MBW Reacts is a series of analytical commentaries from Music Business Worldwide written in response to major recent entertainment events or news stories. Only MBW+ subscribers have unlimited access to these articles. The below article originally appeared within the latest MBW+ Review email, issued exclusively to MBW+ subscribers.
Who’s got the bigger user base: Netflix or Spotify?
Right now, there’s no contest: it’s Spotify.
According to its newly-released Q3 results, Daniel Ek‘s green machine was accessed by 640 million MAUs (monthly active users) in the quarter to end of September.
Netflix’s official user base hit 282.7 million ‘members’ in the same period. In addition, Netflix recently confirmed it now has 70 million people signed up to its ‘ad-supported’ tier, which launched two years ago.
The big difference?
All of Netflix’s users are paying something.
That Netflix ‘ad-supported’ tier costs you $6.99 per month to access in the United States, or GBP £4.99 per month to access in the UK.
It’s a low-cost tier – not a no-cost tier.
Meanwhile, over at Spotify, approximately 60% of those 640 million global users are currently paying nada… because Spotify’s ‘ad-supported’ tier remains completely free.
This is just one reason why major music companies – most vocally Sony Music Group, via Chairman Rob Stringer – are increasingly questioning whether Spotify should start charging a small fee for its ‘free’ tier in mature markets like the US.
A quick glance at Netflix’s product menu hints at the majors’ other big future hopes for Spotify: price increases and price differentiation.
A standard Netflix subscription in the US today costs $15.49 per month; a Premium sub, which comes with additional perks such as 4K viewing and spatial audio, costs $22.99 per month.
That latter price is around twice the size of Spotify’s largest individual tariff in the US today ($11.99 per month).
Quite the stat: thanks to its more ambitious pricing, Netflix’s subscriber ARPU in Latin America alone is substantially bigger than Spotify’s subscriber ARPU worldwide (including the US and EU): USD $8.40 vs. USD $5.17 per month, respectively.
(Source: Netflix and Spotify investor filings, converted at average exchange rates in Q3.)
Going forward, then, music’s ‘majors’ can turn to Netflix for strong arguments as to why Spotify should (a) increase its prices, (b) introduce a more expensive tier for ‘super’ users, and (c) slap a cost on its ad-funded tier in the United States.
But an altogether different argument has been raging between Spotify and the music rights industry these past few days.
And it’s one in which, as Daniel Ek literally counts his money, Spotify may find its long-held position somewhat compromised.
You’re an MBW reader, so you’ll know the context.
Earlier this year, Spotify – having recently added audiobooks to its Premium tier offering – lowered the mechanical royalty rate it pays to songwriters and publishers in the United States. SPOT claimed it was entitled to do so via a ‘bundling’ loophole in its contractual agreement with publishers, as determined by the Copyright Royalty Board in 2022.
This ‘bundling’ move is estimated to cost songwriters and publishers around $150 million annually in terms of royalties they will receive from Spotify this year vs. what they would have received before said loophole was activated. (The MLC is fighting Spotify in court on the matter, and may well prevail.)
Spotify, of course, has a murky history of penny-pinching from songwriters.
You no doubt remember when SPOT, along with Amazon Music and others, appealed against a royalty-rate rise for songwriters in the US six years ago — an appeal whose primary aim ultimately failed.
Back then, we first heard Spotify’s ongoing justification for such behavior to songwriters: “We already give out around 70% of our money to music rightsholders. We need our portion to survive as a business, so if you want more cash, go knock on the door of the record industry.”
Okay, Spotify didn’t exactly say those words, but that’s effectively what it meant when the firm said in 2018: “It’s natural for everyone to want a bigger piece of [streaming’s revenue] pie. But that cannot come at the expense of continuing to grow the industry via streaming.”
This wasn’t a one-off. Back in 2016, Spotify’s then-CFO claimed that the ability to lower royalty payments to the music industry would be “critical to Spotify’s future”.
Then, in 2021, the Digital Media Association (DiMA), extended this ‘poor me’ argument further still.
DiMA, acting as a Spotify mouthpiece, suggested to songwriters that asking SPOT to pay them more money – without record companies lowering their royalties from the service – was akin to “burning the village in order to save it”.
There are robust arguments as to why it’s unfair that songwriters and publishers, generally speaking, get paid around one-quarter of the royalties collected by their recorded music brethren for streams on Spotify. These arguments will and should continue.
But Spotify’s previous get-out-of-jail-free card in this debate – “there’s no more money in the pot; don’t ‘burn the village’, guys!” – is now dead and buried.
Partly thanks to Spotify laying off over 2,000 people last year, and partly thanks to a pull-back on marketing costs, SPOT is on course to post its first-ever annual operating profit in 2024 – via a more handsome figure than most expected.
According to Spotify’s Q3 results (and Q4 forecast), the company expects to post a clean USD $1.5 billion annual operating profit at the close of this year.
Meanwhile, Daniel Ek and his Spotify co-founder, Martin Lorentzon, have jointly cashed out over $840 million (!!!) in Spotify stock over the past 18 months… with $400 million+ cashed out just last week.
The long-argued premise that Spotify needs to claw back margin from songwriters – or indeed any music rightsholder – in order to survive is now palpably false.
There’s no need to burn the village. But, please, stop pretending it’s not full of riches.Music Business Worldwide