The current model of ‘free’ ad-supported music streaming could be headed for an overhaul.
Last month, Sony Music Group Chairman Rob Stringer took aim at freemium services offered by the likes of Spotify during a presentation for Sony Group investors on May 30.
Stringer pointed to a “poor contribution to streaming monetization” from ‘free’ streaming tiers, stating that “their primary purpose” – as opposed to generating meaningful revenue – is to “convert users into paying subscribers”.
The Sony executive then suggested that DSPs should close what he called the growing “price gap” between paid and free users, especially in mature streaming markets.
Stringer’s solution: charging current free users a “modest fee” to listen to music and other content via ad-supported services.
Stringer’s suggestion of a “modest fee” wasn’t a million miles away from an idea contained within Goldman Sachs‘ recently released annual Music In The Air report.
Said report noted that “as the monetization of paid subscription improves, we believe that there is [an] opportunity to better monetize the vast pool of freemium users and evolve the ad-supported offering to improve paid conversion rates”.
The Music In The Air Report authors, led by Lisa Yang, wrote: “As premium plan pricing continues to improve, we believe that the audio ad-supported streaming offering will also need to evolve to improve the monetization of ad-supported users (for instance through higher ad loads and CPMs, or through introducing an advertising light tier for a small charge) and/ or support higher conversion rates towards the premium plan (through placing greater content or feature restrictions on the freemium service).”
As noted by Goldman’s analysts, Premium music streaming monetization has been improving lately via price hikes.
Spotify, the world’s largest subscription music streaming service, just announced its second price hike in the space of a year for its US subscribers. (Spotify’s Premium individual tier will now cost $11.99 per month in the States. Similar pricing changes are taking place in the UK and are expected soon enough in Europe.)
So, what would happen if Spotify, as Stringer suggested, now additionally began charging a modest fee for access to its ad-funded tier?
Alternatively, what would happen if Spotify did something even more radical… what if, in a bid to force the conversion of ‘free’ users to Premium subscribers in mature markets, SPOT shut down ‘free’ in these territories entirely?
Here, MBW crunches the numbers on how such scenarios could play out…
1) The ‘modest fee’ model: global
You can look at this first part as an unrealistic hypothesis… but one that sets the scene.
Before we begin crunching the numbers, we should say this: In Q1 2024, ad-supported revenue at Spotify globally stood at €389 million ($422 million), barely more than 10% of the total money generated by the platform. (Subscriptions weighed in with EUR €3.25 billion; see below.)
We mention that because the modeling MBW has done in each stage of our analysis below doesn’t take this $422 million of quarterly advertising money into account.
For one thing, we cannot know how much of Spotify’s current ad revenue would remain if its audience were suddenly asked to pay a ‘modest’ fee to access advertising-supported music. It’s a fair bet at least some of it would be sacrificed.
Now… let’s move on to our scene-setter.
According to Spotify, of its 615 million global MAUs in Q1, 388 million of them were ad-supported users.
So… what would happen if we started charging these 388 million people the equivalent of USD $1 per month to access SPOT’s ad-funded tier?
Alternatively, what would then happen if we started charging them USD $2.50 or $5 per month?
Let’s also consider another metric: what would happen if 10% of SPOT’s current global free users paid up? What if it was 25% or even 50%?
The answers to these questions are below.
Within the parameters we’ve set out, Spotify would generate anywhere from USD $465.6 million per year (for a $1 monthly ‘modest’ charge, with 10% of currently free users signing up) to USD $11.64 billion per year (for a $5 monthly ‘modest’ charge, with 50% of currently free users signing up).
Now… when we mentioned the above was an unrealistic hypothesis, we meant it.
There are a few reasons for that, but it’s mainly summed up by this:
- There are many parts of the world where the equivalent of USD $5 (roughly Spotify’s global Premium monthly ARPU) would be considered far from a ‘modest fee’, and would, in fact, buy you multiple full Spotify Premium subscriptions;
- Take, for example, India. A standard individual Spotify Premium sub in India today will cost you ₹119 per month – the equivalent of just USD $1.43. That’s without additional potential discounts via Family Plans, telco bundles, local annual deals, etc. (India is not only one of the fastest-growing music streaming markets, but by the end of 2024, it might actually become the No.1 streaming market in the world by volume.)
Rob Stringer’s suggestion of requiring a ‘modest fee’ to access Spotify’s ad-funded tier, therefore, was surely more of a nod to more mature markets like the US, UK, and Europe – rather than so-called “emerging markets” like India.
That’s especially true when you consider that the total number of paying subscribers in the USA grew by just +5.2 million in 2023, according to RIAA, compared to nearly triple that figure (+15.1m YoY) in 2020.
Plus, according to IFPI data, ad-supported revenues from audio music platforms grew by just 3.2% YoY in the United States in 2023. That’s slower than inflation!!
With all of that understood, let’s now solely focus on the two most ‘mature’/established designated markets in Spotify’s corporate landscape: North America plus Europe (including the UK).
2) The ‘modest fee’ model: NORTH AMERICA + EUROPE
Using approximate math based on Spotify’s own numbers, MBW estimates that the service currently has around 128 million ‘free’ users across North America (the US and Canada) and Europe (including the UK).
Without weighing you down too much with math before the good bit (!), that calculation is based on two pieces of data:
- According to SPOT, of its 615 million total MAUs at the end of Q1 2024, North America and Europe (UK included) jointly claimed 46% of them; and
- According to SPOT, of its 239 million paying subscribers in the same period, North America and Europe (UK included) jointly claimed 65% of them. (Yes, still today, only around a third of Spotify’s paying subscribers are based outside NA and Europe/UK.)
- (Additional caveat: Our 128 million estimate here is fair, but will slightly overestimate the number of ‘free’ users in these territories. That’s because, in Spotify’s financial numbers, there are a relative handful of counted Premium subscribers who are not actually MAUs – i.e., premium subscribers who haven’t actively used their account in the period.)
Right. With all that established, let’s get down to business.
If there are approximately 128 million ‘free’ Spotify users in North America and Europe (including the UK), we can determine what revenue impact a ‘modest fee’ requirement for SPOT’s ad-supported tier might have in these territories.
Once again, the below calculations do not consider any revenue that would continue to be generated from advertising on these tiers in these markets. They only show how much new money the introduction of a ‘modest fee’ on Spotify’s ‘free’ offering in North America and Europe might generate.
Once again, we’ve considered whether that ‘modest fee’ might be worth USD $1, USD $2.50, or USD $5; we’ve also considered what would happen if 10%, 25%, and 50% of the current free users in these markets signed up.
Here’s what happens: Spotify generates anywhere between USD $153.6 million per year (for a $1 monthly ‘modest’ charge, with 10% of currently free NA + Europe users signing up), all the way to a possible USD $3.84 billion per year (for a $5 monthly charge, with 50% of currently free NA + Europe users signing up).
3) The total ‘free’ shutdown in North America and Europe
For Spotify and its partners, of course, any restriction of / paywalls added to its ‘free’ tier would have to make economic sense.
Remember: In Q1, Spotify’s global advertising business generated USD $422 million. The hypothetical numbers above (RE: ‘modest fee’ introduction) would have to grow this figure significantly to be worthwhile.
Critics of Spotify’s free tier will point out that no other audio service – from Apple Music to Amazon Music, TikTok Music, YouTube Music, SiriusXM/Pandora, and TIDAL – offers a similarly permanent free tier to that currently presented by SPOT. (Most offer limited-time free tiers that expire after three months before users have to pay.)
Is Spotify therefore giving away too much, too cheaply in mature streaming markets? Should a ‘modest fee’, or other restrictions on SPOT’s ad-funded tier, be introduced for this reason alone?
(Reminder that Goldman Sachs suggests a potential “advertising light” tier – i.e. ramping up the volume of ads on fully-free Spotify, and charging users a modest amount to get rid of some of them.)
Those opposed to curtailing Spotify’s free tier argue that without it, users will return to piracy or simply learn to be fully satisfied, music-wise, by ad-funded YouTube.
It’s a debate that will continue to rage. But for now, let’s add to it with one more set of hypothetical numbers.
It’s not just a ‘modest fee’ addition to Spotify’s free tier that is being discussed behind the scenes at music rightsholders.
Two senior global figures in the business have recently talked to MBW about the potential of pushing Spotify towards a Sirius XM/Apple Music-style trial model, at least in the US and Europe.
Imagine if, tomorrow, all current and new subscribers to Spotify were told: You have three months from today free – after that, it’s pay… or go.
Below, we model out how this could look, revenue-wise, in North America and Europe. (Once again, this doesn’t take into account the revenue that would be lost without any ad-funded tier.)
We split out the model into two potential baskets:
- A percentage of current ‘free’ users in North America and Europe (inc UK) starting to pay USD $4.94 per month. This figure is the USD-equivalent of Spotify’s global ARPU for Premium users in Q1, which was EUR €4.55;
- Obviously, that $4.94 Premium monthly ARPU figure in Spotify’s numbers is global, and will therefore have been naturally lowered by subscribers in ’emerging’ territories. (Reminder: In India, Premium subscriptions currently cost the equivalent of USD $1.43 per month.) For this reason, and to illustrate the ‘top end’ estimate of revenues from a free-tier shutdown, we’ve also modeled what would happen if a percentage of current ‘free’ users in North America and Europe (inc UK) started paying $11.99 per month – Spotify’s new premium price in the United States.
The upshot: If Spotify could convert 25% of ‘free’ users in the US and Europe to paying for a Premium subscription (via a ‘free’ shutdown) it could expect to generate anywhere between USD $1.9 billion and $4.6 billion in new revenue per year.
Note: All EUR-USD currency conversions in this analysis regarding calendar Q1 2024 have been made at the average rate of the European Central Bank for the quarterly period.Music Business Worldwide