Platform Mediated Networks: iTunes versus Spotify (Technology of the Week – Team 37)

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With Spotify taking over the future of the digital music market, is iTunes soon to become a mere legend? In the same way iTunes made physical CD stores go bankrupt, Spotify now aims to transform the digital music market and lead the streaming revolution.

Platform Mediated Networks
Both firms are delivering an online ‘marketplace’ for digital music, where on one side artists supply music, and on the other side consumers demand music. Therefore, we can deduce that both iTunes and Spotify are platform mediated networks. In particular, their value increases as the number of users increases, which is called network effects.

Technological Comparison
The battle between the platforms begins with their technological differences, namely in the audio delivery, audio quality, and the supported operating systems.

The main technological difference between the platforms is that of how they deliver music to their customers. iTunes relies on the downloading of music, whereas Spotify has introduced the streaming of music. Customers of iTunes can own the audio files, whereas Spotify’s customers can only listen to them. However, iTunes does require its customers to have an extensive memory space. In contrast, Spotify requires its customers to have a stable Internet connection. Hence, both have their (dis)advantages for customers.

With respect to audio quality, iTunes has an advantage over Spotify. Since iTunes offers its music in a higher quality (256 Kbps) than Spotify (160 Kbps), the customers will be more satisfied with their audio files. Hence, iTunes wins this battle.

For the operating systems that are supported by the platforms, we find that Spotify wins this battle. Spotify supports the following operating systems: Android, BlackBerry, iOS, OS X, and Windows. iTunes however only supports the latter three and therefore misses out on a large potential user-base.

Business Comparison
Both platforms also compete in business dimensions, which we consider next.

In terms of cost and revenue models, both platforms have a cost-revenue-ratio of 30% -70%. A difference can be found in the way they generate revenue: iTunes charges a price per song, whereas Spotify earns from advertisements and monthly fees.

Network effects are a specific feature of platforms, and are estimated based on the total number of users of a platform. iTunes offers 35 million songs, and has 800 million customers. Spotify, however, only offers 20 million songs, and has 40 million customers. Therefore, the battle for network effects is currently won by iTunes. Still, Spotify has larger growth potential than iTunes, as it only operates in 58 countries as opposed to iTunes’ 123.

As for business strategies, iTunes focuses on convenience for customers, whereas Spotify aims to enlarge the network effects by means of its social media strategy. iTunes cannot obtain a sustainable competitive advantage on this premise, whereas Spotify understands where the future of the digital music market lies.

Overall, whilst iTunes currently outperforms Spotify in most dimensions, Spotify holds a greater future promise. If iTunes wants to maintain its market leader position, it should recognize and seize the opportunities of the digital world.


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