Running Head: SPOTIFY: A LOOK 1

Spotify: A Look at Its Inner Workings

MBA 5110

Andrew Turner

Management Critique of Spotify

August 29, 2015

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Spotify: A Look at Its Inner Workings

Spotify is a music streaming service that originated in the country of Sweden by its two

founders Daniel Ek and Martin Lorentzon (Crook & Tepper, 2015). Daniel Ek met Martin

Lorentzon at Martin’s house and from that meeting the idea of Spotify came into being (Crook &

Tepper, 2015). For the first few months of Spotify’s inception both Daniel and Martin worked

from Daniels apartment, which remains 80° even in winter time due to all the servers running

(Crook & Tepper, 2015). From there Spotify launches its first public beta software and 2007 for

PC and later that year for Apple (Crook & Tepper, 2015). Spotify was officially launched in fall

2008 and launched its mobile app one year later (Crook & Tepper, 2015). In 2010 Daniel Ek and

Mark Zuckerberg met to discuss a Facebook and Sp’s otify integration and Spotify was released

in the US one year later (Crook & Tepper, 2015). Spotify now offers family plans and has a

feature that matches music to how fast your jogging (Crook & Tepper, 2015).Spotify’s current

corporate office headquarters are located New York, New York (Corporate Office, 2015).

Company Description

According to Bloomberg business (2015), Spotify is a limited company or in other words,

a LLC. According to Investopedia (2015), a LLC protects the members of the company from

personal liability for the company’s liabilities or debts. One of the key features of an LLC is it is

a hybrid entity, meaning it finds the characteristics of incorporation and a partnership or sole

proprietorship (Investopedia, 2015). A LLC is not directly taxed but is a pass-through/flow

through entity with the member or members of the LLC being taxed (Investopedia, 2015).

Spotify’s organizational structure is an organic one due to the fact that employees are split up

into 30 squads with 250 people in three countries (Lunden, 2012). Each group has a product

owner, which is the means to connect to other groups (Lunden, 2012). There are further means

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for groups to connect such as grouping groups into tribes and having cross tribe connectivity

through guilds (Lunden, 2012). There are very few levels vertically speaking from the average

employee’s perspective and all groups tribes and guilds are autonomous and have decision-

making authority on products.

Applied Management Theories

Spotify uses the open system theory and how their organization is structured and

operates. Ford open system to be considered open it must meet four key elements: “agents with

schemata, self-organizing networks sustained by importing energy, co-evolution to the edge of

chaos, and system evolution based on recombination” (Anderson, 1999). What is schemata?

According to Merriam-Webster (2015), schemata is the plural of schema which is “a mental

codification of experience that includes a particular organized way of perceiving cognitively and

responded to a complex situation or set of stimuli.” In other words, for an open system to be

open agents have the ability to use their own experiences and thought processes to deal with and

make decisions on key design features on the parts the product/product they’re responsible for.

This coincides with Spotify’s extensive utilization of autonomous self-operating units called

squads (Lunden, 2012). Each of these units focus on a specific function “and it are rates on

minimum viable product, releasing updates early and often” (Lunden, 2012). Each squad has his

own workspace and has a “product owner” that acts as a liaison of sorts to engender

communication between the squad he or she is attached to and the other squads (Lunden, 2012).

By doing this, Spotify has reduced the necessity of having layers of management.

Also, by organizing its staff into autonomous self-operating units, Spotify has a working

example of one of the key features of an open system, agents with schemata. According to Philip

Anderson (1999) “most conceptual and empirical models employed by scientists studying

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organizations use a set of independent variables to explain variation in one or more dependent

variables” (p. 220). However, just focusing on a handful of independent variables to explain how

Spotify’s systems work would not have a broad enough scope. One way of getting around that is

to use a CAS model. A CAS model takes in accounts changes in the “agent’s decision rules, the

interconnections among agents, or the fitness function the agents employee to produce different

aggregate outcomes (Anderson, 1999). Another feature of this model of analysis is that it is an

excellent tool to explain observed regularities as a result of involving interactions among lower-

level units (Anderson, 1999).

A good example of the CAS model is squads interacting each other and being temporarily

grouped up into tribes and guilds if the product requires it. Every step of the way through this

process, the individual agents (employees that make up the squads) are able to use their own

experience and perception to respond to a situation (the design choices of the parts of a new

product they are working on). By doing so, the squads own and are responsible for the piece of

software or features that they are working on. The employees at Spotify are not “the prisoners of

a fixed set of rules” (Anderson, 1999, p. 220). Just like with any other open system, is seamless

by the fact that actors involved in the system share a common social order and can organize

information from their environment into a working knowledge structure (Anderson, 1999). This

allows the development of sequences of specific activities to handle routine situations or recipes

and when the squad faces uncertainty or unusual problem the individual employees to rely on

their experiences and each other to develop a blueprint on how to handle this particular problem

(Anderson, 1999). There is a vested interest by the squads to produce a good product since they

are in a quasi-ownership role from start to finish which further encourages each individual

member to be in a continuous state of creative problem solving.

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It is that natural harmony of interests that allows independent actors through their

interactions, create a stable structure governed by a system of recursively applied rules

(Anderson, 1999). Since Spotify’s squads self-organize, regularity emerges of its own accord

without any direct intervention from the executive level. This level of autonomy further

encourages the notion of agents with schemata. According to Anderson (1999), rules developed

by the system “generate structure because the state that is the output of one application of the

rules becomes input for the next round” (p. 222). For clarification purposes, the output of the

rules could very well be and how these shuffle function operates on both versions of the Spotify

app. The input, on the other hand, would be when Spotify changed the algorithm he used to

allow these shuffle function to work. Self-organization, in general, only occurs in open systems

that incorporate external energy (Anderson, 1999). In contrast, a closed system will degenerate

“to a fixed point equilibrium characterized by maximum disorder” (Anderson, 1999, p. 222).

Therefore, the strength of an open system similar to what Spotify uses is that it is a

dissipative structure that is maintained through energy being constantly injected into it

(Anderson, 1999). An organization that structured as an open dissipative structure can only exist

“what members are induced to contribute energy to them” (Anderson, 1999, p. 222). The

induction occurs through volition versus course of force due to the fact that each one of those

members involved in the squads are more than just employees/stakeholders. They literally and

figuratively own a piece of the end product through the works of their hands and the intellectual

effort expended on the project. That is how the system obtains new energy to operate through

personal ownership and the cross functionality of squads, which are a perpetual source of new

energy. This motivation in turn, shakes up the organization and prevents it from stagnating

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thereby always keeping the organization fresh and “providing new set the challenges they cannot

be mastered by queuing together existing procedures” (Anderson, 1999, p. 222).

Rapid change and adaptation allow for the organization to continually renew itself in the

face of ever changing customer tastes and preferences and threats in the market. All of these

ideas go back to a core foundational principle of ownership; converting typically passes

stakeholders (employees) to active participants who have co-ownership over the

intellectual/physical processes which help create the product. The drawback to Spotify squad

system is that the agents involved each squad only act on the information that is available in their

immediate environments which can cause decay (feedback loops which prevent change) or chaos

(if changes keep reverberating through the system causing instability) (Anderson, 1999). It is

through the utilization of a squad leader/product owner to create channels of communication

with other squad leader/product owners (Lunden, 2012). Also, as a means to improve innovation

and prevents feedback loops due to stagnation, Spotify encourages each squad “to spend roughly

10% of their time on ‘hack days’” (Kniberg & Ivarsson, 2012, p. 3). Another means of

preventing decay or chaos in their system is to further subdivide squads into chapters with each

chapter being autonomous from the next (Kniberg & Ivarsson, 2012). Guilds can be created from

these chapters or parts of chapters to add further diversity in whichever project they are currently

working on and through that create and bring in new sources of creative energy to keep the

system going due to cross collaboration

Since Spotify as an organization, is a self-perpetuating system operates on creative

energy being put into the organization, it morphs and changes in a different way than a closed

system would. It is the idea of co-evolution to the edge of chaos and brings order to seeming

chaotic bedlam of minimum viable products, rapid/multiple updates, and the ever-changing

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landscapes of forming and breaking up of guilds (Kniberg & Ivarsson, 2012). The adaptation of

the system itself is due to individual agents adapting to the environment that find themselves in

in order to improve their own payoffs (Anderson, 1999). The limitation of these actions

interactions are that the individual agents tend not to be able to forecast, at the system level, the

outcomes of their choices (Anderson, 1999). However, the benefit of these individual outcomes

is contingent on the outcomes of other agent decisions. Through this process agents and/or

clusters of agents can co-evolve with each other, “because changes in distribution of behaviors

among agents change individual fitness functions, and such shifts in turn alter behaviors”

(Anderson, 1999). It is in this ever-changing landscape in which agents adapt continuously to

maximize both the payouts for the individual agents and also for the organization as a whole

(Anderson, 1999).

Example of how Spotify utilizes the co-evolution dynamic is through its quarterly

surveys of each squad (Kniberg & Ivarsson, 2012). The goal of these surveys is to help focus

improvement efforts to find out what sort of support systems need to be implemented or

revamped (Kniberg & Ivarsson, 2012). Surveys included graphs noting that major pieces and

functions of the squads in question (Kniberg & Ivarsson, 2012). It is color-coded circles with

green meaning there is a current problem, yellow represents a slowdown, and red indicates a

slowdown/bottleneck has occurred at any speed fixed (Kniberg & Ivarsson, 2012). There are also

arrows adjacent to the color-coded circles noting the current state for each one of the particular

categories (Kniberg & Ivarsson, 2012). The arrows and the direction of arrow determines the

color was the same color system utilize for the circles which in turn note the current trend of that

particular category (Kniberg & Ivarsson, 2012). An upward pointing green arrow indicates that

particular category is improving for that particular squad, a black horizontal arrow indicates no

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real change, and a downward pointing red (Kniberg & Ivarsson, 2012).arrow indicates necessary

action needs to be taken to reverse the trend in those particular categories (Kniberg & Ivarsson,

2012). By doing so, there is a tangible measurement concerning the outcomes of all decisions by

each independent agent.

All of these features feed into an inner environment that contains a complex adaptive

system that “are nested hierarchies that contain other complex adaptive systems” (Anderson,

1999, p. 225). Each one of these particular systems change and are subject to change through

evolutionary pressures being applied to them (Anderson, 1999). Each element in the broader

system that operates Spotify as an organization such as an agent’s schemata, or the functional

reality of its self-organizing networks and how they derive creative energy to keep both flexible

and creative (Anderson, 1999). It is through recombination and system evolution that this occurs

in new and more efficient methods are adopted an old efficient methods go extinct (Anderson,

1999). According to Anderson (1999) “a fundamental aspect of a complex adaptive systems is

they allow local behavior to generate global characteristics that then alter the way agents interact

(Anderson, 1999, p. 225). Thereby each individual agent and actor can in their own part have a

direct effect on the organizational structure and culture itself. This phenomenon is similar to a

rotor on a ship, even though it is the smallest part of the ship, it holds great sway over the

entirety of the vessel itself. Spotify exemplifies that phenomena through the incorporation of

novelty and recombination they keep the organization fresh and new.

Management Tools Used

One of the of the biggest management tools Spotify utilizes is Continuous Process

Improvement. Continuous Process Improvement by definition “is a set of steps to accomplish the

defined purpose produce a defined product or service” (MITRE, 2013). This is a continuous

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process that focuses on systems engineering and management activities used to select and assess

processes used to achieve the organizations business goals (MITRE, 2013). There are four steps

that are involved in Continuous Process Improvement which include: planning, doing, checking

and acting (MITRE, 2013). In the planning and doing process, Spotify utilizes what they call it

agile coaches whose job it is to “run retrospectives, sprint planning meetings, do 1 – on – 1

coaching, etc” (Kniberg & Ivarsson, 2012). If all goes well, each squad still is autonomous and

do not have any blocking dependencies to other squads slowing their workload (Kniberg &

Ivarsson, 2012).

If there is a noticeable slowdowns or bottlenecks in any of the processes in the squads or

in their cross squad, tribe, chapter, and Gil interactions, it will be picked up in the quarterly

survey of squads (Spotify’s analysis stage) (Kniberg & Ivarsson, 2012). In the acting phase, fixes

to unnecessary dependencies are discussed and implemented (Kniberg & Ivarsson, 2012). One of

features that has come out of the acting phase for Spotify is that the developers in the squads

release the code themselves and operations who would normally do the releasing of the code

access support for developers (Kniberg & Ivarsson, 2012).

Competitive Challenges

Spotify’s biggest competition is coming from other streaming music services. The chief

competitors for Spotify in the music streaming industry are iTunes and Rhapsody. Rhapsody is

the longest surviving for the music streaming service (Snyder, 2014). Rhapsody offers much the

same features Spotify does which include the ability to download tracks, albums and playlists

(Snyder, 2014). Rhapsody also charges roughly about the same amount for their paid service

($9.99 monthly) and has about 20 million songs in their library (Snyder, 2014). Another large

competitor is iTunes radio with 250 stations created by DJs and they offer for annual $25 B class

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stores through iTunes match, iTunes boasts about city 7 million users (Snyder, 2014). There is

also Pandora’s radio service which is $3.99 monthly for ad free listening (Snyder, 2014). There

are several other services such as Google Play Music All Access, Music Unlimited, Rdio

(founded by Skype creator Janus Friis) and Xbox music.

Leadership Styles

Spotify’s culture is a combination of clan culture and adaptability culture. Definitionally

speaking, “adaptability culture is characterized by strategic focus on external environment

through flexibility in change to meet customer needs” and clan culture which “focuses on

meeting the needs of employees as the route to high-performance” (Daft, 2013, p. 400). The

adaptability part of their culture comes in the play with flexibility of squads, tribes, chapters, and

guilds that could change and adapt on the go as needed. The clan part of Spotify’s culture the

personal connectivity to each member of the squad to each other and their fellow squads and the

one-on-one coaching from their agile coaches (Kniberg & Ivarsson, 2012). As far as what

leadership style would be appropriate for Spotify, the affiliative management style seems to fit

best. The affiliative management style focuses on “creating harmony in the group by connecting

people to each other” (Wall Street Journal, 2015). It is through creating connectivity between

each individual and breaking down barriers that cause work slowdowns is what allows for

Spotify’s squad system to work so well. There is a great deal of emphasis on each person’s

fulfillment in their work like the encouragement of employees participate hack days, which

allows employees to work on something different that they want to do (Kniberg & Ivarsson,

2012).

Business Strategies

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Spotify’s business strategy is to entice new users to join through the free ad supported tier

of accessibility and then encourage those users to move to a premium with the extra value added

items such as unlimited skipping on their mobile device and cross-platform listening of music

(Spotify Artists, 2015). Another facet of their business strategy is that they offer easy access to

hit and not so famous music months or years after its release date (Spotify Artists, 2015). It is

through the extra royalties generated through an artist’s older music and the control afforded to

the individual listener that further encourages people to buy into Spotify and create a premium

accounts (Spotify Artists, 2015).

Spotify utilizes both differentiation and cost leadership strategies (Dean, 2013).Spotify

uses differentiation by giving more control over the music that the user listens to and by

offering more niche market items such as Korean pop, music from Bollywood and extreme

metal (Dean, 2013). The cost leading strategy comes in the play due to the price points which is

much cheaper than buying songs in iTunes and free users have access to all music with ads and

shuffled listening on mobile devices, while for a $10 fee users get unlimited ad free access to all

music and also on mobile devices (Dean, 2013). Revenues figures from 2011 to 2012 show

revenue has more than doubled from $250 million-$576 million (Sweeting, 2013). In 2015

Spotify announced there are 20 million paying users and 75 million users overall (Crook &

Tepper, 2015). Also, as of 2015, Spotify is currently valued at $8.5 billion and gives users access

to 30 million songs (Campbell & Viita, 2015).

Conclusion

In conclusion, Spotify’s success to the fact that they, understand what the customer wants

and what their employee wants. What the customer wants is autonomy and choices. The

autonomy part is through the ability to control what they wish to listen to and the choices that

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Spotify offers is through all the music that they offer and ease of access to those offerings.

Unlike iTunes, which forces users to for the music they want to listen to like there Captain. Ahab

chasing after Moby Dick. Pandora on the other and only offers the ability to make “radio

stations” which is no better than just the over glorify playlist users can’t get all of the artists’

works without going to all the trouble making a list for it. Spotify also understands that this

dynamic autonomy and choices also affects the employees. By having one-on-one coaching, a

supportive executive group that streamlines the process of getting work done, and encourages

employees to take days off of their normal work to do something that they want to do, gives the

employee a level of self-actualization that does not really occur all that often. It is through

Spotify taking care of the basic elements of process and stakeholders that enriches the

shareholders and the business’s bottom line.

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References

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May/June 1999; 10, 3; ProQuest.com.

Campbell, Matthew &Viita, Kasper (2015). Spotify value tops $8 billion as investors bet on

streaming. Retrieved from the globeandmail.com.

Crook, Jordan & Tepper, Fitz (2015). A brief history of Spotify. Retrieved from techcrunch.com.

Dean, Josh (2013). Let a billion streams Bloom. Retrieved from ebscohost.com.

Hausman, Adam (2013). The Spotify business model: no guts no glory. Retrieved from

capitalisticcreations.com.

Ivarsson, Anders & Kniberg, Henrik (2012). Scaling agile @Spotify was tribes, squads, chapters

& guilds. Retrieved from scribd.com

Lunden, Ingrid (2012). Here’s how Spotify scales up and stays agile: it runs ‘squads’ like lean

startups. Retrieved from Techcrunch.com.

Snider, Mike (2014). Spotify and competitors played to their musical strengths. Retrieved from

USAToday.com.

Staff Writer at Corporate Office Headquarters (2015). Spotify corporate office headquarters.

Retrieved from corporateofficeheadquarters.com.

Staff Writer at Investopedia (2015). Limited liability company – LLC. Retrieved from

Investopedia.com

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Staff Writer at Merriam-Webster (2015). Schemata definition. Retrieved from Merriam-

Webster.com

Staff Writer at MITRE (2013). Continuous process improvement. Retrieved from mitre.org.

Staff Writer at Spotify Artists (2015). How is Spotify contributing to the music business?

Retrieved from Spotifyartists.com

Staff Writer at Wall Street Journal (2015). Leadership styles. Retrieved from WSJ.com.

Sweeting, Paul (2013). Spotify revenue up, profits down. Retrieved from research.gigaom.com.