Classroom Companion: Business

19.4 · Digital Business Models

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network effects on each other as shown 
in 
.
Fig. 
19.7
: getting more free music 
listeners also increases the value for 
those who pay for the service. This is so 
because a larger user base means that 
Spotify can negotiate better deals with 
the music industry. More importantly, 
with a large user base, Spotify will be in 
a stronger position when competing with 
other music streaming services. Users can 
also exchange playlists with one another.
The number of non-paying users 
induces positive indirect network effects 
on the advertisers since more users 
means a potentially larger audience for 
the advertisements. On the other hand, 
advertisements—or rather the amount 
of advertisements—induce negative 
indirect network effects on the users. 
This is because advertisements are, for 
most people, an annoyance and disrup-
tions from using the digital service.
Spotify’s business model has had an 
effect on how people pay for content on 
the Internet. It has also changed the size 
and operations of the online content 
piracy industry.
Key strategies of Spotify—operating 
under the freemium business model—
are to minimize costs related to market-
ing, customer acquisition, and customer 
care because most of Spotify’s custom-
ers are non-paying customers generat-
ing only a small income per customer. 
The foremost challenge for Spotify is to 
acquire and keep customers and to com-
municate with them for the lowest cost 
possible.
User
User
Spotify
User
Monthly subscription
User
User
User
Advertisers
Advertisements
Music streaming
Advertisement fee
(+/-)
. . .
. . .
Free users
Paying users
(+/+)
. Fig. 19.7 Spotify modeled using the SRM. (Authors’ own figure)