This spring, I attended a workshop hosted by a very inspiring person: Jarno Vanhatapio, founder of Nelly.com, the largest online fashion retailer in the Nordics. This is his story:
Back in 2003, Jarno Vanhatapio was getting tired of his job as a construction worker in Norway. For three years, he had dreamed of putting up his own business. He had some experience as an organizer of school discos and knew basic html programming, but other than that, he had no experience of importing, e-commerce or business (and he was not that interested in fashion, either).
Jarno thought long about his options, and finally decided to start selling underwear through a web site, which he dubbed Nelly.com. The rationale was simple: a small underwear parcel would fit in the mailbox, making delivery easier. He found cheap underwear suppliers in China, and started running the business from his small studio, which was soon crammed up with cardboard boxes containing bikinis and boxers.
When Christmas was approaching, Jarno saw his sales starting to grow exponentially. After that, it never really stopped. Running the business was a constant struggle to keep up to demand, to have enough products in stock and to convince suppliers that they would eventually get paid.
After three years, the company had a turnover of around 20 million Swedish krona (approx. 2.5 million EUR) and had become the largest online underwear retailer in the Nordics. The difficulties with the supply chain were however putting a big burden on Jarno’s nerves, and when the large Swedish media group MTG made an offer to buy 90% the company, Jarno couldn’t refuse.
After securing the supply chain and getting new financial backing, Nelly.com could start expanding its business even more. Today, Nelly.com has 11 million monthly page views, 850 different clothes brands and a yearly turnover of 816 million SEK (approx. 100 million EUR).
The story shows how new, emerging technologies have made it possible to succeed for anyone with a fairly good idea, and more importantly, the will to implement it.
Here are some of the observations on e-commerce Jarno Vanhatapio wanted to share with his listeners:
- Co-creation is great. Modern technology and social networking makes it a cheap and efficient marketing tool. For example, you can put up a design on your Facebook page, and simply ask people if it should be produced or not. It is also easy to let people submit their own designs.
- The business is going to consolidate. Only a few big actors will be able to serve the variety-seeking mass markets, having both the logistical capabilities to handle high inventory turnover, and the analytical expertise to make the most out of big data.
- Payment and ordering processes are getting easier. You won’t be asked to type in your credit card details over and over again. Also, companies will be able to evaluate whether you are creditworthy or not.
- Classical advertising is slowly dying. As of today, 25% of Nelly’s traffic comes from fashion bloggers/affiliates. An advice he gives to fashion retailers in particular to have at least 50% of your marketing and sales department working with social media.
When Spotify was launched back in 2008, it marked the rebirth of the music industry. The long slump in revenue growth was halted thanks to the smart new service that allowed people to enjoy the benefits of unlimited music access.
The main reason people download music illegally is not because it is free. It is because one is able get instant access to all the music in the world. In the old days, purchasing music meant going to the record shop and buying an album, and even then you only have access to the songs on that particular CD. Services like iTunes made access easier, but the product was basically the same as the one offered for free by the illegal alternatives.
The founders of Spotify understood this, and developed a product/platform that was more user-friendly than any downloading alternative. Streaming the music means that one doesn’t have to download anything, and you have unlimited access as long as you have got an internet connection. Spotify charged for access instead of ownership, and it worked. The user base has grown ever bigger, meaning that more and more artists and record labels have wanted to offer their content on the platform. Spotify is thus a huge success!
Or is it? Sure, the consumer is better of, and so are the record labels. However, as Spotify has grown, so have the losses. In 2012, the company more than doubled its revenue, to 434 million Euro. Unfortunately, the losses also grew by 50%, to 59 million Euro (http://www.dn.se/ekonomi/spotifys-svenska-bolag-gor-forlust, http://computersweden.idg.se/2.2683/1.516763/okade-forluster-for-spotify). Spotify has serious troubles turning a profit. An article in the Swedish business magazine Affärsvärlden (Affärsvärlden, 14th February 2013, Volymen räcker inte för Spotify) discusses what the company itself sees as its main problem: there are still too few users that prefer the ad-sponsored version to paying the full monthly fee.
It is also possible to analyze Spotify’s situation from a platform theory perspective. Most of the world’s music is in the hand of three big record labels: Sony, Universal and Warner. Early on, Spotify had to subsidize these major record labels, who were “magnets” that could provide strong cross-side network effects, attracting a large user base. This meant that Spotify would have to charge more from the music consumers. However, music consumers were used to not paying anything at all (high price elasticity), which meant that Spotify had to subsidize them too, basically giving the content away for nothing. As consumers, over time, have come to accept paying a small monthly fee, Spotify has been able to charge more. However, it is still far from the amount needed to cover the heavy royalty rates that Spotify has to pay to the record labels.
As more companies are now getting in to the music streaming business (Google, for example (http://crave.cnet.co.uk/software/google-will-launch-a-free-music-streaming-service-ft-says-50010505/)), Spotify will face price competition on both the consumer and content provider side, limiting its options even more.
I know that this question has been asked before, but in light of the interesting lecture on platforms we attended this Friday, what advice would you give to Spotify? Is it time to throw in the towel, or is there a way out?
My tip is that Spotify will either go bust, or be bought by another, financially stronger actor.