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?
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).
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
For more information about squads, tribes, chapters, and guilds at Spotify: https://www.google.com/?gws_rd=ssl#q=scaling+agile+spotify