Spotify’s big skill is in converting non-payers to premium subscribers

Music streaming service may not have made a profit, but its customer base is still enviable

Spotify is fascinatingly hard to pin down. Is it an all-powerful industry reshaper or a debt-laden European underdog yet to make any money? Is it a democratic platform "enabling" artists to break free of the control of uncaring major labels or merely the latest cultural gatekeeper in disguise?

As it prepares to go public on the New York Stock Exchange, the world's biggest music streaming service is hardly free of contradictions. But for other media companies trying to create or build on modest subscription revenues, the glory of Spotify lies in one simple trick: the impressive rate at which it has converted users of its free, ad-supported tier to its premium, paid-for one.

The big caveat attached to any discussion of Spotify’s success is the biggest one possible: it is not yet profitable. Nevertheless, at this precise moment, it manifests as a successful example of “freemium”, the business model much coveted by those media businesses that can barely make a cent from online advertising.

Enviable figures

Some figures revealed in its recent 264-page filing to the US Securities and Exchange Commission are enviable indeed. As of the end of 2017, Spotify had 159 million monthly active users, which was 29 per cent higher than a year earlier. Some 71 million were premium subscribers, with this number having swollen 46 per cent year-on-year.


This places Spotify, founded by Sweden's Daniel Ek and Martin Lorentzon, well ahead of its nearest rival, Apple Music, which has 36 million subscribers.

Astonishingly, nearly 45 per cent of Spotify’s users are premium subscribers - a highly significant percentage given that for years the proportion hovered much closer to 25 per cent. And make no mistake, subscriptions are where the money is: Spotify’s premium tier accounts for 90 per cent of its revenues.

So how has it done it? According to Spotify, its premium service and ad-supported service "live independently, but thrive together". They're like Noel and Liam Gallagher, if you will.

Premium subscriptions

The ad-supported service is the funnel that has driven more than 60 per cent of its new premium subscriptions since 2014, Spotify said. Regular users of the free tier won’t be at all surprised by this, given that the most commonly recurring ads they will encounter on Spotify are for Spotify itself. Nor should any envious media companies be shocked that the first step to amassing revenue turns out to be registration.

Once lured to the free music buffet, users of the ad-supported tier are firmly in the marketing loop for the €9.99-a-month premium tier (which has no ads and much better functionality), receiving regular email reminders that they can “get beats, not breaks” in a free one-month trial, or perhaps three months for 99 cents. At least a fifth of Spotify’s new premium subscribers in the past two years have come from these discounted offers.

What does it take to convert more non-paying users to the premium kind? Sometimes the answer is as obvious as dropping the price. Spotify has been content to let its average revenue per user (ARPU) figure fall for premium customers in a trade off for headline subscriber growth. In 2015, Spotify’s premium ARPU was €6.84. This fell to €6.20 in 2016, and in 2017, it came in at €5.32.

Willingness to experiment

It attributes the decline to the launch of its family plan (up to six accounts for €14.99 a month) and its student plan (a 50 per cent discount). These, however, have had the benefit of reducing the rate of subscriber cancellations, or churn.

And it hasn't got this far without a willingness to experiment. Compromise has been a hallmark of its negotiations with the major record labels. The company's renewal of its deal with Universal Music last year included the significant clause that Universal's new releases could be reserved for premium-tier customers for a two-week period, obliging non-payers to wait.

Spotify had consistently sought to avoid any catalogue distinctions between its two tiers. This in itself was interesting, as it could have used exclusive content, or pursued a “hear it on premium first” strategy, to convert more non-payers to premium. Instead, it leaves the business of chasing big exclusives to its rivals, telling potential investors that “personalisation, not exclusivity” is the key to its success. The big pitch is that Spotify is better than its competitors at understanding its users.

Listening habit data has been repurposed in a series of clever advertising campaigns and sent back to users in the form of personalised annual “top 10 songs” that they need little encouragement to share on social media.

Personalised playlists

But the primary advantage to being hot on data is that it gives Spotify the ability to finesse the algorithmically-generated personalised playlists that now account for 17 per cent of all time spent listening. Curated playlists decided by its editorial teams – which can massively increase the discoverability of some artists – account for a further 15 per cent.

These concerted in-house efforts to programme more of our listening time have coincided with an overall uptick in the average hours users spend on the platform. In other words, we really like to be told what song to listen to next, and Spotify knows it.

It’s a good lesson in how to leave as little as possible to chance.