The hitchhiker‘ s guide to the corporate world

As you may have noticed, the title above this article is inspired on the novel The Hitchhiker’s Guide to the Galaxy, although I must confess that I haven’t read it. In the first pages of the book the earth is accidentally destroyed by a Vogon constructor fleet, to make way for a hyperspace bypass. The idea of the earth being so casually obliterated by a corporate intergalactic company had a devastating effect on me and I just couldn’t continue reading. I was depressed for more than a week. Twenty years later, when I watched the movie, I found out that they recreated the earth, but to this day I still can’t seem to motivate myself to read the book.

KPI
What does any of this have to do with corporate companies? The Vogons are a bureaucratic alien race that has no trouble whatsoever destroying something that is of great emotional value to others. They simply do it because they are contracted to construct a hyperspace bypass. Or, as we would say today, they needed to hit a certain KPI. For those of you who haven’t heard of KPI’s, a KPI is a Key Performance Indicator. It tells you how you perform and how this relates to the tgrowth target set by the company your work for. A KPI can be the number of new clients to be contracted, the number of products to be sold, a reduction in the number of calls to your helpdesk or bringing down the number of system failures. And believe me, if you don’t hit your KPI, within the corporate business that means you don’t perform very well and you will miss out on your bonus. So, basically everything is done to hit the KPI, even destroying things of great emotional value.

EMOTION
Let’s look at a few things that can have great emotional value. Music is of great emotional value to everybody. Most people have a song, or songs, that directly penetrate their emotional cortex and make them feel instantly sad, happy or loved. Play up-tempo folk music when I’m in the room and I’ll start jumping around like an old mad man and drink lots of beer. Play AC/DC’s ‘Highway to Hell’ and I’ll go into full stampede mode, grinning like a Batman’s Joker. Play progressive house music and memories of the all parties I went to in the late nineties will instantly put a happy smile on my face. Music has a lot of emotional value for many people (if not all), albeit in varied and highly personal ways.

We all know that music and the music industry have been disrupted by technology that started out in the early nineties, and that this trend will continue. It is interesting to look at a recent quote by Tim Cook about music and technology, from an interview with Fast Company:

“Music is a service that we think our users want us to provide. It’s a service that we worry about the humanity being drained out of. We worry about it becoming a bits-and-bytes kind of world, instead of the art and craft.”

To illustrate this quote, I would like to tell you about one of my favorite bands, a band that brought art and craft together perfectly, at least for me.

GORILLAZ
The Gorillaz. A perfect blend of art, craft and emotion. Jamie Hewlett’s art and Albarn Damon’s music creates an experience that I haven’t seen anywhere else (although Pink Floyd’s ‘The Wall’ comes very close). The lyrics far surpass the teenage dribble by Justin Bieber and his ilk. Even at live shows, artwork dominates the stage and the band does not hesitate to put two drum kits on stage to get the full sound of the beats they want to impress on you.

But let’s have a look at how the Gorillaz are displayed in the music app that most of you have on your phone, just like me.

Thanks, Spotify, great playlist, but is this what music is all about? By the way, I love Spotify and I use it every day (if not every hour). An endless source of music in your pocket, wherever you go — it would have been a wet dream when I was a teenager, but it would also have changed the way we experienced music back then.

For me, Spotify is the Vogon here. They accidentally destroyed the art, craft and emotion inherent in music and reduced it to a streaming thing on an app. A title, a song, related to other artists, based on the sound and what other people liked. But music is so much more than a song on a playlist.

Social change and music interlinked
Think about the Sixties, the Seventies, the Eighties, and gangster Rap. There are numerous examples of music, art and social development being closely interlinked. The birth or rebirth of music, fashion and graphic styles often go hand in hand with generational changes. As I am an old geezer, I can only come up with outdated examples, but I’m sure your local hipster cafe owner will know some contemporary songs that provide the right Zen to make a perfect latte with almond milk and two extra shots of espresso. This lifestyle side of music is totally absent in Spotify. Spotify may be all about music, but it might slowly be killing it.

Interface to database
Spotify is a very effective interface to a database and basically has nothing to do with music anymore. It became a corporate company, pushing for one goal. Optimizing one functionality, to trigger their growth and their market share, aiming for world dominance. And there is no way back, now that they are listed on the stock market. Most people probably regard Spotify as a disruptive startup, but not me. I consider them a corporate entity, and to show you what I mean by that, I would like to focus for a bit on the forces that influence the decisions of corporations.

The corporate world
Corporations have stockholders, and when you have done an IPO, the stockholders are interested in one thing and one thing only: making money. You make money by optimizing your profits and keeping your costs as low as possible. How? We will go into that next. Please bear with me, even if it gets a bit technical.

CAPEX and OPEX
In the corporate world, a company basically has two kinds of expenses: OPEX and CAPEX.

OPEX are operational expenditures, needed to keep the company running, and these are recurring costs.

CAPEX are capital expenditures, i.e. investments to make the company grow and add value to it.

OPEX drain resources and capital from the company, CAPEX adds value to the company. I will give you a few examples. When you buy a printer, the printer is CAPEX, but the toner and paper are OPEX. Buy a car, and the car will be CAPEX, the petrol OPEX. The owner of the hipster cafe buys a coffee machine and that is CAPEX. The water and coffee beans are OPEX, and when he hits financial hard times, he will buy ground coffee at the supermarket to cut his operational costs. In very large companies, the permanent staff that operates the company is also OPEX.
This system’s logic dictates that a company will always try to keep its OPEX as low as possible. This can result in negative effects, the most famous being legacy IT systems.

Legacy IT
Setting up information systems is CAPEX, running these systems is OPEX. Nowadays these systems are usually core systems within the company. From a financial viewpoint you want to spend the least possible amount of time and money on them. They are operated and maintained by OPEX staff. You can run them with CAPEX staff by hiring third parties, but if you do that, not all knowledge of your information systems will be in-house, and changes to the system will be expensive. The third party will after all act in its own interest, writing invoices and billing as many hours as possible. In the end, this will drain your CAPEX budget. This has been one of the main reasons that information systems are not well supported and maintained, and are often outdated. They have become a dragging anchor for big corporations. In the case of Spotify, the legacy factor will be small, but the company has been around for 10 years now, so their information systems must be starting to cause the occasional headache. The CAPEX will definitely be huge. They need to invest to become and stay the dominant player and all their effort will go into adding value to the company.
And the CAPEX/OPEX issue is not the only issue corporations have to deal with.

Administrative expenses
Another force that directs the course or the developmental speed of corporations is administrative costs. Corporations have millions of clients and a large variety of products, services, offers and warranties. That’s good for business, but it also creates an enormous amount of paperwork. It gets especially complicated when product, service and terms of conditions evolve over time.

Clients
Clients don’t only bring in paperwork. Corporations operate on a large scale, which means that the products they make should fit a lot of people. Creating a product that appeals to 100 people is easy. That’s why startups are so successful.

But making a product and/or a new functionality for a million people is far more complicated. These products have to be comprehensible and operable for a million people. If not, not only does your product fail, your helpdesk will also be overrun with calls, which will increase your losses. And once you have your product, you still need to sell it to millions of people, meaning you have to find a common emotion for a marketing campaign that targets these people.

Again, addressing 100 people is far easier, because the range of usable common emotions within that group is far bigger than if you’re targeting a group of millions. Spotify operates in 65 countries, so any new main functionality must be comprehensible and operable for all their clients.

Three forces that slow down innovation
To recap: CAPEX/OPEX leads to legacy IT, and millions of customers lead to mountains of paperwork that needs to be processed with this legacy IT. As a result of that, innovation slows down.

It becomes incredibly hard to get all the cogs in this machine working. Besides that, a corporation has many employees with many differing opinions. Making something that one department likes is easy. Making something that the whole company likes is hard.

Small circles
Is this bad? Well, not necessarily. Consider these three circles as a slow-moving object. Corporations do something that not a lot of companies can do: they serve millions of people. And around these three circles a lot is happening.

There are constant developments that challenge these processes and try to modernize or break them down to make everything more effective. Whether they succeed is vital for the corporation, because a company has to adapt to new developments around it. This happens in waves. Let’s focus on the current wave that should alter these processes to make corporations adapt to changing business situations.

Digital transformation / corporate startup
Digital Transformation focuses on making corporations more agile, which means breaking down the situation I explained before and moving towards an organizational model that is more adaptable to change and more focused on clients instead of processes, with scrum teams of 6 to 10 people with end-to-end responsibility who directly test their work against clients. If the client likes it, it’s good.

The ultimate example of this is the corporate startup. Here, the team operates completely outside the company and starts from a greenfield situation. Once the product is right and it has the potential to reach millions of clients, it is beamed up to the corporate mothership and then launched.

From startup to corporation
The big difference in the agile way of working is that rapid change and adaptation are core elements from the start. This is typical for startups. But startups can become big companies, and do an IPO. The question is whether the “new” corporation will encounter the same problems with legacy IT, administrative costs and clients as traditional corporates. (I think the answer to this is yes.) For me, the question why IBM is still around is therefore as interesting as the question why Spotify is such a success. Will Spotify be around long enough that everybody else will start to consider it a corporate company, too, instead of just me?

Spotify as business model
Time to get back to music and Spotify. Let’s take a long, hard look at Spotify’s business model.

Spotify wants to bring music to as many people as possible on a subscription basis. They want to abandon the physical ownership of music and let people pay for music again — something that wasn’t very common in the early years of the new millennium, when music was freely distributed in all kinds of illegal ways. The general idea is that in the early days of physical music carriers (vinyl/cd/tape) average people didn’t spend 120 euro a year on music. They will when they have a Spotify subscription (unless they use the free option, but then they are bombarded with commercials). This basically means that people will spend more money on music than before with this subscription model, and that is good business. However, the amount of music they consume also multiplies enormously. Instead of 4 cd’s, they now consume 180 cd’s (this is just a random number, but the actual number will be huge, supposing you listen to Spotify at least an hour a day). And Spotify has to pay royalties to record companies for the songs they stream. Every time you play a song, Spotify pays. Every time you play a cd at home, you already paid by buying it.

Of course, there are no non-digital distribution costs and no need for artwork, printing or boxes (which is very good for the environment), but there are technological expenses. We know that technology is supposed to become cheaper and cheaper, but Spotify’s expenses must be astronomical, because most of them go into streaming data and that is not for free on a provider level. Also, the flawless service Spotify delivers will demand a lot of very expensive hardware.

From a business viewpoint, the best thing Spotify can do is to deliver music as efficiently as possible on the technological front. From a client engagement viewpoint, they should let people listen to as many songs as possible by offering an extensive music catalogue. From an accountant’s viewpoint, the less music is streamed, the less royalties and data traffic have to be paid for. Here we encounter a bit of a contradiction, because the more successful they are, the more capital they need, as the business model at this moment isn’t profitable. In the end it is bits and bytes that are sent from server to client. Tim Cook is right when he says that the art and craft side of music is completely overshadowed and the Spotify system is ignoring the emotional value music has for its listeners, and definitely also for the musician and the album cover artist. Developing a functionality to upgrade the role of musicians and artists will, however, not benefit the business model of Spotify at this moment. First they need to find a balance point where subscription income meets expenditures. As yet they are still far from finding that.

End of the business model
What’s more, this business model has no real potential for growth. The deal is one subscription per person, no more. We are not buying two subscriptions and switching from one to the other to listen to different kinds of music. Spotify is a very good deal for consumers — unlimited music for 10 euros a month. The service is great, but the business model is quite narrow. The Spotify model has a clear end. At some point they will have reached their maximum of users at the lowest possible technology costs, and then that’s it.

The question is whether this will ultimately generate enough profit to keep the company running. Subscription models are mostly good and profitable business models, but Spotify hasn’t made any profit yet. And the scary thing is that the product they sell — music — is not owned by them. Remaining the number one music streaming service will demand enormous effort and cash. So, are there possibilities for growth?

Extending the business model
Can Spotify become a record label by picking up independent artists and sign them on? I’m not so sure, because then they will directly compete with the companies whose music they play now.

Data services, maybe? Can they commercialise the data they have more than they do now? I think that is definitely a good option and I’m sure they are working on it, but the new GDPR legislation makes the the commercialisation of data increasingly difficult. They could offer more variation in their subscriptions models. Like a premium subscription with a high quality audio format for audiophiles. Or they can go into hardware, like Dr Dre, and compete with Sonos or JBL. Hardware can be a good spin-off. Spotify supplies music, so why not make sure that music is played on the best possible sound device?

To me, Spotify is a very good interface to an enormous database, and they know how to deliver new content. They have some powerful algorithms and they know how to handle infrastructure. Quite an achievement and an art in itself. If I were them, I would not have done the IPO, but might have tried to get Apple on board. Apple has hardware and cash. They could focus on bringing the art, craft and emotion back into music. Not that they have done that very successfully in the last decade, but Apple has enough artists and producers on board who would know how to do it. It would be a long road to accomplish that and it would require serious money, but think of the possibilities that AR and VR could offer if you control the hardware. Moreover, a deal between Spotify and Apple would free us of iTunes. All in all a win-win situation, I would say.

As an educated historian, entrepreneur and self taught technologist I like to connect the dots of technical, social and economic developments.

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