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

2.2.4. Customer Relationships (CR)
This section will talk about the relationships between Spotify and her customers. Because Spotify offers value to different target groups, this section is divided in two parts; the listeners and the advertisers. For the listeners Spotify offers various ways of relating to them. Depending on the situation Spotify offers no, little or personal assistance. 1. Automated service: Spotify notices you by your user account and gives you your personal playlists and other personal information. Furthermore, Spotify allows you to connect your Spotify account to your Facebook profile, so you can share your music with your friends. 2. Self service: In case of needed support Spotify offers a FAQ (Frequently Asked Questions) Help section online. In this section you can get general help for any problem that might occur while using the Spotify application or other related services. You need to look for the information yourself and there also is information stated on the site that is not specific for your problem. This section does not recognize you as a specific user but just gives all information, thus not being an automated service. 3. Community: Spotify also offers support through their Support Forum. This forum contains much more information about problems that might occur during usage of the Spotify application or other Spotify related services. In this section you can post your problem or question and other users may react to your post, giving you the answer to the problem. This section is also not filtered to your personal problem and therefore automated service does not apply. 4. Personal assistance: This can already be seen in the community part, where employees of Spotify sometimes give possible solutions to a problem. The real personal assistance comes in cases where both the FAQ and Support Forum cannot give solutions to the problem at hand. In this case it is possible to send a message by Contact Form to Spotify and wait for an answer. For advertisers it is harder to state the various ways in which Spotify offers Customer Relationships to them. The advertisement companies rely on personal assistance more than listeners, since it can be big business in some cases. Therefore Spotify offers a more personal assistance. 1. Self service: To help the advertisers with the first steps, however, Spotify has set up some guidelines on the website which will make the first steps easier for the advertisers. When advertisers stick to these guidelines, the chances of getting advertisement space is significantly larger than when not sticking to these guidelines. It is however up to the advertiser to find this out and make sure he complies with the set standards. 2. Personal assistance: This comes in the form of an advertisers contact form or email address of Spotify which allows for advertisers to get in contact with Spotify. It is unclear what more kinds of assistance Spotify offers to advertisers, since you would probably have to be in the business to see these. Imaginably these could be personal assistance, where an employee of Spotify makes sure that all the data is submitted in the right format and some contracts are signed. This kind of service is not dedicated, since it is probable that an employee will have multiple contacts to deal with.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

2.2.5. Revenue Streams (R$)
Spotify’s revenue stream as very basic. They collect revenues from two different streams. The first stream comes from the fixed subscription fees of the Unlimited and Premium account members. This is roughly 75% of Spotify’s total revenues. Secondly, there are the advertising revenues received from the advertisers. Together, this provided Spotify with a total revenue of about $85 million over 2010.

2.2.6. Key Resources (KR)
In order to deliver the above mentioned values, Spotify also needs certain resources. First of all, order to deliver music, they need to have music. Therefore the music licenses are the most important resource that are needed. Next to the music itself, a server is needed to actually get the music to the user. These are the two most important resources. Finally, in order to get customers, branding is needed. In the time Spotify is on the market it already established quite a name in a great part of the world. This branding provides more users and thus more revenue.

2.2.7. Key Activities (KA)
Next to resources, Spotify needs to undertake activities to deliver and keep delivering their services to their customers. First of all the server they use to get the music to their customers needs to be maintained. However, as Spotify grows, its server also needs to grow and thus even needs regular development. Furthermore, Spotify is still not able to deliver all music in the world to their users, and thus can their music library also still use more expansion. But the alternative services Spotify delivers (next to music on the pc) are also still growing. Finally, not only creating more value enables Spotify to increase their revenues. Launching Spotify in new markets creates more users and thus also more revenues.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

2.2.8. Key Partnerships (KP)
Spotify cannot work on its own. To exist, Spotify needs other companies to work together with. Of course, to deliver music, Spotify needs to have music. To get music, Spotify must have deals with record companies. So the record companies are a very important key partner for Spotify. If there are no deals, there is no music and if there is no music, there cannot be any listeners and if there are no listeners, Spotify has no customers. Another key partner for Spotify, is Facebook. Due to the deal that Spotify has with Facebook, Spotify is brought to everybody that uses Facebook. People that are sitting behind their computer, see at that moment that someone else is using Spotify. It is a very small step for them to take a look what Spotify actually is and to download is, because they are already on the internet. Beside Facebook, other social media like Twitter are possible future key partners as well.

2.2.9. Cost Structure (C$)
The money that goes to Spotify, does not all stay there. Spotify has to pay other companies to keep their own service running. Most money goes to the record companies, to buy the licenses for the music. This cost can also be seen as an investment, because if there is more music available, Spotify will become more attractive to use. Other money makes sure to keep the servers up, pays the loans of the employees of Spotify and goes to travelling and bounding with (possible) key partners. And the money that is left stays at Spotify itself.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

2.3. The Essence of the Business Model
We abstracted from the business model what we think is the essence of Spotify’s business. It starts with the music. There is no Spotify without music so the way to get music is to pay the record companies, their key partners, for royalties so they can add music to their library. The bigger the library the better Spotify works. Then the obtained music goes to the user who can chose how to listen to it. The first option is to listen for free. But this means for Spotify to still earn profit the open user needs to listen to advertisements. Here come the advertisers into the picture, they are also customers because of the money they pay to advertise, they get information back about the listeners and maybe new customers. When the user does not want to listen to advertisements they can pay 5 euro (or dollar) to get rid of it and be able to get more time to listen to music. This means the user is an unlimited user and the advertisers are no longer involved. If the user even wants an upgrade with extra’s like listen offline their own playlist they can pay 10 euros (or dollar) and this will make them premium users. Next to this the business model is aiming at getting a lot of Premium users, this is their biggest income so they need to get as many users as they can. The most important way of doing this is automatically posting on the Facebook profiles of users what they are listening to. This will interest their friends in Spotify and generate more users for the company.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

2.4. Tangible business model
One of the most striking features of Spotify is the fact that their value is not music but time to listen to music. The user does not own the music and this is why the music in the tangible model is projected. You can see it but you can’t really own it. The business model has to be picked up by the user to start working just like Spotify needs the user to work. When the user sees the projections (listens to music) he/she does not really see the business model of Spotify. For that they have to turn the ball around where you can find the essential parts of Spotify next to the user; record companies, advertisers and social media. The connections are made dynamic by the water flows. The user interacts with the ball (Spotify) by paying for unlimited or premium and this will change the projection and going from open to unlimited user the advertisers in the back will also lose their light. This back is exactly like the previously explained essence of Spotify.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

3. Process
3.1. Canvas
To start with building the business model the model presented by the Board of Innovation was used. With this the connections could be established between different parties. After looking up on the website of Spotify what were their major parties, the overall layout of the BoI model was set. With this model the customer segments and value propositions could be determined as well as revenue streams, cost structure and key partners.

One of the biggest problems that occurred was that it was unclear where to put a certain party. The advertisers were a grey area, considering that they bought something from Spotify, but also allowed the possibility for Spotify to offer their free service to the listeners. Because of this uncertainty we first set the advertisers as being key partners, which we got commented on during the first presentation. So, after all we adjusted the advertisers to part of the customers as Spotify offered a specific value proposition to them as well and the fact that the advertisers allowed the free service meant they could also be set as a key partner, but they eventually became to insignificant for that to be inserted in there. The customer empathy map was first set up for an ideal costumer, yet during the first presentation we got the comment that most likely there will be no such costumer. To get a more reliable empathy map a new map was constructed around a more realistic costumer. With the first two parts, costumer segments and value propositions, sorted out and an empathy map made we carried on to the other parts in the next week.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling
For the second presentation the Channels, Customer Relationships and Revenue Streams were set up. To get the information needed we looked at a report of Spotify by the Guardian from August 2011 and an interview from Daniel Ek, chief executive, with the Financial Times in March 2011. This gave some data on what the most recent costs and revenues are and how much influence the paying customers have on the revenues. For the Customer Relationships all the information could be found on the website of Spotify itself offering various ways to aid the customer, both listener and advertiser. The Channels were a bit harder to find out, as things as media attention were harder to assess. During the second presentation we were informed that they actually do have commercials, something we were unable to find. The left side of the Business Model was actually quite easy to fill in, since they were already a bit apparent during the process of filling in the right side. Key Activities, Key Resources, Key Partners and Cost Structure were all already thought up. Key Activities was just what all other music services needed to do as well as Key Resources. The Cost Structure we were able to deduce from the information we had gathered for creating the Revenue Streams segment. The Key Partners contained the logical ones like record labels and social media.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

3.2. Translation
From the first segments of the canvas on we started creating a tangible model. The essence of what was used for the model, contained the major parts of the model. These major parts are: Spotify; record companies; advertisers; social media and the listener. To generate ideas a brainstorm is often used. other variations of a brainstorm are brain drawing and brain writing. The idea for our model came out of a sort of brain building. To generate ideas we took a hands-on approach. Instead of just making mind maps and writing things down, we decided to all take some random stuff from home and try to come up with ideas through that. This unconventional approach spawned some good ideas, which we combined into a model. We used parts like the representation of flows by tubes, the projection of the music note to show that the user does not actually have the music, but can only listen to it and the inserting of money to get rid of adverts and better music. For the first presentation we made the projection with a bicycle lamp, made a fake button to push for removing the advertisement, and pleased this with some vague forms in a plastic orb. At that point not all the ideas were properly integrated bur as it was only the first presentation, this was not the issue.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

Assignment: Business Modeling

3.3. Tangible Model
The projection of the note was done by sandblasting the front of the ball. The rest of the front that would not be used for projecting any information was painted to represent Spotify.

After the electronics were soldered a framework for the projecting LEDs was hot glued into the front of the ball. The green and blue projecting LEDs are using the same filter so they were carefully positioned and glued at the right angle together with the filter. The red LED was positioned and glued together with another filter for the advertisers.

Most of the electronics and all the projecting LEDs are covered by the dividing disc inserted in the front part of the ball. This way the back end of the ball stays clear. The dividing disc also divides the ball into a user- and ‘the world of Spotify’-part. In the world of Spotify we show the most important flows between the most important parties. These flows are represented by tubes filled with colored liquid. If the ball is turned the user can actually see the different ‘flows’.

The interaction with the model is done by inserting one or two coins. If the user inserts one coin the advertisements will disappear from the screen and the light of the advertisers on the back part will also turn off. If the user inserts a second coin an extra note will appear on the screen representing better music and more functionality.

As a finishing touch we made a stand for the ball that turns off the power of the ball.

Group 1: Thomas Westelaken, Sebastiaan de Monte, Chris Hoedemakers, Daniëlle Peverelli, Teije Oudshoorn

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