In the life of a young media company, a lot can change in a decade. Writing about Spotify in August 2014, I declared it a hit, but I hedged my bets, too, holding out the possibility that it would be an ephemeral one.
At the time, the Swedish company – then a privately owned platform that only streamed music – had 40 million monthly active users, 10 million of which were paying subscribers. I described this 25 per cent conversion rate as “astonishingly high”, my view skewed by the fact that I preferred – and still prefer – to buy music, not rent it.
Ten years on, Spotify officially has 626 million monthly active users, including 246 million “premium” subscribers who pay something for the pleasure. That’s 39 per cent of a much-expanded user base.
Spotify, which since its foray into podcasts has become an audio streamer not purely a music one, has hung around and become not just a mainstream concern but something of an industry player. It has remained the leader of the market it created. Lately, it has even been turning consecutive quarterly profits.
I don’t know about astonishing, but that 25 per cent rate was pretty high for 2014, when the concept of subscribing to an online media service was still in its relative infancy. Spotify helped popularise the idea of paying up each month for content that it had also made available – albeit with much faff involved – for free.
With its almost too-good-to-be-true offer, it became an enviable example of the freemium business model. The advertising-free premium tier brought in almost all of its revenue, but the ad-supported free tier, which has significantly more limited functionality (especially on smartphones), served as a reliable sales funnel for the paid-for product.
The numbers don’t tell the whole story about what’s going on with Spotify now, however. Because as decent as that 39 per cent figure is, it actually used to be higher. In 2019, a year after it floated on the New York Stock Exchange, it reached 46 per cent. Since then, it has steadily waned.
It is unclear how many subscribers switched to the free tier in order to save money as cost-of-living pressures hit and also unclear how many might have defected to services offered by Apple and Amazon. Either way, the ad-supported free tier is outpacing the premium one, with a year-on-year growth rate of 15 per cent (to 393 million) versus 12 per cent.
What a nice problem to have, right? I mean, those double-digit growth rates still sound kind of great. It seems perfectly reasonable that it would be easier to attract more ad-supported users than paying ones. As long as users continue to be lured into subscribing – often via a three-month “taster” of the premium tier for precisely nothing – the system works for Spotify.
But Spotify doesn’t exist alone in the music streaming ecosystem. It is in a mutually dependent relationship with the music industry, led by the “big three” major labels Universal Music Group, Sony Music Entertainment and Warner Music Group, in that order.
And while there have long been signs that they don’t like Spotify’s free tier as much as Spotify does, industry-watchers are now wondering if those tensions are about to surface again, with consequences for users who currently enjoy paying zero for the platform.
Noting how Spotify’s revenue growth came in well ahead of second-quarter growth in Universal’s subscription streaming revenues, the experts at Music Business Worldwide (MBW) think they might.
Citing Universal executive Michael Nash’s remark that there is an addressable market of 180 million consumers that will form the next wave of music subscribers, MBW surmises that Universal might not be fully relaxed with Spotify claiming them ahead of its streaming competitors. One way to “clip its wings” would be to go after the free tier.
Both labels and established artists have traditionally disliked the free tier for the obvious reason that it appears to devalue their product. Before she signed to Universal, for instance, Taylor Swift maintained a three-year boycott of Spotify, arguing that “music should not be free” – a stance that helped her clean up in physical sales of her album 1989.
Universal, now armed with Swift on its roster, are the big boys here and never seem too scared of a fight. But Sony, too, recently expressed dissatisfaction with the “poor contribution to streaming monetisation” from free tiers such as Spotify’s, with Sony Music Entertainment chief executive Rob Stringer suggesting that users of ad-supported services be charged a “modest fee”, on the basis that Sony thinks “everyone is willing to pay something for access to virtually the entire universe of music”.
There’s up to 393 million non-paying Spotify users who might say otherwise. Another wing-clipper, however – one that could feature in the next round of licensing negotiations between the streamer and the industry – would be for labels to refuse to fully license their catalogues to the free tier, reserving certain albums or tracks exclusively for paying subscribers only. Spotify has largely resisted that. But it doesn’t always get everything its own way.
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