On-demand music service Spotify has passed 50m paid subscribers, up from 40m reported in September 2016. Spotify has been extending its lead in the on-demand music subscription business – Apple reported 20m paid subscribers at the end of 2016. Other leading music services include those from Amazon – which has been growing its base of bundled Prime Music customers, Google – with Google Play Music and YouTube Red, Deezer, and Tidal.
Strong lead, but competition still poses a risk
Spotify’s lead in the on-demand music business is well established, but its competitors can still pose a significant risk. Spotify’s competition includes services from Apple, Google and Amazon – all of which are companies with wider consumer platforms across multiple businesses which can be used to subsidise losses in their music services. Despite reporting strong revenue and subscriber growth, Spotify is yet to make a profit and the company is reportedly still engaged in its latest round of major label rights negotiations, deals which make up the vast majority of its costs. Spotify’s subscriber base may have grown over the past 12 months, but IHS Markit understands that its ARPU has decreased as it cut the price of family plans to match its competitors and continued to offer discounts to grow its user base.
Spotify remains focused on user acquisition ahead of possible IPO
Spotify’s number of subscriber additions has remained steady over the past 12 months; it added 10m subscribers in the six months from March to September 2016 and a further 10m to March 2017. Spotify’s year on year growth rate in paid subscriptions to March 2017 was 67%, IHS Market estimates that this is the same as for the 12 months to December but down slightly from the 75% range for earlier in 2016.
Spotify’s strong subscriber growth rate is impressive as it scales. While the growth rate has slowed somewhat, it compares favourably with other large subscription media platforms. When video subscription service Netflix passed 50m paid customers in 2014 its annual growth rate was 33% compared with Spotify’s 67%. Increased international expansion has helped Netflix maintain a healthy growth rate of over 25% each quarter to 2016, although the rate is slowing.
Spotify is already active in 60 countries so future growth won’t come from simply expanding into new territories and unlike Netflix in video its ability to differentiate through original or exclusive content is limited. So while Spotify should continue to grow its paid subscriber base, the growth rate may well slow over the next few years as it faces increased competition and its core markets start to mature.
Spotify’s current focus on user acquisition comes ahead of plans for a possible IPO. The terms of its $1bn debt funding round agreed in Q1 2016 reportedly required it to IPO within 12 months or see the debt transferred it into equity at a discounted rate.
Competition leads to investments and acquisitions
Spotify remains committed to its free ad-funded tier, which it sees as a vital user acquisition tool to bring customers onto its service. Rivals like Apple and Google only offer premium subscriptions, a factor which has enabled Apple to try to attract users through exclusive or early access to certain new releases and content. Spotify’s recent product focus has instead been on building a wider portfolio of services through features like podcasts, original content and video. Spotify is also investing to widen its reach across business as well as consumer services; it participated in enterprise music start-up Soundtrack Your Brand’s recent $22m funding round. Soundtrack Your Brand offers licensed music content to enterprise customers including restaurants and retailers and runs Spotify Business – its platform for delivering licensed music to commercial and public spaces. Spotify has also invested to secure its core subscriber base. It acquired subscriber analytics firm Preact in November 2016 to improve its churn reduction and user acquisition activities.