When Facebook flicked the switch on stage two of its Socially Optimized Web Strategy at f8 it was clear that the social network had just found an effective means of embedding itself further into all of our digital lives, by making itself the universal content dashboard. What wasn’t so clear at that time was quite how significant an impact it would have on music services, Spotify in particular.
Today Spotify hit 20 million monthly users on its Facebook app, having added 500,000 new users in less than two weeks, from the 3rd to the 15th of May (see figure 1).
Spotify has added 1.5 million users since the end of April, representing a growth rate of 8%. That compares to 0.5 million new users and 4% growth for the entire month of May in 2011. Facebook integration, coupled with launching in the US has turbo charged Spotify’s growth trajectory.
And yet, as impressive as Spotify’s total user growth is, it is only par when compared with other streaming music services. Looking at the growth in total users by month since launch date of service (see figure 2) Spotify is close to the average for streaming music services.
In fact it is only above Pandora and lags imeem and Last.FM, both of whom were once the future too. In favour of Spotify, services like Pandora first launched in the US – a much larger addressable audience – and have unlimited free tiers. Against Spotify, the market is now much more mature in terms of technology and consume readiness. Measuring against current user levels, 20 million users is also a long way south of Pandora’s 100 million users. 3 million paying subscribers is also far off Apple’s 80 million iTunes customers, though the comparison isn’t necessarily apples-to-apples (pun fully intended).
All of this is not to say that Spotify’s growth rate should be questioned but instead to put it into appropriate historical context, namely that Spotify is performing at the rate that streaming music services should perform in their first 40 months. Not more, not less.
What is different about Spotify, is the need to amass new free users to drive premium subscriptions (see figure 3).
Although Spotify officially quotes 10 million registered users (the same number it first reported in December 2010) it is more instructive to look at paid conversion as a share of the 20 million monthly users reported by Facebook. (Bear in mind that Spotify first quoted 10 million users back in December 2010, long before the US launch or Facebook integration).
Even with the 20 million users measure, 17% stands out as a highly successful conversion ratio for Spotify, an affirmation of the Freemium model. Not only that, the conversion rate has grown strongly month upon month. Spotify has been getting progressively better at converting free users to paid. The conversion from active users to paid is even more impressive: 27%.
However it is also clear that the acceleration in new user acquisition enabled by Facebook integration is beginning to dent the conversion rate (see figure 4).
This is though just a natural byproduct of rapidly expanding the funnel: these new free users need to have time to get hooked on the service and then get migrated over to paid. The rate of new users is so much higher than previously that it will take time for Spotify’s overall metrics to balance out. But that should indeed happen. And if it does , then it augurs well for positive premium growth down the line.
If Spotify converts between 17% and 27% of each of the new daily 45,454 users, it will add between 0.7 and 1.1 million new paid users a quarter, or between 4.8 and 4.5 million a year. Assuming a 27% conversion rate of these new active users, Spotify could have just over 8 million paying subscribers by May 2013 and 36 million total users. The lower case, and probably more realistic, 17% conversion rate scenario would result in 6.3 million paying subscribers.
Although the rates and ratios will fluctuate over the coming 12 months, these numbers give us a useful directional sense of the long term impact of Facebook on Spotify’s current growth metrics. There remains a big question over the scale of the actual addressable market, i.e. is there a demand ceiling that Spotify will hit somewhere south of the 5 million paying subscribers mark? But ceiling or no ceiling, and low or high conversion scenario, there is one inescapable conclusion, namely that Facebook integration is transforming Spotify’s business, fast.
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These charts and the above analysis feature in a brand new Music Industry Blog free report: ‘ When 2+2=Free: Making Streaming Music Add Up’. The report is free of charge to Music Industry Blog subscribers. To receive your copy simply subscribe to email updates of this blog using the box to the upper left of this page.
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That’s a brilliant article Mark! Staggering numbers going on there, and it really does highlight just how radically the music industry has changed in the past few years alone in terms of how consumers access music. I remember being really excited about getting a physical album from a shop and having all the artwork in front of me. Now it seems like that same passion for a physical product has been overtaken by the passion for discovering new music – which really seems to be going at a rate of knots, thereby making instant ‘viral stars’ out of artists who upload their music to the public access platforms of YouTube and Spotify: Case in point: Rebecca Black with her song ‘Friday’.
What is your take on the music streaming business as opposed to having an album in your hands? I’m not claiming to be a purist, but having an album is a nice thing, and gives a richer overall experience, however the convenience of being able to instantly find an artist that you love listening to, and then getting recommendations for associated artists/tracks in the same minute is quite remarkable.
Very interesting times we live in, and I hope that the bands who produce this exceptional music – (OK not Rebecca Black) – get their fair % of the subscription costs. (Mainly because I want to be able to make some money out of the music I write in my band).
Take care Mark, and thanks for writing this article, I really enjoyed reading it.
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Very interesting figures.
If Spotify reaches 6.3 million paying members in May 2013, this means Spotify could potentially generate $31.5m a month (if we consider basic subscriptions at $4.99) and over $377m a year. And this figure should even be higher if we take in consideration premium memberships (at $9.99) and currency conversions (mainly Pounds and Euros).
Spotify has recorded losses until now, but wouldn’t a turnover of $377million allow Spotify to make benefits and become a profitable business? The real question then is how much of that $377m would get redistributed to record labels and artists.
Tom – you raise some very valid points. But I would say that the heart of the matter is less about ownership and more about the role of the artist-fan relationship. When someone subscribes to Spotify they are paying for access to all music. Their relationship is with the service / format first and the artist second. When some one buys an album their relationship is with the artist first and the format second. The consumer thinks in terms of ‘I paid for x’s music’ rather than ‘I paid my monthly music subscription fee’. I strongly believe that we need a new generation of artist specific digital products, not to replace music services such as Spotify, but to complement them. if you haven’t seen it already take a look at my report ‘The Music Format Bill of Rights’ and let me know what you think!
Sebastian – the big question of profitability will come down to what Spotify need to do to keep their marketing funnel growing. If for example getting to 36 million total users means rolling out into half a dozen more territories then profitability will be dented markedly. If however 36 million can be achieved organically in existing territories with modest marketing spend then profitability remains achievable. As for the distribution of that income. The amount Spotify pays out to for rights is by the large fixed percentages. Though how rights holders distribute that income to performers and songwriters is much more variable. A final part of the mix is whether the equity stakes some rights holders have in Spotify allows them to participate in non-recoupable income such as dividends.
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We can’t forget that Last.fm is global and Spotify is near global. Pandora is only in the USA, as was Imeem. So Spotify’s growth, although impressive, is not as impressive as Pandora and Imeem.
hearing this at AIM’s Music Connected last week and again reading it here, I would say the one factor not covered in a very stimulating article/commentary is that of consumer segmentation. this has two particular impacts.
firstly pitting spotify’s growth against pandora, imeem and lastfm suggests they are aimed at the same people. they’re not. pandora is a sit-back experience centred around hand-picked recommendations. imeem was music wrapped in a fast-paced social network. lastfm is for discerning musos who want to plot their musical DNA. spotify was initially for tech-savvy, music-loving, heavily-engaged early adopters and has become more mainstream over time but is still pitched as an on-demand jukebox for those who want to drive their music. who a service is aimed at and what else is available at that time for that consumer segment is critical in understanding whether a growth curve is good or not. spotify’s growth may be below their bullish pitches to investors, but is actually good, especially when you consider they are an app not ‘click n play’. spotify still needs to be managed to some extent by the user, and as they go deeper into the mainstream, they touch users who find it so much easier to play on youtube. or grooveshark.
this brings the second segmentation issue. spotify’s new ‘via-facebook’ users are increasingly mainstream and more casual than their initial devotees. as the mainstream segments engage with on-demand music less, they have less propensity to upgrade to paid music subscriptions. and if their experience is reduced after a time (eg usage/play restrictions) they will simply go elsewhere. will the major labels allow spotify to nurture and retain a growing mainstream free audience who will never upgrade to a subscription ? in my view they should, for the incremental play revenues that can be generated for rights holders. but that’s not the ‘freemium’ pitch given to date.
Clive – lots of great points in there. As you know, I’m a data guy at heart and have designed many many segmentation schemes in my time, so I am very sensitive to the issue of service-to-segment targeting. You are of course entirely correct to identify that there are distinct usage behaviours for Pandora vs Spotify (though I would argue that the share of Pandora user that will be poached by Spotify is actually a lot higher than Tim Westergren would argue).
I would also argue that Spotify is actually beginning to try to be all things to all people. Whereas We7 pursued a Pandora-like radio strategy as a pivot to differentiate etc, Spotify is doing so simply to broaden its appeal and in turn reach. Add to this mix the dynamic you highlighted of the potential to have a very large segment of free users who will likely never pay and thus need a different monetization model with different commercial terms (e.g. YouTube). Then Spotify evolves from being a cleanly targeted service into an all singing all dancing access based music behemoth.
Casey – the counter argument is that the US is a *much* better market to target. more unified, more addressable, better technology adoption, more digital music-ready consumers etc
I agree Mark. Spotify’s recent moves to become more Pandora-like are because they understand segmentation and their need to broaden and simplify their offering if they are to go truly mainstream to attract people who want ‘sit-back’. Like you I think Pandora’s audience is a key and essential target for Spotify for them to become the ‘de facto’ music service for all. This audience will not (generally) pay for a music subscription, so future sustainability must come from ad revenues even if some rights holders are slow to grasp this reality. Free usage has to become so widespread that the aggregated micro payments per play become significant to rights holders, eventually much higher thank subscriptions which will always appeal to just a minority of the total market. Thanks for as always stimulating a great debate.
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Mark, the 20M figure represents active users. What do you mean by 38% inactive users, out of the 20M, and where does this # come from?
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Hey, is it possible to have a copy of the report you mention “When 2+2= fre…” ?
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That’s a sensible answer to a chennalgilg question