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Spotify reached $3 billion in revenues in 2016, amid a booming music-streaming market that now made up 51% of the U.S. music industry's total revenues. Finally the industry had embraced digitization and was now seeing two-digit growth for the first time in decades. However, that growth had an Achilles' heel. Spotify itself was staring at an operating loss of $350 million, having never been able to post a profit in all its years of existence. Now, the company was starting a round of negotiations with the major labels in order to get a new licensing deal that would help improve the company's numbers. The case looks in detail at both the history of the digitization of the music industry, and the history of Spotify itself, presenting a snapshot of the state of the industry at the time these negotiations were taking place. What are the alternatives for Spotify? Would a deal with the labels be enough to make it profitable? Does the company - and the industry itself - have a positive future?
This case was written for courses on strategic management, particularly those dealing with competitive strategy and network markets. Spotify's success and challenges, within the framework of a music industry that has seen significant disruption in the past two decades, are topics that are well suited for analyzing the following key subjects: - how the introduction of new business models affects an industry's structure - the power of the different players in a value chain and the relationships established between them - how value is created and captured in a changing ecosystem