Tencent Vs. Spotify

Tencent vs. Spotify

Name

Institution Affiliation

Tencent vs. Spotify

Introduction

        Both Tencent and Spotify are online music streaming services providers. The two companies are different in a number of operational aspects, and consequently different financial performance. In 2017, Tencent Music Entertainment reported $1.7 billion dollars profit while Spotify reported losses amounting to $461.4 in December 2017. A comparison of the business strategies employed to the global market by the two companies is a good metric of establishing the cause of the disparity in financial performance. Spotify operates in more countries than Tencent since it has subscribers from Europe, America and some parts of Asia and Africa while Tencent operated exclusively in China. Besides the fact that the market conditions are different in the distinct regions that the two companies operate, the strategies employed in taking maximum advantage of the opportunities in the market and dealing with risks accordingly has led to the different results in the performance of the two companies. This paper explores the similarities and differences in the operations of the two companies and analyzes the performance of each of the companies relative to the strategies employed. An empirical approach is adopted in assessing the results of each of the companies since the companies operate in separate markets with different conditions and populations.

Historical background

Spotify was started I 2006 in Sweden by a team known as Spotify AB. The company was founded by former managers at successful companies; Daniel Ek and Martin Lorentzon who both previously worked at Stardoll and TradeDoubler respectively (Jhonsa, 2018). Spotify is based in Stockholm, Sweden although it has offices in most of the countries in which it operates in. The company was officially launched in 2008 where it sought to acquire subscribers and to make deals with music labels. Free service began in 2009 in the United Kingdom. Due to the release of mobile service, Spotify ended the free registration strategy and adopted the policy on invites to the platform only. In 2009, the first premium cards were offered to subscribers. The company used ads to fund its free trial period that lasted up to 2012 when the number of hours that one could listen to free music was limited to ten hours daily, and the free services were ended in 2013. Spotify then embraced a freemium business model where basic online music streaming is free, but one has to subscribe for better quality services. The company embarked on a wide expansion strategy in the global market and it currently operates in America, Europe and some parts of Asia and Africa (Jhonsa, 2018).

Tencent Music Entertainment is a branch of the giant Tencent Company that began its operations in China in 1998. Tencent, therefore, has a lot of knowledge and experience on the Chinese entertainment market which explains the success of TME. TME was started in 2016 and its growth has been rapid courtesy of dominating all the segment of the online music industry in China. This followed the acquisition of China Music Corporation by Tencent in 2016 (Tencent Music, 2018). Later, Sony acquired shares in the investment by Tencent Music and the company offered to issue shares publicly in 2018. TME is based on technological innovation and it operates through QQ Music, Kugou and Kuwo applications that cater to all the needs of music listeners in China. The three music applications are estimated to have contributed to 56% of the total music streaming services that were offered in China as of July 2016. The company has successfully dominated the market in China at the expense of Apple Music and Spotify.

Business model

 Spotify operates on a freemium business model while TME uses a nickel and dime model. Spotify offers free online streaming of music to all people but one has to pay in order to reduce the interruptions beads, to use the Spotify mobile service, to have enhanced the sound quality of up to 320 kbps bitrate, have access to Spotify music offline and to use Spotify Connect service. TME, on the other hand, requires its customers to prepay for all the services they enjoy (Jia, Kenney, & Zysman, 2018). The cost of acquiring a song is relatively low and one has to pay in order to get access to other services that are advertised in the TME platforms. The freemium business model adopted by Spotify has enabled to expand its market and have higher levels of popularity globally. The main problem with the freemium model is that many customers will be satisfied with the free service, leading to the loss of revenue that would have otherwise been earned in the form of subscription fees. TME, on the other hand, attracts a lot of customers since it offers high-quality services at affordable prices. The satisfaction levels of TME customers are likely to be higher than those of the people who stream from Spotify for free due to the low sound quality and constant interruption of music by ads in the latter.

Product differentiation

 Spotify offers exclusive music streaming while TME uses its three dominant applications to cater to the tastes and preferences of the listeners in China. Spotify only offers all genres of music on its one and only platform hoping that consumers will filter to their preferred songs and listen to them (Aguiar, & Waldfogel, 2018). TME uses QQ to offer freemium music streaming services, and Kugou and Kuwo cater for music lovers who are most interested in karaoke among other smaller breakdowns of music. The three applications run by TME make it possible to capitalize on specific customer segments using the applications. Limiting the focus of the applications to fewer target market segments enable TME to understand its customers better and to offer them satisfactory services all the time regardless of the dynamics in the market. The generalization of the music streaming market by Spotify does not allow the company to have a chance to cater adequately for each `of the customer segments accordingly thereby leading to lower levels of customer satisfaction and loyalty. Spotify is therefore at a higher risk of losing its customers to other online music streaming providers than TME which is likely to maintain its current share and to attract even new consumers.

Relation with artists

        TME offers better services to artists and label managers than Spotify. TME is able to take care of artists that are already well-established as well as upcoming ones by adopting a low pricing strategy. The effectiveness of the low prices in dealing with the rampant music piracy in China makes the platform as popular to artists as it is to listeners (Thussu, De Burgh, & Shi, 2017). The ability of TME to maintain its customers makes it reliable to artists and label managers who are assured of lucrative investments in TME. The low process also revives the music industry in China that had been negatively affected by pirates who offered cheaper access to music before the inception of TME in 2016. Spotify too has a good strategy of attracting artists and label managers to the platform. The “Spotify for Artists” strategy aims at involving artists more in Spotify by offering them packages that allow them to develop customized profiles on the platform that enable their fans to reach them easily. The strategy is an effective way of helping Spotify to cater for the various consumer segments since it lacks a proper product differentiation strategy like TME which has developed separate applications to cater for customer segments independently and adequately.