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.
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.