Kim Kizyma
Graphic Designer + Creative Technologist

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Average Spotify subscriber pays just $5.50/mo.

I’ve been streaming for years now but still purchasing CD albums as they release because I liked having an immense physical collection of the albums I love and support. Lately, things for me have changed. And I don’t know how I feel about it.

Collecting CDs has been a big part of my life growing up, as odd or as trivial as that sounds to anyone but me. I would buy from Target, Best Buy, Walmart, Half Price Books, or anywhere else I could grab the CDs to up my collection. I wanted to own every single CD by my favorite artists. I had an iPod classic that I imported all the music to, and I would constantly listen to it on shuffle, learning new music all the time. I also would go to my local library and check out all the CDs that interested me and import those to my computer for my iPod too.

I really liked learning about different artists and their different styles of music and everything I could.

And then Spotify came along and became super popular. I remember using it in college but not paying for premium. I still used my iPod and listened to music on the way to class with that, and that worked fine, but when working on my laptop, I went to Spotify. The ads didn’t bother me at first.

Then after graduating college and still using Spotify for like two years, I realized how extremely inexpensive it was to simply upgrade to Premium and not have to deal with ads, and be able to choose which music I wanted to listen to on my ride home from work. This all happened after my iPod classic broke and Apple basically laughed at me for asking about buying a new one.

On the surface of things, New York-based Warner Music Group should be delighted. The company, which owns the third-biggest recorded-music operation in the world, just posted record full-year results for the 12 months to the end of September last year.

WMG’s annual recorded-music revenues grew by $340 million, or 11 percent, to $3.36 billion — an all-time pinnacle for the major. This growth, predictably, was driven by surging yearly revenues from streaming services like Spotify, Apple Music, SoundCloud and Pandora, which hit $1.73 billion. Warner’s biggest money-spinners in the 12 months included records from stars like Cardi B, Ed Sheeran and Lil Uzi Vert, as well as the bestselling soundtrack to The Greatest Showman.

And yet, when he spoke to analysts after these results were published on December 20th, one couldn’t help noticing that Warner CEO Steve Cooper, now and again, sounded a little . . . miffed.

His bugbear? ARPU, or Average Revenue Per (paying) User, which reflects the mean price paid by consumers for a streaming subscription to services such as Spotify.

“The main drivers responsible for the trend of falling ARPU are family plans and meaningfully lower price points in emerging markets,” Cooper pointed out on Warner’s earnings call. “We will be working with our subscription partners to address this concerning trend.”

The issue of Spotify’s declining ARPU has been a bête noire at the major labels for some time, and is due to come to a head later in 2019 (for reasons we’ll come back to). Before then, let’s run a quick review of this downward pattern, and what it means for the music business.

Digging back through Spotify’s past filings at Luxembourg’s Companies Register, we can gather a picture of what the platform’s average subscriber was paying at the close of 2014 — four years before Cooper’s “concerning trend” comments. Spotify ended 2014 with 15 million global paying subscribers, who contributed €982.9 million in revenue to the company.

Taken as a snapshot at the end of 2014, then, the average Spotify subscriber was paying €65.53 per year, which, at the prevailing annual exchange rate, translates at U.S. $87.09, or $7.26 per month.

Why doesn’t this figure equate exactly to the well-known standard Spotify subscription price of $9.99 per month? Because of a few factors that, as Cooper hinted, rankle the major labels.

For one, the average sum paid for Spotify subscriptions is diluted, globally, by the lower price points the company picks in certain regions, which tend to be sensitive to local GDP. For example, in the first quarter of last year, Spotify expanded into four new regions, including Vietnam, where a subscription currently costs 59,000 Vietnamese Dong per month — equivalent to approximately U.S. $2.50.

Spotify’s average global subscription price is further diluted by price promotions (it often runs a $.99-for-three-month-subscription deal to attract new users), as well as membership offers bundled with cellphone network tariffs. Plus — and this is perhaps the most irritating factor in label circles — there’s Spotify’s discounted Family and Student deals.

Six relatives on a Family Plan in the U.S. can subscribe to separate Spotify accounts for $14.99 per month in total — a per-head cost of just $2.50. These value-packed offerings are designed to keep Spotify’s worldwide subscriber numbers ticking ever upward, a crucial factor in the company impressing analysts on Wall Street and, consequently, buoying its share price.

Just before Spotify floated on the New York Stock Exchange in April last year, its ARPU became a matter of public record. According to an F-1 SEC filing, Spotify’s monthly ARPU had officially fallen to €6.84 at the close of 2015; a year on, it tumbled again to €6.20, and in 2017 it hit €5.32. And in Spotify’s latest fiscal update, for the third quarter of 2018, ending September 30th, the company posted an official monthly ARPU figure of just €4.73 ($5.50).

This means that the average Spotify subscriber around the world is now paying more than $20 less per annum than he was four years ago. And the record labels fear this situation is about to get worse.

Spotify is widely expected to launch in India over the next six months, a country where a typical fully stacked streaming-music subscription (on services like Gaana, Apple Music or JioSaavn) will cost somewhere between Rs 99 to Rs 120 per month — the equivalent of less than $2. Spotify also recently landed in MENA (the Middle East and North Africa), where its approximate monthly dollar-converted premium subscriptions range from $5 per month (UAE) down to $3 per month (Egypt).

By the end of 2019, don’t be surprised if Spotify’s average subscriber, worldwide, is paying less than $5 per month. You can understand why record labels, to whom Spotify pays out the majority of its revenue, are starting to cry foul.

Furthermore, insiders tell me that the revenue likely to be generated by Spotify’s free tier in some emerging markets, such as India — where current per-stream payouts are minuscule when compared with the U.S. — is causing particular consternation on the rights-owning side of the industry.

“This isn’t really about record labels, it’s about artists — it’s about Spotify pushing down the inherent value of music in order to accelerate their customer acquisition,” one senior major-label source told me this week. “Spotify is subscription streaming’s market leader, and by driving down ARPU they’re starting to do the same thing to artists that Amazon is accused of doing to authors.”

Another major-label source added, “Spotify is trying to subsidize their business model with some of this behavior in emerging markets. The rates they want to pay the industry are so low, it’s tantamount to them asking artists to write them a check, not the other way round.”

That being said, at some point it may eventually become in Spotify’s own best interests to arrest this ARPU decline. Wall Street watchers of the company are increasingly growing impatient for SPOT to demonstrate a clear path to profitability, with an improving but still-sizable operating loss of more than €300 million expected for its full-year 2018 performance.

Adding to the drama, Spotify is due to renegotiate its current licensing deal with Universal Music Group at the end of Q1 — the first of three major music companies it will need to persuade to sign a new agreement before 2019 is through. (Steve Cooper’s Warner is up last.)

Options on the table for Spotify to improve its bottom line include a rally of advertising revenues on the platform, which have under-performed to date. This is something that Spotify is certainly working to improve, judging by Microsoft’s recent sponsorship of its Discover Weekly playlist.

Another oft-discussed option would be for Spotify to raise its prices — which, as a consequence, should drag its ARPU up. Spotify experimented with this in Norway last year by hiking its subscription price by 10 percent, in a presumed test of customer loyalty within a mature streaming market.

Interestingly, since Spotify landed in the United States in 2011, Netflix has raised its prices twice. In 2015, the video service elevated its standard monthly HD subscription price from $7.99 to $9.99; and in 2017, it increased the cost of its most popular monthly tier by $1, to $10.99, and raised its Ultra-HD monthly offering by $2, to $13.99.

In September last year, when questioned at the Goldman Sachs’ Communacopia conference in New York, strong-talking Spotify CFO Barry McCarthy said the question of whether his service should raise its prices was a “really dumb” one — flatly dismissing the possibility.

Privately, one suspects that Warner boss Steve Cooper, and his fellow major-label chiefs, may hold a very different view (Rolling Stone).

kk