Why Spotify needs Russia

Spotify’s delayed Russia launch finally happened this week. While it did not drive a stock price growth like the Josh Rogan deal did (the stock closed just 1 cent higher than the previous day’s close) it will actually prove much more important in the medium term.

Podcasts are Spotify’s long-term bet, the moon shot that keeps investors excited and that points to a future where Spotify is better able to plot its own destiny without being constrained by record labels. But that future destination does not mean anything if Spotify is unable to maintain strong growth in its core business in the interim. Which is where Russia comes in.

Spotify has an Apple-like problem but chose a very non-Apple solution

Global streaming revenue growth was 22% in 2019 and growth will slow significantly in the COVID-19 impacted 2020. Growth rates however were already slowing due to the maturation of developed western markets, while subscriber numbers were growing faster than revenues, pushing down ARPU. Spotify has the same challenge as Apple.

Apple is the market leader in smartphones but does not own the majority of the market and the overall smartphone market is slowing, which means that iPhone sales have slowed. Apple could have decided to go ‘down market’ and created cheaper devices for less affluent consumers and emerging markets. It decided not to, and instead to start pushing its top-end devices even higher up the market with higher price points. Spotify has taken the opposite approach. Rather than increase prices in high-value markets, it is prioritising lower ARPU emerging markets. Spotify has done so because a) it does not have a diversified product like Apple so is less able to risk slowing sales, and b) its product is not sufficiently differentiated from other streaming services to prevent churn if prices went up.

Betting big on emerging markets

Instead of focusing on maximising revenue growth among existing subscribers, Spotify is rolling the dice on subscriber growth. It keeps telling investors to measure it on growth and market share, and that is exactly the game Spotify has chosen to play. Which is where Russia comes in.

Emerging markets are where the subscriber growth lies: Asia Pacific, Latin America and Rest of World combined will drive 71% of global music subscriber growth between 2019 and 2027. Spotify is already committed to this strategy and is already seeing results. In its Q1 2020 earnings, Latin America and Rest of World were the workhorses of Spotify’s growth during the quarter, accounting for 73% of all new subscribers; one year previously the share was just 30%.

But emerging markets take time to convert, users need to get familiar with the service via ad supported and extended trials before slowly converting to paid, though always at lower rates than in developed markets due to lower spending power. So, Spotify needs to keep expanding the user acquisition funnel which means launching in populous new markets such as Russia.

Russia’s contribution to the global picture is what matters for Spotify

The question many are asking is, has Spotify left it too late for Russia? There is no doubt that 2019 was a big year for streaming in Russia, with revenues growing at 79% to reach $249 million in retail terms, which makes it a sizeable, but not (yet) a large market. By way of comparison, Brazil’s streaming revenues are comfortably more than double that. As of Q1 2020 there were 7.4 million subscribers with Vkontakte and Yandex commanding a combined market share of 80%, so Spotify is entering an established market with well-established indigenous players.

This is not Spotify’s modus operandi and the last time it took this approach was India, which is yet to deliver results. So Russia is unlikely to be a runaway success for Spotify, but it is entirely reasonable for it to expect to pick up three million subscribers there over the next three years, which in turn will help sustain Spotify’s global subscriber growth. This is not about winning in Russia but instead winning globally. Or put another way, Spotify needs Russia more than Russia needs Spotify.

Soon to be the Biggest Ever YouTube Channel, T-Series May Also Be About to Reshape Global Culture

pewdiepie tseries

Some time over the next month or so a YouTube landmark will be passed: T-Series will pass PewDiePie as the most subscribed YouTube channel on the planet. As of time of writing T-Series had 75.4 million subscribers compared to PewDiePie’s 76.4 million. (PewDiePie’s lead was narrower but he has mobilised his fan base to delay the inevitable.) But do not mistake this milestone to be a narrow measure of the shifting sands of the YouTube economy. Indeed, it tells us more about the future of streaming as a whole (both music and video) than it does the current status of sweary Swedish gamers.

For those of you who somehow do not yet know who T-Seriesis, it is a leading Indian music label and movie studio – it in fact claims to be ‘the biggest – that is the world’s largest YouTube music channel and before long it will likely be able to drop the ‘music’ qualifier from that title. It is also the label that Spotify just struck a deal with as it preps its protracted launch into India.

A streaming market of contradictions

India is a problematic market for streaming monetization. It has 1.4 billion consumers but just 330 million of those have smartphones. There were 215 million free streaming users in 2018 but just 1 million paid subscribers despite leading indigenous players like Hungama and Saavn having been in market for years. Total streaming revenue was just $130 million in 2017 generating a combined annual ARPU of $0.27. And that number is heavily boosted by unrecouped Minimum Revenue Guarantees (MRGs) due to local streaming services continually failing to meet their projected subscriber numbers (though according to local accounts, perfectly happy to continue to effectively overpay for their streaming royalties). The video side of streaming is more robust with eight million subscribers generating more than three times more revenue than music streaming does. Even still, eight million subscribers is scant return against a base of 330 million smartphone users.

Streaming unlocks the potential of emerging markets

India is exactly the sort of market that streaming business models have the potential to unlock. The old world was defined by commerce, by people paying to own music or for hefty household TV subscriptions that inherently meant owning a TV set. As a direct consequence, the traditional music and TV markets skewed towards western markets with higher levels of disposable income. This was a massive missed opportunity and one that can now be fixed. As Mexico and Brazil are currently in the process of showing us, populations with strong cultural heritage and large, but lower income, populations can have massive impact. Like or loathe Reggaeton, its ability to permeate the global music marketplace is testament to the power of Latin American music fans and the artists they support, as is Colombian J Balvin’s current status as the most streamed artist on Spotify.

The growing influence of second tier markets

Streaming can monetize scale in a way the old model simply could not. What we will see over the coming decades is a steady realignment of the balance of power across the global music and video markets. Western markets – and a handful of others such as Japan – will continue dominate revenues due to a combination of higher subscription penetration and higher subscriber ARPU. But large population, 2ndtier markets will have a growing influence. The BRIC markets (Brazil, Russia, India and China) are obvious candidates but also Mexico, the Philippines, Nigeria, Egypt, Turkey and Thailand all have similar potential.

Large, engaged local audiences can shape global trends

One of the key reasons Latin American artists have become part of the global cultural zeitgeist is that Spotify has a big regional user base – 42 million MAUs as of Q3 18. Because record labels over-prioritise Spotify in terms of marketing and trend spotting, when Latin American artists started blowing up, European and North American labels started paying extra close attention and building up their own rosters of Latin American artists. Latin American users represent 22% of global Spotify MAUs but their influence is amplified by the fact that they stream a lot and they tend to stream individual tracks repeatedly. So, when they put their support behind something it blows up, edging into the global charts which then triggers a whole bunch of actions that see that track being fed into non-Latin playlists and user recommendations, which can then trigger a further escalation of playlist strategy. And so forth. This was Luis Fonsi’s path to global stardom.

Could India ‘do a Mexico’?

So the obvious question is, if T-Series had enjoyed the same sort of success on Spotify that it did on YouTube, would Guru Randhawa be topping Spotify’s global artists instead of J Balvin? Would we be finding Bhangra in every sonic nook and cranny instead of Reggaeton? The answer is – as certain as a counter factual claim can ever be – almost certainly yes. Whereas Latin American emigres are a major demographic in the US, they are less so elsewhere. Also, Latin American culture is divided between Spanish and Portuguese. The Indian diaspora however, is far more global, with large populations in the US, Canada and UK. What is more, though India has many indigenous languages, English is spoken nationally, with many artists releasing in English. Similarly, a growing number of Bollywood movies are being made in English with an eye on the global market.

So when Spotify finally launches in India, expect a series of global cultural aftershocks. Spotify is unlikely to covert that many premium subscribers – except via telco bundles – but it is likely to build a big free user base. And when that happens expect T-Series to take centre stage with Guru Randhawato be the most streamed artist globally by 2020…?