Spotify, Scratching Beneath the Surface of the Numbers

The Financial Times today report that Spotify has 250,000 UK Internet Users have downloaded the streaming music application, and 800,000 worldwide. Not bad for an application which has only recently just stopped being invite-only. I’ve posted before on why Spotify has been so successful, now we have some numbers to measure that success by. First of all let’s assume that 98.5%+ of those 800,000 are free, ad supported customers, so I’ll treat the reported numbers as being largely synonymous with free. I invite Spotify to challenge that assumption, but I think it’s a relatively safe bet.

  • 250,000 is more than 4 times higher than the premium subscribers Napster has managed to accumulate in the in the UK after years of trying. That’s significant because the free Spotify service effectively offers just what Napster’s 9.99 tier does but with much weaker editorial and programming. This is proof positive of why being free has been at the core of Spotify’s success to date. All the ease of use, deep catalogue, smart streaming technology and clever use of pyramid-selling peer promotion would have come to naught if it had just been for the 9.99 tier. And this is why Spotify have to realistically build their business for being an ad supported business not a premium subscription business.
  • 250,000 may be bigger than Napster, but Napster was never anything more than a niche player in the UK. As a share of the total UK paid digital buyer market Spofity is less than 5%, as a share of the total UK digital music audience, less than 2%. So 250,000 is a great first step, but it’s not at ‘taking over the world’ proportions yet.
  • 250,000 means that the UK accounts for nearly a third of the total 800,000, with each of the other 5 markets accounting for an average of 110,000. As much as the Brits do really like Spotify, I’d expect France and Spain to be really strong markets too, especially Spain. Both are big free-music markets. In fact as a label exec I’d be a little concerned that Spotify was doing so well in the UK (the strongest European premium digital music market) and hoping it doesn’t cannibalize iTunes sales.
  • Let’s generously assume that only 95% of the 800,000 are free: compared to those users being 9.99 paid subscribers, that’s a shortfall of just under 100 million euros annual subscription revenue that needs to be made up in advertising. I admit the comparison is a bit disingenuous given the explicit tactic of deploying a free tier to promote the service. But Spotify must be careful not to expect to convert the majority of those to paid subscriptions. They’ve cast their net among free music fans and they’ve reeled in a nice catch of freeloaders who love their music but predominately won’t pay to stream it. Charging for must-have added functionality, such as mobile, might be an avenue, but Last.FM, Pandora, imeem etc have all set the standard of mobile support being free. So charging for mobile would arguably be as damaging to their growth potential as if they’d only launched with a premium offering.
  • Finally the numbers must be caveated with the fact they only refer to downloads, not active usage.

So a solid start for Spotify, but the real test is building a vibrant business around free music and kicking it towards the mainstream. If anyone can do that right now, it’s Spotify. But they need to strike whilst the iron is hot before they start getting bogged down with the every day tedium the rest of the digital music market has e.g. directly competitive services, disgruntled customers, differentiating from file sharing, competing with Apple etc.

UPDATE: Spotify have just announced that they passed the 1 million users mark.

9 thoughts on “Spotify, Scratching Beneath the Surface of the Numbers

  1. Very interesting article, especially the comparison with Napster numbers. I expect the 250,000 number for the UK has increased a fair bit over the past few days, since that announced before last week’s BBC news stories and U2’s BBC-sponsored gigs.

  2. Plus the huge shortfall in ad revenue vs payouts on streams they currently are making up with their own cash. They will surely need to up the advert quotient per stream soon and that will start to intrude on listening a lot more that it does currently..

  3. I’m still not convinced Mark. I mean sure they’ve got the old style mega.com PR hype machine behind them (like fellow Swedes Boo) but at the end of the day I really don’t see them as having a huge differentiation to what is currently out there. The FT even say it when they mention that it is similar to last.fm and not being able to mobilize the music, that is download the mp3 to a device is a massive set-back. Let the hype dust settle and we’ll see how many of those 800k still have an appetite for a streaming fixed radio proposition with ads.

  4. I completely agree that they’re not differentiated. They’ve got to where they are because they’re free and well marketed. But they’re also where they are because they’re easier to use than Last.FM and imeem. They’re tilting at mass market consumers. A Last.FM, Pandora or imeem style mobile app would give them the portability story. IMO their longer term issue is whether they have the cash or the will to support a mass market free audience.

  5. Easy,

    Coincidentally installed the player yesterday- just to listen to the U2 LP.

    I imagine U2 got paid upfront a few millions- & maybe Catalog acquisitions of this sort were part of the business plan that got Spotify €15.3m from Northzone Ventures few months ago.

    In full agreement with you guys; cant see viable business model..
    Web 2.0 companies = future record label??

    Probably not.

    G

  6. I’m no businessman, but I do like listening to music, and I’ve been using Spotify for a couple of months.

    I don’t think this is an alternative to iTunes – I think people will see it as an alternative to illegal downloading, a much, much bigger slice of the market. It’s instant and free, and much easier to use than the browser-based alternatives.

    It’s also an alternative to the radio. I hope they can persuade enough of the advertisers currently using commercial radio to give them a go, and they’ve made a promising start in attracting listeners.

    I don’t agree with the point about downloading to a device. Eventually, all the data will be in the cloud so no need for mp3 downloads. What’s important is that it can be used on devices like iPhone.

  7. a spotify mobile-app would be very different from those last.fm and imeem-apps. none of these offer real on-demand streaming whereas a spotify-app would. i think ppl would be willing to pay for that.

  8. what about the artists? They are getting almost nothing from spotify…this is barely better than piracy. Pretty nasty of the labels – who are big shareholders in spotify…it may be a good service but I’d rather actaully pay artists a small amount directly…rather than let this mob make billions when thsy sell spotify, all based on shortchanging artists. The labels have become the pirates…if you can’t beat them join them I guess is their thinking.

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