How Spotify experiments with partnership-enabled business model innovation

Spotify has been on my business model watch list for some years. They constantly leverage partnerships to build next steps for developing their business model and achieving growth. In this article, I wanted to take a closer look at some of the partnerships that Spotify has created. How does the business utilize these partnerships? To what extent are these partnerships successful? Do they contribute to a cohesive user/customer experience, or is Spotify turning its product into an attribute soup?

Many people, including myself, know and love Spotify, the online music streaming service from Sweden. Initially Spotify was only available in Scandinavia. They expanded to more countries whenever they could obtain licenses for streaming music. These licenses are terribly laborious to obtain, as each country has its own systems and process for agreeing on the terms for broadcasting.

In the early days of the company, Spotify’s priority appeared to be to get enough coverage geographically, working hard to obtain license deals. But now that they have achieved coverage, they’re dealing with other growing pains. Spotify has a sizable body of listeners, about 50 million. Of those 50 million, 12,5 million are paid subscribers. These are also the company’s main source of revenue. But with increasing competition from services like Apple’s upcoming Apple Music platform, Rhapsody, Rdio, and even Youtube, Spotify is on a mission to onboard more users, and to increase the rate at which they can convince free users to convert to a paid premium subscription to the service.

Within this business landscape, Spotify is clearly opting for the partnership model to compete. Just a sample from the list shows partnership collaborations ranging from Coca-Cola, to Bang & Olufsen, to Uber. However, these partnerships are strikingly diverse. You wonder what the overall strategic rationale would be.

To better understand Spotify’s partnership-driven strategy, I’ve selected a couple of interesting partnerships for closer examination. Firstly we’ll look at Spotify’s deal with Facebook, because Spotify utilized this partnership to enter the US market (where it was completely unknown, before entry). Secondly, we’ll have a look at Spotify’s deal with Bandpage, a social media integration site for artists to engage more with their fans. Lastly, I’ll speculate about the recently announced partnership with Starbucks, a very interesting move, blending value from 2 seemingly disparate industries, each operating with their own clock speed.

I will use The Partnership Canvas in combination with the Business Model Canvas to examine these partnerships. For each case I’ll reflect on 2 critical questions to assess the robustness of the partnership rationale:

  1. Does the partnership contribute to Spotify’s current strategic challenge to on-board more users, and increase the rate of conversion to premium subscriptions?
  2. Are these partnerships an equally compelling proposition to Spotify’s partners?

Spotify and Facebook
As I mentioned in the beginning of this article, Spotify was initially active in the European markets. However, they didn’t have any directly addressable market in the US. Nobody knew them when they wanted to enter the US in 2011. Instead of going for a widespread advertising campaign, Spotify opted for a leaner approach by using Facebook’s channels to land in the US.

-Partnership design-
The design of this partnership is as follows. Spotify has its eyes on Facebook’s main asset: Facebook.com and its users. Spotify’s offer is to leverage this channel with shareable streaming music content. This way, Spotify offers its unique resource of music licenses, which were painstakingly won on a country-by-country expansion basis, as a proposition to leverage Facebook’s social networking proposition to its customers.

To ensure mutual accessibility to these value elements, Spotify and Facebook have jointly created a music streaming API to stream, and share Spotify-powered tunes within Facebook.

This value exchange creates a new channel for Spotify, where its app is displayed prominently on the Facebook user’s dashboard. For Facebook this exchange creates an addition to its value proposition by offering legally shareable music on the social network, something that would have taken them ages to attain by themselves. This sharability additionally boosts Spotify’s presence by creating viral network effects to expand its reach to new users.

The complete setup of the partnership, and the contribution to each partner’s business model is shown below:

spotify-facebook
The Spotify-Facebook partnership

-Partnership Hypotheses-
The hypothesis for Spotify is that the Facebook channel, in combination with the network sharing effects, will provide it with exposure in the US, and lead to new sign-ups. The focus is mostly on acquiring new users. The partnership design doesn’t address the deepening of engagement with these users to increase the likelihood that they will convert to a premium subscription.

For Facebook the hypothesis is more complex. The music streaming service value proposition firstly has to increase user engagement with the platform. In turn, this engagement must then lead to new user behavior data, which would increase granularity for targeting advertisement campaigns for Facebook’s main source of income: advertisers. 

As for the objective on obtaining more users, this partnership was a very successful partnership for Spotify, because they successfully entered a new market in the quickest way possible. Their current presence in the US market validates their partnership hypothesis. The fact the partnership is still active to date, is an indication that it is also creating value for Facebook.

Spotify and Bandpage
The context for this partnership is compelling. Spotify has been under fire from several artists like Radiohead’s Thom Yorke, and Taylor Swift about the rewards they obtain from providing their work on the Spotify platform. As a response, Spotify was compelled to search for new opportunities to add more value to their relation with music “suppliers”. They saw an opportunity to make this happen in a partnership with Bandpage. Bandpage is an online service that integrates an artist’s social media presence. Artists are able to integrally update news on their tours, and availability of merchandise from their sites, to a wide range of media channels, like Facebook, Twitter, Xbox, and in turn increase engagement with their fans. Could this partnership solve Spotify’s issues with artists, and at the same time increase user engagement with its platform?

-Partnership Design-
What Spotify desires from Bandpage is the convenient link it provides to the artist’s own media campaigns. Spotify would be able obtain all their artists’ campaign content through a single aggregator, instead of having to source it from each artist individually. To leverage this asset, Spotify offers the artist’s Spotify profile page, and their (playable) discography (again employing the licenses it has to artists’ music content) as a means of targeting promotional campaigns.

To ensure mutual access to the value that these partners bring to the table, Spotify has created the ability to integrate Bandpage’s content stream into the artist’s Spotify profile. Artists can opt-in to this feature by linking their Bandpage and Spotify accounts.

The value this creates for Spotify is the ability to offer instant updates to a highly targeted audience of artist fans. This is a value proposition to both fans using Spotify, as well as to artists. Interestingly this expands the role of the artists in Spotify’s business model. They move from being a supplier at first, to also being a customer to the Spotify platform through the partnership. For Bandpage, this partnership fits into their overall partnership strategy to link up with as many relevant social media channels as possible. The added benefit in partnering with Spotify is the highly targeted channel to fans.

The complete setup of the partnership, and the contribution to each partner’s business model is shown below:

Spotify-Bandpage.png
Spotify-Bandpage partnership

– Partnership Hypotheses-
For Spotify the partnership creates a new value proposition for a new customer segment, namely artists. To find out how this proposition would play out, Spotify would need to test the hypothesis that this campaign positioning will convert to a significant increase in traffic to the artist’s site, thereby stifling their criticism on the lack of value Spotify creates for them.

For Bandpage this partnership will create a new channel via the Spotify platform. The main hypothesis I would test, is whether this very targeted channel to fans leads to a higher conversion rate in sales of the artists’ merchandise. The reason is that Bandpage’s revenue stream depends on sales taking place on the merchandise sold through the leads it creates with fans.

Whether the partnership was able to validate these hypotheses is still not clear. From my own experience in using Spotify (a lot) and listening to a broad range of artists, I haven’t seen any artists that have used the Bandpage integration yet. If artists aren’t making use of the possibility to link their Spotify and Bandpage presence, it will also not create any additional engagement with fans.

It’s thus likely that the partnership isn’t creating the value hoped for. On the other hand, the partnership doesn’t conflict with either of the partners’ business models, and it doesn’t cost either business anything. So it is could be that this partnership will be continued and improved upon.

Spotify and Starbucks
Yes, you read it right! Spotify and Starbucks recently announced a partnership. A music platform, and a coffee house are joining hands. This is a seemingly unlikely combination, but Starbucks does have a track record in providing music as part of its value proposition with its range of CD collections, and until recently its partnership with Apple’s iTunes. Although the partnership with Spotify is yet to be implemented, and both companies are secretive as to what their proposition will actually look like when they launch, we can speculate how it might play out for both partners by filling in some of the blanks from their press release.

-Partnership Design-
Spotify has some Starbucks assets on its list that it desires to have access to. Firstly, Starbucks has over 7.000 physical coffee shops, and 150.000 staffers on the ground. This is something Spotify doesn’t have. Secondly, Starbucks has a very successful loyalty program, which hosts about 10 million active members.

To leverage these assets, Spotify can offer its streaming music service, to be used in the context of Starbucks’ physical stores. This is very interesting to Starbucks as they have no presence yet in the growing music streaming market. Secondly, Spotify has a group of premium subscribers of comparable size and geography to Starbucks’. Together, this could create an interesting community.

To provide mutual access to these value elements, the partnership would create 2 types of transfer activities. Firstly, the partnership will integrate a Starbucks staff playlist feature into the Spotify app, so Starbucks staff can stream music in-store. Customers will also be able to vote/comment on these tracks to influence the music that is played. Secondly, Spotify and Starbucks will couple their respective premium accounts, and loyalty program. This creates the opportunity for combining forces to deepen customer relationships.

For Spotify the partnership will create a new channel, where their platform is used in-store to provide for music. Also staff will be actively promoting their brand. Secondly, Spotify could offer Starbucks rewards for every increment in duration of a user’s premium membership with Spotify (but this is speculation).

For Starbucks the partnership will mean that they’ll gain a prominent position on Spotify’s categories of playlists. This could give a significant boost to Starbucks’ online presence, and opportunities for people to engage more with the Starbucks’ brand. Secondly, the coupling of membership/subscriber accounts would enable Starbucks to hand out tokens for Spotify membership discounts in combination with their loyalty program points (again speculation).

The complete setup of the partnership, and the contribution to each partner’s business model is shown below:

spotify-starbucks
Spotify-Starbucks partnership

-Partnership Hypotheses-
Of all the three cases, this partnership is the only one that has the potential for meeting both facets of Spotify’s strategic challenge. By having an in-store presence Spotify could expect more people to sign up for their service. On top of that, the link with the Starbucks loyalty program could incentivize these sign-ups to a premium membership, resulting in an improved rate of conversion!

For Starbucks, the main hypothesis is that providing streaming music will enhance engagement with their existing loyalty program members, as well as increase the number of loyalty program members, by onboarding people from the Spotify platform.

We’ll have to see if this partnership design will actually be implemented as described. But in any case, the combination of values between these two companies has great innovation potential to boost the customer experience.

Spotify’s full partnership portfolio
Now that the partnerships have been presented separately, the question remains whether Spotify’s business model is still cohesive.

The portfolio overview of these selected partnerships is presented below. Overall they don’t overlap in terms of their market space. Also the partners don’t interfere with eachother in terms of brand identities. Spotify has figured out a way of positioning their partnerships discretely enough, so that they don’t interfere with user segments that don’t care for making use of what the partnerships have to offer. This is a good indication that the partnerships can co-exist within Spotify’s business model.

Fig 4. Spotify’s partnerships with Facebook, Bandpage, and Starbucks.
Fig 4. Spotify’s partnerships with Facebook, Bandpage, and Starbucks.

What’s also striking is that Spotify is very consistent in their partnership design. In each case, they seek for an opportunity to leverage their key resources: the music licenses. Even though Spotify might be dwarfed by the size of some of their partners, the asset of having these licenses brings enough to the table to be an equal partner in negotiations with the likes of Facebook and Starbucks.

Final thoughts
The Spotify partnership cases have been instrumental to show how the company experiments with partnerships to evolve its business model to compete. The $64.000 question remains what business model will prevail in the space of music streaming. Yes, Spotify and its streaming competitors might draw in a lot of free users, successfully pulling them from the paid downloads market. But the streaming industry is still struggling to find the business model to pull of the job of converting people to paid subscriptions. The key will be to keep experimenting with the value proposition and the customer experience.

Spotify stands out in this respect. They’re approach to experiment through partnerships to find the right business model pattern stands out. Not only because they amplify their existing business model, but even more so because they are willing to utilise partnerships to reshape the building blocks in their business model.  Spotify takes partnering to a whole new level.

Aside from the case specific insights of this article, the Spotify partnerships also reveal some generalities about partnerships and business model design. I would like to close off this post with these insights:

  1. Money is not the critical factor in designing partnerships. A partnership is built on the combinations of value from both businesses, which don’t depend on paying each other for a service. As soon as money enters the discussion, you might be moving towards setting up a transaction, or to an investment relation. Those relations are very distinct from the partnership relation.
  2. The realm of partnership enables you and your partner to create value. The realm of your respective business models will determine whether you’re able to deliver and capture that value.
  3. A partnership only really works when the hypotheses for value creation (in the partnership) and capture (in the business model) are validated for both partners.
  4. Every partnership is only a hypothesis upon conception. Partnership hypotheses need to be tested, and most likely iterated. Therefore it makes a lot of sense to apply the lean startup build-measure-learn cycles to developing partnerships. A tool like the partnership canvas can help to communicate and consciously design experiments for testing together with your partner.
  5. Use the partnership canvas for partnership portfolio design. Avoid loosing overview what partnerships contribute to your business model by being explicit about what each partnership contributes, how you test and monitor whether that works. Also prevent partners from getting into each other’s space by partnering with you, and make sure that you don’t mash up conflicting brand identities in your partnership portfolio.

Interested to learn more about how Spotify reigns the world of partnerships?
You can join the Partnership Design Linkedin group, or get a seat at one of our Partnership Design Masterclasses.


[I owe a truck load of gratitude to some people who provided me with the feedback on this post. Firstly there’s my wife, Anne Bruinsma, a leader on open innovation in agriculture. Then there’s Mike Lachapelle who is a very experienced business model consulting practitioner. And Syamant Sandhir, who is an expert on designing customer experience for the web.]

The partnership proposition canvas: designing your value network

[Ed. 17-10-2014 We have an updated version of this partnership tool]

Alex Osterwalder’s business model canvas is proving to be an indispensable tool in the process of business model innovation. It trawls your sets of ideas for those innovations where you can improve on, or create novelty in bringing value to the customer. Also, there are exciting new developments to this tool, such as the value proposition canvas, which can be used as a plugin. The business model canvas is ideal for gearing your business for market disruption, toppling your competitors with a proposition that best fits to current customer needs.

Yet, there is one important aspect in the process of market disruption, that the business model canvas doesn’t take into account in detail, namely the value network, located at the back-end of the business model. As Clay Christensen, and Richard Rosenbloom (1995) wrote,

“The key consideration is whether the performance attributes implicit in the innovation will be valued within networks already served by the innovator, or whether other networks must be addressed or new ones created in order to realize value for the innovation.”

Forging the value network partnerships, which are required to make your business model work, is not an easy task. Potential partner businesses are already part of other existing value networks, and it is often not self-evident for them to engage with you in a partnership; they would rather stay in the relations they’re currently in. The upshot is that in order to realize a new business model, we not only need to convince our end users to prefer our idea, but we also have to motivate others within the value network to stop using our competitors. In this blog post I will present a prototype of a new business tool, that helps you in designing your partnerships, and intends to work seamlessly together with the business model canvas.

Available tools
It is my experience in discussing key partnerships with the business model canvas, that the discussion remains constrained to what I would need as a complement to my own business model, ie. what I would like to use my value network for. But a partnership is not just about my business model. It is a two-way relation. The questions I see myself asking in addition are:

  • What position do I have in approaching potential partners? What can I offer that is of value to them?
  • How can I assess the balance between what I offer my partner, and what I obtain in return?
  • How can I best utilize these returns from my partnership for use in my own business model?

… and I keep guessing about the answers.

There are tools out there, value mapping being the most prominent of them. You can find a great feature of this tool in Vijay Kumar’s latest: 101 Design Methods. However, the inherent problem with this tool is that is primarily an analytical tool. It does not carry the conversation forward to creating the actionable hypotheses, which are required to validate a new business model. Just like the business model canvas, value mapping only provides guidance on possible outcomes for thinking about partnerships, not on how to specifically arrive at an outcome. There is thus a need for asking even better questions about your business model, making your thinking on partnerships more granular.

A prototype tool for discussing partnerships
Something that comes closer to a resolve of this issue is the value network exchange process between two partners that Verna Allee (2008) describes in het work. Verna defines an exchange relation in a value network as a 3 step process:

  1. value input to the relationship (what do you bring to the table?)
  2. value enhancement (how can you enhance the value you can provide to your partner?)
  3. value conversion (how can you make use of the value that your partner holds?)

Expanding on this, I’ve broken these 3 steps down into 8 building blocks. Each building block contains its own questions that need to be asked in order to achieve the flow of value between your business model and a specific partner.

Screen Shot 2013-07-05 at 1.58.02 PMThe content of this table can be rendered into a canvas structure. I have dubbed this the partnership proposition canvas.

Partnership Proposition Canvas

The partnership proposition canvas (v0.4): rendered from The Business Model Canvas (BusinessModelGeneration.com) 
and licensed under the Creative Commons Attribution-Share Alike 3.0 Un-ported License

How does the partnership proposition canvas work?
This canvas can be used either as a stand-alone tool, or in conjoint design with the business model canvas, as a zoom-in tool. You can use the partnership proposition canvas when you have validated the primary hypotheses relating to your value proposition-customer fit, and are looking to validate the rest of your business model. As Steve Blank explains in the (free!) Udacity Lean Launch Pad class: you can’t begin early enough with exploring potential partnerships.

Linking the partnership proposition and business model canvas

The partnership proposition canvas has a two level relation with the business model canvas. First, key activities and key resources need to match in both. Secondly,  “usable forms” in the partnership proposition canvas need to be relevant and applicable in any of the other building blocks of the business model canvas. This way you can indicate how a specific partnership adds value. The added value from your partnership can be evaluated by comparing the cost structure of the partnership, with the returns from application of the “usable forms” in your business model canvas.

Matching the back-end of the business model canvas

Matching the partnership proposition canvas with the back-end of the business model canvas

"Usable forms" and the business model building blocks

The “usable form” building block should contain elements, which fit back into the business model canvas.

2 Examples
I’ve worked out two cases to demonstrate how the partnership proposition canvas works. The first is case of a company that has really taken its partnership strategy to the next level: the relation between Nespresso and its machine manufacturers. The second is a relationship gone sour: the relation between Apple, and its component manufacturer Samsung.

Nespresso and the machine manufacturers
Nespresso’s business model is famous for the relation it has set up with its partners, the machine manufacturers. The manufacturers have their own distribution channels through which they market their versions of the Nespresso machines. This dramatically increases the reach of the Nespresso concept, because once you buy the machine, you’re also stuck to buying the coffee pods.

But what would compel these manufacturers to make their distribution channels available? The partnership proposition canvas below shows how this is done

Nespresso partnership model

Machine manufactures have 3 assets that Nespresso doesn’t have, namely manufacturing facilities, a product distribution network, and product marketing. These are the desired assets that Nespresso wants to make use of.

Nespresso offers manufacturers three propositions: a license for using their technology to build the machines, a co-branding opportunity for marketing them, and providing a one-stop-shop for product returns. Nespresso’s condition for giving out this proposition is that the manufacturer co-designs its machines with Nespresso, and that they co-design the machine advertisements. This is firstly to safeguard the overall look and feel of the Nespresso concept. Also this compact supports changes to machine designs as the Nespresso R&D department periodically comes up with new technologies. As a deliverable to the arrangement, Nespresso includes the machines in their advertisement activities. On top of that Nespresso also offers to market the machines through its own Nespress.com and flagship stores, and defective machines back if they’re still under warranty.

What does Nespresso get in return that it can utilize for its own business model? Firstly of course, the mentioned access to the manufacturer’s distribution channel. But there’s more! The offer is apparently so appealing to manufacturers, that Nespresso is even able to seize a percentage of the sales of the machine through the Nespresso stores out of the deal, as well as a small license fee. When looking at the bottom line of this partnership, it creates more than enough value to offset the cost of running the partnership.

Apple and Samsung
The Apple-Samsung relationship dates back to 2005. Apple was looking for a stable supplier that could realize the replacement of the hard disk drive in its iPods with flash memory, and could at the same time meet the supply requirement for its upcoming line of other portable devices. At that time there weren’t many players out there who could supply that technology at the volumes and quality required by Apple: “Whoever controls flash is going to control this space in consumer electronics,” Steve Jobs said. Not only did Samsung fit the requirement as a supplier of flash memory, it also would deliver processors, and screens of high quality for iPods, iPhones, and iPads, fitting to Apple’s huge quality and energy saving demands.

So, what does this partnership look like?

Apple - Samsung partnership model

Apple offers Samsung an exclusive procurement relation, where Apple will only buy its desired components from Samsung on a long-term basis. The steady growth in sales of i-devices backs the long term value of the proposal. Also, joint development of processors is a crucial part of the deal, as that requires capabilities that Apple doesn’t have on itself. As a deliverable, Apple purchases components, and shares sales projections, so that Samsung can coordinate its supply. The tricky bit of this arrangement is though that Samsung has also become very active on the mobile devices market since initiation of this partnership on 2005. That’s why the compact includes a confidentiality agreement, where Samsung’s components division is forbidden to share Apple sales forecasts with its mobile devices division.

Currently this relationship appears to be outlasted. Where Apple initially took advantage of the fact that Samsung was the largest manufacturer of flash drives in the early days when sales for the iPod really started to grow, Samsung has now turned into Apple’s main competitor on the mobile devices market. The confidentiality arrangement is put under pressure as the rivalry between the two companies on the consumer market heightens. Now that Samsung’s advantage as a flash drive manufacturer has lost significance due to more able rivals being active on the market, and due to the fact that it is directly competing with Apple, the relationship is downgraded. It is reduced to a basic component supplier relationship with limited added value (and potentially it is even a leaky risk!).  Quite clearly, the relation is under pressure, and Apple needs to innovate with new relations and new partners.

Wrap-up
The partnership proposition canvas is a first attempt at creating an actionable tool that can support design from the back-end of the business model. It is informed by value web mapping tools that analyze how an industry’s value network exchanges value. Insights from such analytical tools can be used in the partnership proposition canvas to create actionable hypotheses for experimenting with new relationships in your value network, helping you build a strong business model.

The tool is still at an early stage and will be prototyped by more practitioners over the coming weeks. I hope that this blog post has captured your interest. If so I would really like to invite you to give this canvas a spin, and provide me with straight up feedback on how it works for you. More to come in this space!

Download the partnership proposition canvas template in powerpoint with stickies here:

Key take aways:

1)   Value networks matter for business model design
2)   Your key partner relations are more specific than mere supplier relations. You are often looking for complex forms of (non-monetary) value from your partners to support your own business model operations, and you need to deliver something matching in return.
3)   Your partnership is temporary. What you need in search mode is different than the partnership you will need in execution mode, and even then your relations won’t last forever. Your partnership is thus likely to develop over the period of developing your business. The partnership proposition canvas can help you adapt to those upcoming requirements.

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I would like to express my gratitude to Ernst Houdkamp for reviewing this blog post before publishing, encouraging me to make it as simple as possible. I hope this has worked out. I will be prototyping this canvas together with Ernst over the coming weeks to observe how it is used and learn about the needed refinements.

Literature used:

Allee, V. (2008), “Value network analysis and value conversion of tangible and intangible assets” Journal of Intellectual Capital, Vol. 9 Nr. 1, pp 5-24

Christensen, C.M. and Rosenbloom, R.S. (1995), “Explaining the attacker’s advantage: technological paradigms, organizational dynamics, and the value network” Research Policy, 24, pp. 233-257