What is the key challenge or problem facing the firm?

The major challenge that Spotify faces is improving the company’s profitability. The organization has had significant growth in more than 60 countries across the world. However, since 2008, it has not registered any profits. Despite a considerable expansion of the business, Spotify needs to enhance its profitability to remain viable in the highly competitive digital music industry. 

External Analysis (The Industry and the Economic Environment)

Political.Spotify operates in more than 60 countries and most of these economies have stable political situations, providing favorable work environment for the organization. However, the company needs to adjust its activities to comply with the local legislation and policies of every nation.

Economic. Spotify operates mostly in the USA and Europe, which are economically stable locations. This has markedly supported the company’s growth. The interest and inflation rates are within controllable levels, and are thus not a major challenge to the business.

Social. The increasing acceptance of technology has led to the growth and expansion of the digital music industry. Since Spotify overly relies on technology in the sale of its services, its significant growth in the industry is expected; as of 2017, Spotify had more than 140 million users. Acceptance of technology is mostly based on perceptions and opinions of the consumers on the usefulness and ease of use of the said technology. Therefore, creating a simple platform will assist the company to reach even more customers.

Technology. Internet and smartphones are the major forms of technology that drive the digital music industry. The ever-increasing internet speed and easy accessibility to it in the developed economies have presented a vast opportunity for Spotify to reach a wide audience.

Environmental. Governments and consumers in most parts of the world are becoming conscious of environmental/ecological issues and the need for conservation of resources. Firms operating in these regions are thus expected to adhere to the environmental protection laws and regulations. Though organizations that work on digital platforms are not exposed to many environmental issues, they must implement better “green policies” than others to gain competitive advantage. Spotify should also focus on adhering to these practices to get ahead in the industry.

Legal. Activities of the firms operating in the digital music industry are controlled by the copyright laws. Firms are expected to adhere to the rules and regulations, and receive licensing from original owners of the music or video prior to having them on their platform. Spotify has, in most cases, adhered to the copyright laws of the countries it operates in; however, the organization was recently sued by Wixen Music Publishing for copyright infringement where the company was expected to pay up to $ 1.6 billion in royalties. Therefore, strict adherence to the copyright laws is necessary for a company to avoid unnecessary expenditure.

The competitive rivalry in the digital music industry is high due to the presence of many players. With the launch of Apple Music and its rapid growth in the recent past, the competition is expected to intensify. However, the threat of new entrants is minimal since only high-tech companies with large amounts of capital can manage the high costs of operations. Additionally, since music streaming has replaced most of the other methods of listening to music, the threat from such sources is not much either.

Internal Analysis

SWOT analysis presents the analysis of the internal capabilities, weaknesses, opportunities, and threats to an organization. As observed, Spotify has the strength of being the first and the largest organization that offers music streaming in different parts of the world. The high number of subscribers (140 million) and the competitive pricing strategy employed by the organization have not only enhanced its growth but contributed significantly to the revenue generation. However, Spotify faces certain challenges and threats that can interfere with the overall performance of the company. For instance, the constant losses over the years and over-reliance on artists and labels are weaknesses that if not addressed can have drastic effects on the future performance of the company. Also, the intense competition, lawsuits against the company, and low returns from the business are additional concerns that threaten to hinder the company’s profitability.

Nevertheless, despite the challenges, Spotify has opportunities that can be exploited to improve its performance and position in the music industry sector. Providing more quality content and acquiring licenses from major labels are opportunities that can be explored by the company to manage its challenges. Also, the company can consider acting as an intermediary in linking the artists with the fans by expanding its business to include live music streaming and band interviews.

Two mutually Exclusive Alternatives that can solve the Problem

The first approach is to produce content that is unique to the organization. The company can work with various artists to introduce live music streaming and band interviews. The unique content will attract more viewers and subscribers, leading to increased revenue and overall profitability.  

The second alternative is to obtain licenses from major labels to acquire music at a reduced royalty rate. The reduction in the royalty payments will lower the company’s operational costs. However, this approach is likely not to be profitability since most artists are unwilling to work with the labels. The company has also tried the approach and failed, as such, more failures than successes are anticipated.

Recommended Chosen Alternative and Justification

Spotify should focus on producing unique content for its consumers. The company should engage artists in the production of live music streaming as well as host live band interviews. Spotify is likely to attract more customers by producing its own content.

On the contrary, acquisition of licenses from major labels will not yield significant benefits to the company. Spotify previously tried this approach but failed due to the complaints raised by the artists on low pays and the subsequent withdrawal of their songs from the company’s platform. As currently observed most artists are skeptical to sale their songs through agents, as such, engaging the labels a growth strategy is bound to fail since the future expansion of the business is unlikely.

Providing unique content is a business that is likely to thrive making it the most suitable growth strategy that Spotify can implement. There are limited players offering the service as such the organization is likely to face limited competition. Also, the company is likely gain a higher number of subscribers, which will translate to higher revenue and thus enhanced profitability. Spotify is, thus, likely to benefit more with the production of new music content. 

The cost of airing new content in its platform is likely to be lower than the costs incurred when signing deals with other labels. Initially, Spotify asserted that more than 70% of its revenue were allocated for the purchase or royalties. These royalties were also allocated on a country-country basis thus significant changes in the costs were reported. Reducing the costs of the royalties will not be of significant financial value to the organization. One, most artists fell-out with the labels thus unlikely to consider taking part in the deal. By the year 2016, the songs being aired by Spotify in its platform reduced by 20%, a percentage that is expected to increase as more agents gets into the market. The consequence will be significant reduction in the number of subscribers.

On the contrary, more subscribers are likely to be attained with the airing of unique content. Also, the operation costs of the approach is negligible since no additional capital is required. As indicated in appendix 1, an enhanced profitability is likely to be reported in the subsequent years, when Spotify avails unique content to the users.