The Spotify ‘Squad’: How to successfully lead a global organization WITHOUT an operations team
How to successfully lead a global organization WITHOUT an operations team
If you are like me and you are among the over 75 million users of Spotify, a “freemium” music streaming application based out of Sweden, then you probably know how easy it is to navigate the organization’s over 30 million songs. Not unrelatedly, Spotify’s business model is just as simple:
Three stakeholders are important to understanding Spotify’s business model:
- Users. The company separates consumers into two tiers: free-tier users and premium-tier users. Free-tier users can access any song in Spotify’s catalog on-demand but can only “shuffle” music. Further, they must view advertisements and can only skip a limited number of songs. Premium-tier users have unlimited access to music, can download songs, and are never shown advertisements. They pay $9.99 per month, which is used to fund the royalties that Spotify pays for music in this tier.
- Advertisers. Along with premium-tier users, Spotify generates revenue by selling advertisement platforms. This revenue is used to fund the royalties that Spotify pays for music to free-tier users.
- Right holders. While not depicted in the illustration, rights holders, or owners of music content (e.g. labels, publishers, distributors, and some independent artists) are essential to Spotify’s business model. Contrary to popular thought, Spotify does not pay royalties on a fixed “per play” rate. Rather, 70% of revenues are distributed to rights holders using an equation that takes into account variables such as the country in which people stream their music and the number of paid users as a percent of total users.
However, while Spotify’s mantra may be “simplicity,” are its operations really that simple? The following slide was included in a recent company presentation:
So how does Spotify’s operations team manage the activities for over 75 million users and 1.5 billion playlists across 58 markets?
It doesn’t.
Operations in Squads
In mid-2012, Spotify disbanded its operational team of five people, referring to the trade-offs of scaling a central team as “the impossible task”. Emphasizing that operations at the company was everyone’s responsibility, Spotify divided its engineering team into eight-person autonomous “squads”. Each team worked towards a common mission, but were given the autonomy to choose what they worked on. In addition to squads, tribes, chapters, and guilds formed the basis behind Spotify’s operational model.
- Squads. Each squad is designed to feel like a mini-startup. They are self-organized and have unique long-term missions. While squads do not have to have a squad leader, they have to have a product owner, who is responsible for prioritizing work in the team. Each squad implements its own “agile method,” such as Kanban or Scrum.
- Chapters and Guilds. These groups are what hold squads and tribes together. Full autonomy in any organization can lead to duplication of tasks. Chapters and guilds ensure that appropriate communication flows between squads, without sacrificing too much autonomy in the organization.
Why it works
Squads provide Spotify’s engineering team with the flexibility and decision-making skills to scale the company’s global operational processes. Moreover, the squads operational model enables the company to have a simple, flexible business model to not only adapt to the sheer number of Spotify users but also accommodate each user’s distinct needs. More specifically, this operational model complements Spotify’s business model in the following ways:
- Agility. Small teams allow for quick decision making, and thus afford greater flexibility and adaptability within the organization to solve problems. Agility coaches at Spotify are assigned to each squad.
- Autonomy. Squads make it easier for people to see their impact within the organization, since it is easier to reach consensus within small teams and teams are encouraged by senior management to make decisions.
- Alignment. Each squad serves the save vision, further unifying Spotify’s business model with its operational model. Spotify holds meetings regularly to ensure chapters and guilds keep information flowing between squads.
Finally, Spotify constantly revisits ways to improve its operational model. It acknowledges potential trade-offs between autonomy and alignment, which is summarized in the following image. Ultimately, Spotify strives to be in the top-right quadrant (high autonomy and high alignment).
Resources:
Spotify.com. Dec. 9, 2015. https://www.spotifyartists.com/spotify-explained/
Mattias Jansson and Noa Resare , A case study in operations and development integration at Spotify. Vimeo video. Oct. 31, 2011. https://vimeo.com/31368350
How Spotify built one of the best engineering cultures. Highfive.com. Sept. 11, 2014. https://highfive.com/blog/how-spotify-built-one-of-the-best-engineering-cultures
Spotify company presentation. http://www.slideshare.net/davidpoblador/scaling-operations-at-spotify
ReqTest.com. http://reqtest.com/blog/how-spotify-does-agile-a-look-at-the-spotify-engineering-culture/
For more information about squads, tribes, chapters, and guilds at Spotify: https://www.google.com/?gws_rd=ssl#q=scaling+agile+spotify
Alex– this is super interesting! I’m a happy spotify customer and had no idea they had such an unusual approach to operations. It reminded me of the Valve case we did in LEAD class, and I think these types of self-managed teams can work very well in software companies composed mostly of engineers.
Hi Annie!
Thank you for commenting. Yes, I too was reminded of the Valve case when I read about Spotify’s operational model. In fact, I was also reading that these matrix organizational structures are quite popular among engineering teams.
Best,
Alex
Thanks Alex for sharing interesting Spotify’s organizational structure. Another interesting point about Spotify is its approach to building a product. Each squad is encouraged to create minimal viable products (MVP) first and test it in the market. Then, after seeing the result, the team builds features and adds improvements to its MVP.
Hi Aki!
Good point! Like many creative companies, Spotify has a start-up culture that encourages experimentation. In fact, when I read about how Spotify tests products, I was reminded of the Facebook case.
Thanks again,
Alex
This was a fascinating post, Alex. I agree that the operating model used by Spotify will help propel alignment and autonomy within the company but I wonder how they will manage this as they grow. There are certainly operational tasks that are less “sexy” than others and I’m worried that people may not want to self organize their work on these types of projects. When this happens I’m guessing that managers will have to delegate these projects to squads but I worry that this will significantly impact the operating model. What do you think?
Hi Eric!
That’s an interesting point. I think it emphasizes how important it is to find great talent at the company. People who are passionate about an organization and who want to see the company succeed will find most, if not all, problems that threaten the business’ success to be “sexy”. It also depends on how incentives are aligned to diagnosing and solving problems. If one’s paycheck were tied to the business’ overall success (e.g. equity), that would surely incentivize me to pursue just about any problematic area in the business.
Thanks again for commenting!
Best,
Alex
Interesting model. I wonder how they compensate artists? Is it fixed or variable according to number of plays?
Hi Abdulaziz!
Those are great questions. Compensation is variable, but is tied more to the popularity of a song than to the number of times it is streamed. The equation is slightly complex, but ultimately, I think it’s fair. Here it is:
Spotify monthly revenue * (artist’s Spotify streams / total Spotify streams) * 70% to master and publishing owners * artist’s royalty rate
The company tries to be very transparent with how it compensates artists. More information can be found here:
http://www.spotifyartists.com/spotify-explained/#how-we-pay-royalties-overview
Hope this helps and thanks for posting!
Best,
Alex
So that’s how it works! Great read – thanks Alex. Spotify has clearly taken the works of music streaming by surprise and I’m another big fan and user of their service. Main question in my mind after reading this is around the core competencies of their operating model and sustainability of their competitive advantage. They have an innovative business model, have executed it well and as a result have experienced fast growth by accelerating user’s shift towards ‘free’ streaming not purchase of music (i.e. CDs, iTunes). Seemingly organic Squad approach has worked, however, I am curious to see where do they go from here – how they manage and continue to innovate in both business and operations. Apple Music gathered 15m users in about 3 months since it’s launch. It’s a fraction of Spotify’s 75m but only 20m of them use for-fee subscription, making this an interesting contest to watch.
Hi Aleksis!
You’re absolutely right. We’ll definitely have to see how the Spotify vs Apple contest shakes out. Just as interestingly, I wonder what Apple’s reaction is going to be to gain market share. Currently, Apple’s subscription is priced competitively with Spotify’s (also $9.99 per mo.), so apparently it thinks it can offer users some value that Spotify can’t — what that value is, is beyond me! But of course, I’m bias. Thanks for commenting!
Best,
Alex
Alex, this is very interesting. I am with Annie that I finally understand what is behind this magic music playing box in my cell phone. You did a great job in explaining how the unusual organizational structure functions, the trade-offs when compared to other potential models and how it benefits from a business stand point. It was also very interesting to learn more about how the royalty payment system works. I was very curious about the magic “30%” revenue pool ratio. Do you know anything about why it’s 30% and how is the process of agreeing that ratio with content owners? Anyhow, great, great post! Well written, simple ideas, very tightly connected. Loved it.
Hi Ivan,
Thanks for your nice comments! Very, very good question about “the magic ‘30%’ revenue pool ratio.” To be honest, I am not sure. I did a fair amount of researching, and it seems to be convention (Apple also maintains a 70/30 rule; it pays out 70% of revenues and keeps 30% of revenues). Now, who ever decided this ‘rule’ is beyond me! If I ever find out I’ll be sure to let you know. Also, in case you’re interested, the Entertainment & Media Club’s NYC trek this February will include a visit to Spotify. Might be worth checking out.
Thanks again, Ivan!
Best,
Alex
Alex, this post is really interesting. As someone from a typical “big and bureaucratic” company, I’m impressed by this unique organisational structure of Spotify. I think one of the big challenges for start-ups is how to keep the entrepreneurship culture while the company becomes bigger. And Spotify has done a great job in order to facilitate a high pace of innovation. But as we learn from LEAD, after company size exceeds a certain threshold, this “informal” operation model might be less effective than a “formal” model. I’m curious to see how Spotify is going to do with its “Squad” team structure in the future as the it becomes even bigger than today.
Hi Clay!
Great link to LEAD. I agree and am also incredibly fascinated by self-managed teams. Only time will tell! I would love to see this autonomous structure disprove the idea that more structure is needed in order for a business to scale. Thank you for your comment!
Best,
Alex
Really interesting business model – and as a user I appreciate its simplicity and ease of use, same as you do, Alex. What is more amazing to me is that I never would have imagined such a disorganized system was capable of creating such a user-friendly interface. It is cool to see how the characteristics of the operations and business model are the same, while the structure of the two are quite different (i.e. User interface/business model has to be very easy to navigate and consistent, while the operational model is quite complex and constantly changing and evolving). Thanks for educating me on a service I use quite often!
Hi Will!
Thank you for your nice comment! Yes, I completely agree; what I love about autonomous teams is how “ugly” they seem at the onset, and yet their product is outright gorgeous. Organized chaos is how I see it.
Thanks again for the insight!
Best,
Alex