The important thing to understanding the music streaming economic system is the enterprise mannequin of the music streaming companies, which has emerged within the negotiations between the foremost music rights holders and Spotify. It’s based mostly on advance funds {that a} music streaming service has to pay to the rights holders, that are offset towards the revenues from streaming. This leads to a price construction for the streaming companies that makes it troublesome to generate earnings in any respect. This episode of the weblog sequence on the music streaming economic system explains why that is the case and the way the enterprise mannequin of the streaming companies works, utilizing Spotify for instance.

The Music Streaming Financial system – Half 10: Spotify’s Enterprise Mannequin

From the outset, Spotify needed to develop to outlive economically. Nonetheless, it was not solely the variety of registered customers that mattered, as lots of them had merely signed up as soon as after which remained inactive, but additionally these customers who streamed music repeatedly and have been thought of energetic customers for a sure interval, for instance monthly. These are known as Month-to-month Energetic Customers (MAUs).[1]

Determine 1: Variety of Spotify customers, 2012-2023

Supply: Music Enterprise Worldwide, “How Spotify can develop into worthwhile”, Could 11, 2015, Music Enterprise Worldwide, “Spotify revenues topped $2bn final yr as losses hit $194m”, Could 16, 2016 and annual stories by Spotify Expertise S.A. 2018-2023, accessed: 2024-08-18.

Spotify’s person development is spectacular. In eleven years, the variety of energetic month-to-month customers has grown by virtually 3,000 per cent and the variety of paying subscribers by as a lot as 4,600 per cent. This represents a mean annual development price of 272 per cent and 418 per cent respectively. Nonetheless, a more in-depth look reveals that development has slowed lately. Between 2017 and 2020, the expansion price for energetic customers monthly was round 30 per cent, falling to a stage of 23 per cent in 2023. The decline in development charges for Spotify’s paid subscribers is much more vital. Whereas development was nonetheless at 40 per cent in 2017 and 35 per cent in 2018, it fell to round 15 per cent between 2021 and 2023. Because of this Spotify’s growth into new markets, equivalent to Asia and Africa, has enabled it to proceed to see vital person development, however fewer of the newly acquired prospects are keen to pay for the streaming service, preferring as an alternative to make use of the ad-supported free mannequin.

Why is that this distinction between paying and non-paying Spotify customers so essential? Spotify’s financial success relies upon not solely on the variety of customers, but additionally on the conversion price from non-paying to paying premium customers. The significance of this conversion will be measured by the metric of common income per person (ARPU).

Determine 2: Spotify’s ARPU, 2012-2023

Supply: Music Enterprise Worldwide, “How Spotify can develop into worthwhile”, Could 11, 2015, Music Enterprise Worldwide, “Spotify revenues topped $2bn final yr as losses hit $194m”, Could 16, 2016 and annual stories by Spotify Expertise S.A. 2018-2023, accessed: 2024-08-18.

In 2012, Spotify earned yearly EUR 75 per person of one in all its subscription fashions, however solely EUR 3.70 per person of its ad-supported freemium providing. Though the income per free person may improve to over EUR 4.60 by 2023, that is nonetheless a tenth of the income per subscriber. As well as, the ARPU per paying person has been declining through the years and stood at EUR 49 in 2023. This is because of discounted subscription fashions equivalent to household plans and the like. Subsequently, it isn’t shocking that Spotify raised the costs of its subscription fashions in 53 nations by 10 % in July 2023 for the primary time in its historical past.[2] Spotify’s enterprise mannequin is due to this fact based totally on promoting subscription streaming fashions, which generate most of its income, as proven in fig. 3.

Determine 3: Spotify’s income, 2012-2023

Supply: Music Enterprise Worldwide, “How Spotify can develop into worthwhile”, Could 11, 2015, Music Enterprise Worldwide, “Spotify revenues topped $2bn final yr as losses hit $194m”, Could 16, 2016 and annual stories by Spotify Expertise S.A. 2018-2023, accessed: 2024-08-18.

Though income from the ad-supported freemium mannequin has elevated through the years, it accounted just for 13 per cent of complete income in 2023. Spotify’s financial survival, due to this fact, is determined by income from premium subscription and changing non-paying prospects into paying prospects. This has all the time been the core of Spotify’s freemium enterprise mannequin, which has enabled its financial rise, and mirrored in its quickly rising revenues.

Complete income grew from round EUR 10 million to EUR 97.5 million from 2009 to 2010, and in 2011 it already reached EUR 244.5 million.[3] Till Spotify’s IPO in 2018, the common annual income development was 56 per cent. In 2014, annual income exceeded EUR 1 billion for the primary time, in 2018 it was already greater than EUR 5 billion, and in 2022 income exceeded EUR 10 billion for the primary time. Nonetheless, this exponential development in income was additionally accompanied by an exponential development in expenditure. As will be seen in fig. 4, with one exception in 2021, expenditure has all the time been greater than income, that means that Spotify has solely damaged even as soon as since its basis.

Determine 4: Spotify’s revenues and expenditures, 2012-2023

Supply: PrivCo, “SPOTIFY’s Simply –Closed-12 months Financials Obtained”, October 5, 2012, Music Enterprise Worldwide, “How Spotify can develop into worthwhile”, 11. Mai 2015, Music Enterprise Worldwide, “Spotify revenues topped $2bn final yr as losses hit $194m”, Could 23, 2016 and annual stories by Spotify Expertise S.A. 2018-2023, accessed: 2024-08-18.

Determine 5: Spotify’s working revenue, 2012-2023

Supply: PrivCo, “SPOTIFY’s Simply –Closed-12 months Financials Obtained”, October 5, 2012, Music Enterprise Worldwide, “How Spotify can develop into worthwhile”, 11. Mai 2015, Music Enterprise Worldwide, “Spotify revenues topped $2bn final yr as losses hit $194m”, Could 23, 2016 and annual stories by Spotify Expertise S.A. 2018-2023, accessed: 2024-08-18.

The losses are primarily attributable to value of gross sales, i.e. the bills immediately associated to income technology. Though Spotify doesn’t disclose the composition of its value of gross sales in its annual stories, it may be assumed that these are primarily royalty funds to rights holders, particularly the music majors. Though value of gross sales as a share of complete revenues has been lowered from 104 % (!) in 2010 to lower than 80 %, it was nonetheless a considerable 75 per cent in 2023. Because of this the scope for spending on advertising and marketing, R&D and overheads is proscribed, as will be seen in fig. 6.

Determine 6: Spotify’s expenditures’ construction, 2012-2023

Supply: PrivCo, “SPOTIFY’s Simply –Closed-12 months Financials Obtained”, October 5, 2012, Music Enterprise Worldwide, “How Spotify can develop into worthwhile”, 11. Mai 2015, Music Enterprise Worldwide, “Spotify revenues topped $2bn final yr as losses hit $194m”, Could 23, 2016 and annual stories by Spotify Expertise S.A. 2018-2023, accessed: 2024-08-18.

In consequence, Spotify wanted to chop prices to liberate spending to put money into R&D and advertising and marketing and gross sales. As such, the announcement in early 2023 that it supposed to chop greater than 500 jobs globally got here as much less of a shock.[4] In June 2023, it was then introduced that Spotify can be shedding an additional 200 individuals to restructure its struggling podcast enterprise.[5] The massive bang got here in December 2023 yr when Daniel Ek himself needed to announce {that a} additional 1,500 workers can be launched within the coming weeks. In complete, Spotify had lower round 2,300 jobs by 2023, representing a discount in its world workforce of round 23 per cent.[6]

Nonetheless, the job cuts have been only one measure to cut back prices. Spotify introduced in October that from 2024 it could solely distribute cash to these rights holders who have been capable of generate greater than 1,000 streams previously yr to cut back the executive effort concerned in distributing income shares to rights holders.[7] In a weblog submit, this measure is justified with the combat towards streaming fraud and so-called white noise (i.e. non-music equivalent to recordings of rain, thunderstorms and different pure sounds), however Spotify additionally calculates how a lot cash will be saved with this measure: “Right now, Spotify hosts effectively over 100 million tracks. Tens of hundreds of thousands of them have been streamed between 1 and 1,000 occasions over the previous yr and, on common, these tracks generated $0.03 monthly. As a result of labels and distributors require a minimal quantity to withdraw (often $2-$50 per withdrawal), and banks cost a price for the transaction (often $1-$20 per withdrawal), this cash usually doesn’t attain the uploaders. And these small funds are sometimes forgotten about. However in combination, these small disregarded funds have added as much as $40 million per yr, which may as an alternative improve the funds to artists who’re most depending on streaming income.”[8] Studying between the strains, it’s clear that Spotify is just not solely seeking to save on financial institution transaction prices, however that the payouts for a lot of rights holders are so microscopic that they don’t even attain them. In doing so, Spotify can be not directly responding to the recurring criticism that artists see little monetary profit from Spotify, a criticism voiced by some well-known stars within the media shortly after the Swedish streaming service’s launch.

Endnotes

[1] As well as additionally DAUs (Each day Energetic Customers) and WAUs (Weekly Energetic Customers) are in use as metrics.

[2] Music Enterprise Worldwide, “Spotify is elevating its value within the US and 52 different markets. How a lot cash will that make the music trade?”, July 24, 2023, accessed: 2024-08-18.

[3] PrivCo, “SPOTIFY’s Simply –Closed-12 months Financials Obtained”, October 5, 2012, accessed: 2024-08-18.

[4] Music Enterprise Worldwide, “Spotify to slash over 500 jobs worldwide, as Daybreak Ostroff exits streaming platform”, January 23, 2023, accessed: 2024-08-18.

[5] Music Enterprise Worldwide, “Spotify cuts 200 jobs because it restructures its podcast division”, June 5, 2023, accessed: 2024-08-18.

[6] Music Enterprise Worldwide, “Spotify has laid off 2,300 workers this yr. That’s a shock – but additionally sort of inevitable”, December 4, 2023, accessed: 2024-08-18.

[7] Music Enterprise Worldwide, “Spotify is altering its royalty mannequin to crush streaming fraud and introduce a minimal cost threshold. Its plan? To shift $1 billion in payouts in direction of ‘working artists’ over the subsequent 5 years”, October 24, 2023, accessed: 2024-08-18.

[8] Spotify blogpost, “Modernizing Our Royalty System to Drive an Further $1 Billion towards Rising and Skilled Artists”, November 21, 2023, accessed: 2024-08-18.