Strategic International Business Management: A case study of Spotify
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Institution
Date
Strategic International Business Management
Introduction
The onset and advancement of globalization have been critical in promoting the development of multinational and global companies. Best (2009, p. 2) states that globalization opens new markets for businesses. Complexity and cost of operating overseas have also been the results of globalisation. Twarowska and Kąkol (2013, p 1006) explain that the primary reasons for a company to go international is to achieve expansion and growth. Overseas operations help an organization to reduce its budget and hence achieve financial benefits. Alkhafaji (1994, p. 34) explain that new markets are usually less competitive enabling it to attain more profit.
Global businesses are affected by issues such as national interests and restrictions (Alkhafaji, 1994, p. 32). Jansen (2013, p.4) observed that countries differ in their global economic growth and development affecting the attractiveness of a market. Therefore, the selection of new markets has critical implications for the operations and financial performance of the company. Market selection considers various factors to determine the most suitable new market. This paper provides market analysis for Spotify Company (See Appendix I for the company background). An analysis of the macro-environment of Russia, South Africa, and South Korea reveals that the latter offers the best potential market (See Appendix II and III for the summary).
Rationale for selection of South Korea
Gupta (2013, p.16) stated that political factors can affect how an organisation operates by presenting potential and actual restrictions. Link (2014, p.4) explain that the legal factors can also influence a business’ operations, market demand, and cost. South Korea has political stability, had good bilateral relations with the West and the Middle East and has experienced progressive downsizing of corruption cases (Chung, 2007, p.40; Kemp, 2012, pp. 129-131; Shim, Kim & Martin, 2008, p.5; Van der Molen, 2015). A country’s bilateral relations with other countries have an impact on its economic stability (Cook, 2013, p.3; Monaghan, 2015, p.4). Government control of royalty rate promotes healthy competition based on price while control of internet usage prevents piracy of copyrighted contents (Anonymous, 2013; Chu, 2013). On the contrary, South Africa and Russia have political and legal instability that could hinder effective growth of Spotify’s operations in their regions. There is high inequality and unemployment level in South Africa (Lewis, 2001, p. 2). Russia faces political tensions, has constrained relations with the West and has been involved in many corruption cases (Avulyte & Ramoniene, 2014, p.18; Cook, 2013, p. 10; Monaghan, 2013, p.13). There also exist legislations that control open internet market (West, 2014, p.12).
The Economic environment of a potential market determines ease or difficulty of achieving success (Koumparoulis, 2013, p.32). South Korea has been experiencing an economic growth while South Africa and Russia economies have been declining. There is also improved consumer spending and confidence (Van der Molen, 2015). The country also has developed long-term strategies making it ideal for business investment. On the contrary, South Africa, and Russia provide less suitable economies for investment. South Africa’s economic growth has continued to decline since 2013 (Cook, 2013, p. 24; Statistics South Africa, 2015a). Russia also faces a decline in its economy’s growth rate. According to World Bank Group (2015, p.2), Russia will continue to have a decline in its GDP growth until 2017 when it will slightly stabilize. Moreover, the country is experiencing various economic sanctions by the West (Monaghan, 2015, p.2). Avulytė and Ramonienė (2014, p.18) also explain that the country is having poor recovery from the global economic crisis.
A report by Van der Molen (2015) reveals that South Korea’s population is approximately 50.3 million in 2015 with 73% being within the age bracket of 15-64 years. This percentage composition of the population is estimated to decline in 2060 when it will be 50% promising a relatively constant market demand. The country also has a music streaming culture that accounts for the high subscription rate in the country (Anonymous, 2013). South Africa and Russia also provide a large market with 54.96 million in 2015 and 143.5 million in 2013 population sizes respectively (Statistics South Africa, 2015b; World Bank Group, 2015, p.42). However, there is a high rate of HIV infection in South Africa among the young (about 16.6%) while there is high level of elderly people (approximately 25%) in Russia whose growth is also high. These factors might cause a decline in the growth of the subscription rate.
Shim, Kim and Martin (2008, pp.112-115) explain that South Korea is a digital powerhouse due to its high technological advancement. They further explain that high percentage (approximately 38 million) of South Koreans use mobile phones that they use for such as listening to music, paying bills and shop. South Africa also has a high number of mobile phone users (UNICEF, 2012, pp.5-9). However, the country faces challenges in technological infrastructure and the internet and computer ownership. Russia is among the most technologically developed and innovative countries but faces challenges due to government legislations on open internet market (West, 2014, p.12). Such legislation may affect the operations of Spotify.
Porter’s Five analysis also indicate that South Korea provides the most suitable market. Factors such as comparatively low bargaining power of buyers and suppliers and low threat from substitutes indicate the suitability of the market. There is high demand for digital music while Spotify has already established good relations with South Korea’s record labels alleviating suppliers bargaining power (Benjamin, 2015). South Africa and Russia have comparatively high supplier bargaining power due to the existence of alternative music streaming service providers. Suppliers are hence likely to dictate terms and license a company that meets their requirements (Flynn, 2014; Vermeulen, 2014; Wilson, 2015). Moreover, the South Korea’s buyers have low bargaining power due to government regulation of royalty rate and market domination by Melon (Anonymous, 2013; Resnikoff, 2016). On the contrary, there is easy access to pirated content (Ingham, 2015; Nayager, n.d; Vermeulen, 2014). Zvooq also provides free music streaming services in Russia (Flynn, 2014). Despite all the three companies having other companies providing music streaming services, competition in South Korea is relatively low. Most global music streaming companies have not penetrated its local market except YouTube (Benjamin, 2015). Domination of the market by Melon makes it easy to enter marker through differentiation and pricing. Such would not be the case in South Africa and Russia that have various global music streaming companies intensifying their threat.
Opportunities and threats to Spotify
South Korea provides a large market for the services provided by Spotify Company. According to Frank (2013, p.38), many South Koreans use music streaming services from companies offering such services. Approximately 80% of the music sold in South Korea is sold online with the majority of people downloading it using their mobile phones (Department of Commerce, 2012, p.40). Moreover, a majority of the mobile users are of young age (Shim, Kim, Martin, 2008, p.112). The high percentage of young mobile users and the already present infrastructure for music streaming services will be critical for easy penetration of South Korean market and assures for a high market for Spotify Company. Technological platforms for the establishment of Spotify operations are already in existence in South Korea as it is one of the countries with well-established broadband infrastructure (IFPI, 2012, p.28). Such factors are critical in promoting the success of Spotify in South Korea.
South Korea provides a conducive business environment for services offered by Spotify Company. South Korea has undertaken actions to control access to infringing content. According to IFPI (2014, p.41), South Korea has enacted measures to block websites that infringe copyrighted content such as music. Moreover, Sarmento (2013, p.299) explain that South Korea has strong copyright protection strategies that have promoted the growth of subscriptions to music services provision. Moreover, the lack of tariffs imposed on imported music or content will be critical to the operations of Spotify (Department of Commerce, 2012, p.42). The government may also perceive Spotify as a way of helping it curb piracy (Von Wiegandt, 2013, p.190).
Through its entry into the South Korean market, Spotify Company is likely to increase its customer awareness. According to Tuk (2012, p.21), South Korea’s K-pop is popular in many countries in East and Southern Asia, which account for 69% of K-pop views, as well as in the United States. The country has also become a net exporter of music (IFPI, 2012, p.29). Besides, high marketing of music in Korea will enable Spotify to penetrate the market easily. Entry of Spotify Company in South Korea’s market will give it more digital rights on the country’s music and hence promote its awareness.
However, Spotify faces various challenges in its entry into the South Korean market. For instance, there exist policies that regulate the country’s music market. Tuk (2012, p.12) explain that South Korea highly relies on local music with government policies giving a high percentage to the sale of local music. This legislation is further complicated by Gammons (2011, p. 142) account for the existence of the challenge of determining how music is consumed in digital platforms. Therefore, Spotify might be faced with the problem of determining music consumption as a way of ensuring it keeps the government’s requirement. There also lies the challenge of meeting customers’ needs in the existence of such legislations. Screening of how much of imported music it provides might result in poor penetration of the market.
Gammons (2011, p.141) explain that South Korea adopted legislation that required all internet service providers to ensure that they curb copyright theft. Such measures might impede the establishment of operations in the country by Spotify as it will be required to convince the government that it has adopted effective measures to prevent copyright theft. More so, Von Wiegandt (2013, p.193) explains that Spotify has been accused of low compensation to artists. South Korean government has been greatly involved in educating its public about copyright value (IFPI, 2014, p.41). Spotify might hence be required to change its compensation schemes before it acquires licensing in the country.
The success of Spotify in South Korean market might be impeded by the existence of other music streaming companies. For instance, IFPI (2014, p.20) account for the licensing of YouTube by South Korean government. Moreover, Resnikoff (2016) explains that Melon, a company offering online music streaming services, has attained about half of the population in South Korea’s population. Therefore, Spotify will face significant competition achieving market penetration.
Spotify’s Internal Environment Evaluation: Strengths and Weaknesses
One of the significant strengths of Spotify is their diverse nature of their services. Hsu and Liu (2008, p.346) account for the existence of a positive relationship between product/service delivery and the performance of a firm. Diversification of services allows customers to choose from among different provisions. Such diversification helps in improving the range of customers of a given company. Spotify provides its customers with such as wide choice of songs and information regarding music trends and products (Link, 2014, pp.1-9). Moreover, Spotify has three tiers for its subscribers to select from (Macias & Guitart, 2012). Such allows customers of diverse background to subscribe depending on their financial ability. Besides, Spotify also enjoys differentiation of its services. Teague (2012, p.214) explain that Spotify differs from its competitors through its freemium philosophy. This philosophy helps Spotify to have many subscribers from whom it gains either through subscriptions or advertisements.
Spotify enjoys good positioning in the market through its value creation marketing strategy. According to Link (2014, p.9), Spotify promotes its services as a streaming services provider that helps artists to grow. The company gives 70% of its revenue to the artists and record labels. Besides, Spotify allows artists without contracts with record labels promote their music by uploading it to the website. Link also explains that Spotify allows its users to customize their playlist and also provides suggestions to its customers (Zoll, 2015, p.26). The company has the most customized services compared to its competitors. Such services are critical to ensuring customer satisfaction.
Spotify provides legal and free streaming services (Bryce, 2013; Link, 2014, p.1). The company only offers music from artists and record labels from which it has obtained authorization. Spotify has also established a strong social aspect for its services through its partnership with Facebook (Reime, 2011, p. 42). Reime further explains that the company’s customers are genuine. The company limited the number of invitation sent by an individual implying that people scrutinized invitations and only sent them to individuals most likely to enjoy its services. Thomas (2014) also acknowledges the existence of a good engineering culture in Spotify. The effective engineering culture has allowed Spotify to improve its operations to ensure its growth without affecting its operations.
However, Spotify faces various challenges. For instance, Reime (2011, p.43) explains that the company does not have ownership of content. Spotify depends on licensing from record labels that may affect their charges. Moreover, Wong (2016) account for the licensing of Spotify’s competitors by record labels that previously were its partners jeopardize its competitive advantage. Teague (2012, p.219) observed that Spotify lacks financial transparency. The failure to address financial transparency has resulted in accusations regarding the amount generated and the process of allocation of the copyright pie among the various stakeholders (Reime, 2011, p.4; Teague, 2012, p.222).
Reuters (2016) account for Spotify’s constrained relationship with some artists over royalty issues due to poor pay (Reuters, 2016; Teague, 2012, p.223). It would be critical to consider the interests of artists to ensure fulfilment of their demands. Moreover, Spotify fails to provide artists with the opportunity to determine which freemium tier their music will be contained. Spotify made various changes in time and limitations to its free services indicating challenges of the freemium business model (Reime, 2011, p.43).
Eligible market entry strategies for Spotify
Entry into a new market requires an organisation to determine the most suitable entry strategy that it will use. According to Meester (2008, p.13), an entry strategy is critical as it determines the success that the new business is going to have. Barua and Chowdhury (2014, p.9) classifies entry strategies as either non-equity modes or equity modes. The non-equity modes comprise exports and contractual strategies while equity modes comprise joint ventures and wholly owned subsidiary. In determining an entry strategy, this paper considers franchising, licensing, strategic alliances, joint ventures and wholly owned subsidiary that are eligible for use by Spotify.
Franchising strategy involves obtaining a contract agreement with a similar local music streaming company (Durmaz & Tasdemir, 2014, p.50). For instance, Spotify could get a franchise contract with Milk Music Streaming that has been facing various challenges in the South Korean market (Kamran, 2016). The local company will be paying Spotify for the right to use their trademark while it is provided with technical advice, support, and training. Twarowska and Kąkol (2013, p.1008) explains that franchising strategy involves low political risks and cost. However, there is a likelihood of the franchisee turning to competitors. The strategy also involves huge investment amounts to support the franchisee.
Licensing allows the local company to use such as patent rights, copyrights, know-how and the trademark rights at a royalty fee (Levi & Jeyaseeli, 2006, p.44). Licensing and franchising are similar. However, franchising involves longer agreement periods and does not include intellectual property (Twarowska & Kąkol, 2013, p.1008).Levi and Jeyaseeli (2006, p.44) explain that licensing will keep financial commitment by Spotify low. As mentioned earlier, South Korea has legislations that regulate the time dedicated to local music sales. Such legislation might be detrimental to Spotify’s operations. In such a case, licensing might be useful to help the company to avoid substantial financial investment.
Licensing and franchising involve sharing of know-how to the local company. Teague (2012, p. 214) explains that one of the strengths of Spotify is its differentiation strategy in the use of the freemium model. Agarwal and Ramaswami (1992, p.4) inferred that sharing the know-how with the home company as required in licensing and franchising might cause loss of long-term revenues. The home company may use the gained know-how for their future operations.
Levi and Jeyaseeli (2006, p.46) define strategic alliances as an agreement of combining value chain by two companies with the intention of improving their competitive advantage. Spotify could form strategic alliances for marketing relationships to help it penetrate the South Korean market. Barua and Chowdhury (2014, p.10) explain that strategic alliances help an organisation to reduce its investment risks, enhance global mobility and improve their global competitiveness. Organisations can pool their resources and respond effectively to changes in the market. However, strategic alliances face the challenge of competitive collaboration in which case the partner company may face
Joint ventures involve an agreement of a company with a local one. The host company has sufficient equity stake and management voice (Levi & Jeyaseeli, 2006, p.47; Twarowska & Kąkol, 2013, p.1008). Joint ventures help an organisation to be flexible in the new market and save investment cost through the use of the home company infrastructure. Moreover, the home company has the knowledge and are conversant with external macro-environment factors, competitors and the structure of the local market (Barua & Chowdhury, 2014, p.11). However, joint ventures face the challenges in issues regarding policy making, management control feuds, and strategy adoption.
Spotify could also use the wholly owned subsidiary strategy to enter the South Korean market. This strategy involves setting up operations in the target market either through the establishment of a new entity or acquisition (Barua & Chowdhury, 2014, p.12). This strategy helps a company to establish direct contact with the market and to achieve long-term profitability. Moreover, the company maintains its global competitiveness. However, there are various challenges to the method. For instance, there may be the lack of acquisition candidates (Durmaz & Tasdemir, 2014, p.51). Moreover, direct investment is associated with high investment risks.
Recommendation for the most suitable market entry strategy
Various factors need to be considered for successful entry into a new market. Benjamin Levi (2006, p.194) explain that a market strategy should be based on the company’s strengths, avoid direct competition and should have a clear generic approach. Moreover, a market entry strategy needs to allow a business to choose control and structures that allow efficient operation of its global strategy. The most suitable entry strategy for Spotify is the formation of a wholly owned subsidiary through acquisition. Acquisition of a subsidiary will help the company to protect its know-how that is critical to its competitive advantage, and will prevent loss of its technological competency to its competitors (Levi & Jeyaseeli, 2006, p.48). Acquisition will help the country to reduce investment cost by allowing Spotify to use the home company’s infrastructure.
Some of the critical concerns that Spotify has been shown to face in the South Korean market involve policies, high competition from local companies and issues of content ownership for the country’s recording labels and artists. The use of acquisition will be critical to overcoming these drawbacks. For instance, through acquisition, Spotify will be able to understand the nature of operations in South Korean music streaming services. Moreover, the strategy will facilitate content ownership as it will acquire the home company and its assets. Acquisition will also be critical in reducing competition from local companies during the initial stages of the establishment of the company’s operations.
Conclusion
Spotify is one of the leading music streaming services provider globally and has had success in 57 countries. Spotify is also leading in having the highest number of subscriptions and the number of songs. The company’s success is attributed to its differentiation through its freemium business model, the services provided and has had high success in other global markets. A macro- and micro-environmental analysis reveals that Spotify will incur more success in the South Korean market as compared to South Africa and Russia. The country has conducive business environment due to good legislations promoting digital music and against piracy. The country also provides a strong economic base with high demand for music streaming services. South Korea’s consumer culture provides assurance for a market due to its willing nature to subscribe to music streaming service providers. High domination of the South Korea by Melon makes its market penetration easy. Spotify’s service differentiation, with excellent marketing and entry strategy, makes it more strategically and organisationally positioned compared to Melon.
This research revealed that the most critical challenges that might hinder Spotify’s success are competition and government legislation. South Korea has a specific consumer culture due to government control of the local and international music sales in the country. The high domination of the market by Melon is also noteworthy. The market entry strategy should consider these factors. The acquisition strategy is the most suitable for use by Spotify. The strategy would help the company to alleviate competition while promoting content ownership in the country. The strategy also protects Spotify’s know-how preventing loss of its competitive advantage.
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Appendices
Appedix I: Brief Company Background
Spotify Company provides music streaming, video and podcast services. The company offers digital rights management for media companies and record labels. The services can be accessed from such as mobiles, computers, tablets, cars, home entertainment systems and gaming consoles. The company has about 20 million subscribers with 75 million of these being active. The company has digital rights for about 30 million songs and has 2 billion playlists. By the year 2016, the company offers services in about 58 countries such as Brazil, Costa Rica, Colombia, Czech Republic, Cyprus, Dominican Republic, Denmark, and UK.
Appendix II: Macro-environmental analysis of Russia, South Africa, and South Korea
The table on the next page gives a summary of the four macro-environmental factors that have been considered in this report.
| Macro-environment Factor | Russia | South Africa | South Korea |
| Political and Legal Factors | · Political tensions
· Deteriorating relations with the West · War with neighbouring countries · Poor laws against copyright infringement · Legislations controlling open internet |
· Political stability
· High economic inequality along racial lines · Good relations with the West · Poor laws against copyright infringement
|
· Political stability
· Good relations with the West and the Middle East · Royalty rate influenced by government · Has laws such as three strike rules that prevent copyright infringement |
| Economic Factors | · GDP growth expected to decline before stabilising in 2017
· Experiencing economic sanctions · Poor recovery from global economic crisis |
· GDP growth prospected to decline
· Good economic policies · High corruption levels
|
· GDP growth prospected to increase
· Consumer spending and confidence improvement · Long-term economic strategies · Low and downsizing corruption levels |
| Technological Factors | · Technologically developed and innovative
· Limitation of internet open market · Relatively low level of online music sale |
· High access to mobile phones
· Mobile phones used for various reasons including listening to music · Poor technological infrastructure · Internet and computer ownership problems |
· Digital powerhouse
· High access to mobile phones by the youths · Use of phones for a variety of reasons including listening to music · High levels of online music sales |
| Environmental Factors | · Not likely to be of concern due since the industry is internet based
· No waste release |
· Not likely to be of concern due since the industry is internet based
· No waste release |
· Not likely to be of concern due since the industry is internet based
· No waste release |
| Socio-cultural and Demographic Factors | · Population size of 143.5 million in 2013
· High level of elderly people who are expected to progressively increase · Culture of not paying for music · Different local and international music genres popular
|
· Population size of 54.96 million in 2015
· High percentage of young people · High levels of HIV infection among the young people · Culture of not paying for music · Different music genres popular that are geographically influenced |
· Population size of about 50.3 million in 2015
· High percentage of young people · About 4 in every 5 have access to phones · Online streaming culture highly acknowledged · K-pop music culture very popular |
Appendix III: Porter’s Five Forces Analysis of Music Streaming Industry in Russia, South Africa and South Korea
| Force | Russia | South Africa | South Korea |
| Threat of New Entrants | Low entrant threat level
· Internet policies discourage new entrants into the market · High piracy discourages new entrants |
Moderate entrant threat level
· Increase in online music sales · High piracy discourages new entrants · Improving broadband infrastructure |
Low entrant threat
· Online music streaming regulation by the government · High market penetration by Melon discourages new entrants · Regulation of online content to promote local music |
| Supplier’s Bargaining power | Moderate bargaining Power
· Existence of alternatives in the streaming industry · Need to curb online piracy |
Relatively high bargaining power
· Need to curb piracy · Existence of alternatives in the streaming industry · Music streaming services are still new in the market |
Low bargaining power
· Spotify’s good relations with YG Entertainment and SM Entertainment · High digital music demand by fans |
| Buyer’s bargaining power | High bargaining power
· Existence of other music streaming services with some being free Zvooq · Probable high demands by buyer due to easy access to pirates music · Low switching cost |
High bargaining power
· Easy access to other locan and free streaming services such as Mziiki · Easy access to pirated content and alternatives necessitate buyer demands being met · Low switching cost |
Low bargaining power
· Subscription rate highly influenced by the government · High dominance of industry by Melon · Low switching cost |
| Threat of Substitutes | High threat level
· Free and legal streaming service in the country · Other global music streaming service providers in existence such as vKontakte, Deezer, iTunes and Yandex.Music |
High threat level
· Exists free and legal streaming service providers · Other global providers in existence such as Google Play Music and Deezer |
Relatively low threat of substitutes
· High dominance of market by Melon which provides only subscription services · Very few global music streaming companies, YouTube and iTunes existing |
| Rivalry | High rivalry level
· High rivalry from local service providers, Zvooq and vKontakte with high customer base · Zvooq uses freemium model jeopardizing critical source of Spotify’s competitive advantage |
High rivalry level
· High number of competitors such as Vodacom, Simfy Africa with some offering free streaming services such as Mziiki · Only small market portion has access to streaming services intensifying competition |
High Rivalry
· High number of local and global competitors such as Melon, Bugs, iTunes and Genie · High market dominance by Melon |
