18 November 2014

Quartz: “Forget Taylor Swift: Spotify is facing a much bigger problem”

But as Spotify itself has admitted, YouTube is already, easily, the biggest streaming music site on the planet, and that’s without it even really trying. The YouTube brand, which gets a staggering 1 billion unique visitors each month, might be in a stronger position to convert users into paying music subscribers than its parent company has been. The service will include the ability to watch videos without advertising, and the ability to save music for listening offline, the FT reported.

John McDuling

I’m not sure about the idea of being more successful at converting viewers into active subscribers. The brand has been associated with ‘free’ music for so long that I think it will be hard to change this perception for users. On the other hand, the user numbers shared by Spotify over the years show consistent growth in active users, combined with a very stable portion of paying subscribers. For the past couple of years, roughly one in four Spotify users has been paying for music streaming.

Spotify user growth
Some user numbers for Spotify (millions), as compiled by netzwertig

In fact, I’m almost suspicious of these much-too-consistent numbers. For the last four times Spotify released user data, covering almost two years, the number of active users has been exactly 4 times larger than the paying subscribers! This also means the growth rate for both over two years is identical, which is really hard to believe. No business moves that smoothly, especially one operating in a new environment dominated by old regulations and fragmented by country borders. I’m sure the numbers were rounded to look well in the press, but personally I’m always a bit skeptical seeing such round numbers. It would be good to see some genuine numbers by month or quarter and how does Spotify defines the ‘active’ user, so if you know better data sources, please share them.

I think the threat for Spotify is not so much pure competition, but the gradual transformation of music to a commodity, an undifferentiated service bundled with mobile hardware or services. Basically every major smartphone platform has or will have its own streaming service ( with Beats, with their several confusing and overlapping options, Microsoft with Xbox Music); also mobile operators offer bundled music with select data subscriptions – one good example is the Orange/Deezer partnership in Europe. These new(ish) competitors will not focus on music, instead offering it as ‘bonus’ to strengthen their platform and improve user retention, and they will have the advantage of other sources of income to finance the streaming business, allowing them to leverage lower prices. The only differentiation options are larger song catalogues and presence in more countries, where Spotify currently holds the advantage.

Faced with so many options, users will likely stay with the first service that manages to make them subscribe. Spotify will naturally have a head-start here, but I doubt their future growth will be as steady. In a sense, commoditization could be the main fear behind artists pulling back from Spotify and other streaming services, although their singular decisions will do little to stop this process.

Spotify’s current situation looks similar to what happened to Dropbox in cloud storage. They were the first to launch a reliable and user-friendly sync service, but in time the feature has been adopted by all major platforms and offered at increasingly lower prices. Dropbox customers are still loyal, but growth has shifted to the new players. The recent partnership with Microsoft has immediately sparked rumors of a possible acquisition further down the line.

btw, the rumored streaming service, Music Key, has officially launched since this article was published. Like many Google services, it’s an invite-only beta for now.

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