The End Of Freemium For Spotify?

‘Leaked’ Spotify numbers emerged today indicating that the streaming service has just hit 37 million subscribers, which puts more clear water between it and and second placed Apple Music, despite the latter’s recent growth. It also means that Spotify is now nearly 10 times bigger than Tidal and probably Deezer (which hasn’t reported numbers since its France Telecom bundle partnership ended). It is beginning to look suspiciously like a 2 horse race. But there is a more important story here: Spotify’s accelerated growth in Q2 2016 was driven by widespread use of its $0.99 for 3 months promotional offer. Which itself comes on the back of similar offers having supercharged Spotify’s subscriber growth for the last 18 months or so. In short, 9.99 needs to stop being 9.99 in order to appeal to consumers. Which is another way of saying that 9.99 just isn’t a mainstream price point.

spotify june 1

As the IFPI’s 2015 numbers revealed, the average label revenue per music subscriber fell globally from $3.16 in 2014 to $2.80 in 2015, with price discounting a key factor. According to Music Business Worldwide, 4 million of Spotify’s newly acquired 7 million subscribers were on promotional offers and around 1.5 million of those are expected to churn out when their promotional period ends. That might sound high but it actually represents a 79% conversion ratio, which is a stellar rate by anyone’s standards. Meanwhile Spotify’s total user base is 100 million which means the free-to-paid ratio is 37%. So price promos are converting at more than double the rate of freemium. Does this mean the end of freemium?

spotify june 2

Freemium proved highly valuable to Spotify in its earlier years and continues to be an important entry strategy for new markets. But last year record label execs started to observe that free just wasn’t converting at the same rate it once did in mature markets like the US. This was because most of the likely subscribers had already been converted and so the majority remaining were freeloaders who were never going to pay, and warm prospects who just couldn’t bring themselves to pay 9.99. This is where price promos come into play. They deliver the impact of mid priced subscriptions, which is enough to to hook those wavering free users. Once they get used to paying the majority tend to stick around when the price goes back up.

Mid Priced Subscriptions Will Drive The Market, Even If By Stealth

I have long argued that mid priced subscriptions are crucial to driving the streaming market, and the burgeoning success of Spotify’s mid-priced-subscriptions-by-stealth strategy provides a bulging corpus of supporting evidence. In fact, the average spend of Spotify’s 7 million net new subscribers in Q2 2016 was $3.09 a month.  The tantalizing question is whether that 1.5 million promo users that are expected to churn out would take a $3.99 product if it was available?

As the streaming market becomes increasingly sophisticated, the leading players will have to rely ever more heavily on differentiation strategies. For Tidal and Apple that means urban focused exclusives, for Spotify (for now at least) that means algorithmic, personalized curation and aggressive price discounting. And in Q2 2016 it is Spotify’s strategy that is winning out, resulting in 2.3 million net new subscribers each month compared to 1.4 million for Apple Music and 0.3 million for Tidal.

Freemim is dead, long live price promos?

 

 

18 thoughts on “The End Of Freemium For Spotify?

  1. Pingback: The End Of Freemium For Spotify? – printzblog

  2. To be correct 2 mad horse race!
    Blind race to PICKLE $200 billion of obvious to an idiot music goodwill in 10 possibly $15B subscription jar.
    Both Mr. Ek and Mr. Cue need urgently medical help!
    Labels are beyond any help.

  3. Isn’t the question how long Spotify can even continue? It may be a 2 horse race, but one horse can afford the battle, while the other is losing money on every subscription and, more importantly, seems to have no way to change this. Whether Spotify keeps or dumps free may not matter if they can’t ever make money.

  4. Please delete “New Post” from these emails, since they’re all “new!”

    >

  5. Pingback: The End Of Freemium For Spotify? – Platform & Stream

  6. Hi Keith – I’m afraid that’s a standard WordPress setting that I cannot change
    Mark

  7. If I really think about the numbers above, here’s how it breaks down for me: there is a pool of people who exist in Freemium tier. Then some of those folks ‘upgrade’ to Premium.

    Some do this through a free 30 day trial and others do this through a promotion, like 3 months for 0.99. (And a smaller number direct to paid)

    The 37% conversion above is accurately labeled Free-to-paid but inaccurately assumes it excludes the promotion-to-paid customers. The conversion rate would apply to both since anyone who is now paid could have gotten there a few different ways.

    Similarly, the 79% conversion rate is calculated between all 7M new customers – even though nearly half are not from promos – and all 1.5M customers that churn out (again, whom could be from either half of trial-to-paid vs promo-to-paid segment).

    I don’t think any of these numbers really say anything about whether Freemium is dead or not. In fact, with an overall conversion rate of 37% (which isn’t too shabby), the Freemium pool of users seems like a great one to keep around.

    My guess is that the promos do much better at converting customers to paid than the 30-day free trial generally does, which is why they continue to have promos at all. So if any conclusion would be made it’s that the Free trial is dead.

  8. Rebecca – the free number is actually much bigger than it looks. The total number of people who have tried Spotify free in the last 12 months is a bigger number than the active free number reported by Spotify. So the conversion rates are much smaller. As for free trials. These can convert at between 20% and 40% depending on factors such as auto opt in billing, type of market etc.

  9. Pingback: A Journal of Musical ThingsRandom Music News for Friday, July 8, 2016 - A Journal of Musical Things

  10. It feels like there are a few things here:

    – Payments to labels per user are falling as a result of more trials and promotions, yet the market keeps increasing. Are net revenues falling for the labels though as more purchasers become subscribers?

    – $9.99 is clearly too high a price for light music (average) listeners. If you’re a consumer that historically only spent $30 a year on a couple of CDs and is now being asked to pay $120 a year for streaming, you need to be sure that you’re really getting value. I suspect a lot of users simply don’t at that price point. The question is whether a $3.99 deal or a free deal would work better for labels. (I’ve long been of the opinion like you, that in music, one size – or price – really doesn’t fit all).

    – And are we going to see an even bigger effect because of family plans? Spotify recently allowed six individuals to share a plan. Anecdotally, it sounds like Spotify isn’t too zealously policing this. I know of someone sharing a plan where all six people live in different locations – countries even – and it all works fine. If this misuse is carried out a wider scale it’ll have some impact. Undoubtedly it will bring some new subscribers, effectively on a bargain rate, while others will have downshifted from $9.99 to a share of a family plan. What’s the betting that a lot of younger users are doing this just as they’ve historically shared HBO or Sky Go logins? You do get subscriber growth, but at the cost of revenue per user.

    Meanwhile Spotify doesn’t have infinitely deep pockets…

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