Spotify – an object lesson in the success of the freemium model

Written by on September 21, 2016 in Guest Blog with 0 Comments

Jubelnde Konzertbesucher auf Rock-KonzertFree users are the life blood of Spotify. Spotify’s recent jump to 40m paid subscribers demonstrates just how critical its free users are and why their numbers need to keep moving upwards. Spotify has announced that it has hit 40m paid users gaining 10m users in the last 5 months (2m per month) compared to Apple which has 17m users gaining 4m in the last 4 months (1m per month).

  • Apple has a huge advantage over Spotify because its service is installed on the devices belonging to over 440m users with whom it already has a payment relationship and who can activate the service with the touch of a button.
  • Furthermore, on the Apple App Store, Spotify is a lot more expensive than Apple Music because of Spotify is forced to pass 30% of its revenues to Apple for distributing its service (see here).
  • Against this Spotify competes with a superior service but its key weakness to date has been its marketing because only people who already use the service really know that it is better.
  • This is why the free tier is so important.
  • Free users don’t pay anything but have to endure regular programming breaks so that Spotify can afford to pay the labels for access to the music.
  • This is often a bad business but in Spotify’s case, I think it is providing the company with a huge advantage to which the latest figures are testament.
    • First: Free users get to spend time with the service without paying for it, making it much easier to make these users understand why the service is better than anything else available.
    • In effect, it is like a trial that never expires and I think that increasing numbers of these users are becoming attached enough to the service to be willing to pay to get rid of the advertisements.
    • Second: These free users generate data which Spotify can use to train its algorithms which can in turn be used to make the service better.
    • Apple also has a lot of data but has not been nearly as good at turning raw data into actionable intelligence with which it can improve its service.
    • With the total user count now past 100m users, I think Spotify has hit critical mass and will soon be able to negotiate better terms with the labels to keep more of the revenues for itself.
    • I have long believed that it is the music labels that are making the most money from music streaming (see here) but I think that the balance will soon tip in favour of the music streaming companies and the artists.
    • This is because the time is rapidly approaching when the labels will need the music streamers and the artists more than the streamers and artists need the labels (see here).
    • This is why I remain unconcerned with the risk contract renegotiation with the labels as the risk will soon be in the other direction.
  • I think that the key issue for Spotify going forward is to maintain momentum of growth of its free users.
  • It is the free user pool that has been the source of its outperformance of Apple, meaning that it will be critical to keep the paid tier (where the real money will be made) increasing at this very healthy rate.
  • I continue to think that there is enough space in this market for 2 big players and with those spots filled, it is the fortunes of Pandora, Tidal, Deezer and so on that trouble me now.

This article was first published on RadioFreeMobile.

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About the Author

About the Author: Dr Richard Windsor is the founder of Radio Free Mobile which is an independent research provider. The research helps clients to understand and evaluate the players in the digital ecosystem and presents a unique perspective on how all the pieces fit together in an easy to read and digest way. The product is available on a subscription basis and counts members of the handset, telecom carrier, Internet, semiconductor and financial industries as its subscribers. RFM is the land of the one man band meaning that Dr. W. also makes the tea. .


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