New numbers might show the reason why Adele and Taylor Swift are boycotting the audio streaming service.
For the last several years, the Swedish audio service Spotify has been widely criticized for its so called freemium model. The business model lets the users enjoy the music available without paying, by accepting commercials in between songs. The subscribers have the option to upgrade to a premium service, which is ad free. Pop icons, like Tayler Swift and Adele, have questioned the business model, as well as music industry executives.
The company itself however, claims that the ad revenues cover the artists royalties. Here’s what the company writes on its own site: “Advertisers pay Spotify for exposure to users on our free tiers and in-turn fund the royalties that Spotify pays out for listening that occurs in these tiers.”
However, Breakit can now reveal that the revenues from the free-tier subscribers are far from big. According to Spotifys Luxebourgian financial statement for 2014, which Breakit has seen, the ad revenues amounted to $106 million. That’s just a tenth of the company’s total revenue, even though the free tier subscribers make up approximately 75 percent of the user base.
This means that the company gets less than $2.4 per free tier customer, per year. That is significantly less than the $9.99 american premium users pay, per month.
This fact undeniably affects the amount of money that the artists and music rights holders get when their music is played. Spotify generally pays the rights holders 70 percent of the revenues, but that money depend on a number of parameters. Among others are how large Spotify’s revenues are, in which countries an artist’s music is streamed, and how large the share of free tier users are.
The more free tier subscribers, the less money for the musicians and rights holders.
Spotify justifies the model with the fact that free tier subscribers are often quickly converted to paying customers. The company has also taken measures to develop its ad system. For example by adding more targeting customization, like allowing advertisers to choose their target audience by age, gender, nationality and of course taste in music. If you listen to Spotify’s workout playlists you will get more fitness related ads.
In all fairness, that might have increased the revenues share from the free tier subscribers. According to Stefan Pamquist, Spotify’s head of sales in the Nordics, the company’s ad revenues increased with 53 percent just during the first quarter of 2015. On mobile, ad revenues increased by 380 percent during the same time period.
“We are continuously developing new effective opportunities for our advertisers to communicate with our audience, while we, at the same time, make sure that our audience receive messages that feel relevant for them”, Stefan Palmquist says.
Whether the revenues share of free tier subscribers has increased is still uncertain.
According to the latest numbers, Spotify currently has 75 million subscribers of which 20 million are paying subscribers.