Music streaming service Spotify will be going public via a method known as ‘direct listing’, in which the company’s current shareholders, including employees and investors, will sell shares to stock market investors. This is unusual because in most cases companies sell shares directly on the stock market to the public as part of their Initial Public Offering (IPO).

The company posted revenues of €4.09 billion in FY17, as compared to €2.95 billion in FY16, and €1.94 billion in FY15. However, its losses doubled to €1.24 billion in FY17, from €539 million in FY16. In FY15, it had reported losses of €230 million.

As of December 31, 2017, Spotify operates in 61 countries and has 159 million monthly active users (MAUs), of which 71 million are premium or paid subscribers. While Spotify’s ad-supported service had 92 million MAUs. Premium subscribers have grown 46% year-on-year (YoY) from December 2016, while MAUs have grown 29% YoY.

What can music streaming companies in India learn?

Offer group subscription plans & student plans

Spotify mentioned that the growth in premium subscribers was partly driven by the popularity of its Family Plan, which basically allows up to six premium subscribers to access the ad-free service at a fixed monthly rate. This is similar to how Netflix offers users plans that allow up to 4 people to access the service at the same time.

As an aside, the 71 million premium subscribers reported by Spotify includes “both the master Family Plan account as well as any sub-accounts associated with each household.”

In regards to its Student Plan, Spotify said that:

We created our Student Plan to target the student population, because these users tend to have high retention and tend to migrate to our premium service over time.

From a product perspective, while the launches of our Family Plan and our Student Plan have decreased Premium average revenue per user (ARPU) due to the lower price points per Premium Subscriber for these Premium pricing plans, each of these Plans has helped improve retention across the Premium Service.

Note that Spotify’s premium ARPU has been on a decline. At the end of 2017, it stood at €5.32, as compared to €6.20 in 2016, and €6.84 in 2015. But over the same period, its premium churn (that is the percentage of premium subscribers who have cancelled subscriptions) has reduced. For 2017, it was 5.5%, as compared to 6.6% in 2016 and 7.7% in 2015.

In India, students use streaming services more than any other age group but are restricted to the ad-supported or free version, because they can’t afford the premium subscription. Music streaming service providers need to come up with special plans for them to remain competitive in the long-run. The only incentivisation that we have seen thus far is streaming platforms tying up with telecom operators to provide access to their service at a more affordable rate. They need to start thinking out of the box.

Put in as much effort on the ad-supported service as the paid service

Interestingly, Spotify mentioned that over 60% of the total premium subscribers that they have added since February 2014, began by using the ad-supported service.

And revenue from its ad-supported service grew 51% YoY between 2015 and 2016, and grew 41% YoY between 2016 and 2017. But the company is still apprehensive about the competition.

However, we face intense competition in growing both our Ad-Supported Users and Premium Subscribers, as well as in keeping our Users highly engaged. If User engagement declines or if we fail to continue to grow our Ad-Supported User base or Premium Subscriber base, our revenue growth will be negatively impacted.

The encouraging part is that Spotify’s premium subscribers have grown at a much faster rate than its ad-supported service users, over the last three years. As mentioned earlier, the number of premium subscribers stood at 71 million at the end of 2017, up from 48 million at the end of 2016, and 28 million at the end of 2015. While, its ad-supported MAUs stood at 92 million at the end of 2017, up from 77 million in 2016, and 64 million in 2015.

However, we shouldn’t ignore the steady increase in the ad-supported user base, because just like Spotify, in case most other music streaming services it acts like a funnel to the premium service. Think of it as a movie trailer. If you like it, the chances of you visiting a theatre to watch the movie will he high. If you’re really impressed, you might even drag a few friends along.

Advertising revenue vs subscription revenue

Unless it’s a paid-only service, in case of most music streaming apps, the number of people using the free ad-supported version will always be higher than those who have subscribed for the ad-free version. With this in mind, from a business perspective as well, it makes sense to equally innovate and improve the ad-supported service, as that would directly lead to more advertising revenue.

Spotify says that it is constantly working towards increasing the “listening time that our Ad-Supported Users spend on our Ad-Supported Service. The more content we stream under the Ad-Supported Service, the more advertising inventory we have to sell. Further, growth in our Ad-Supported User base increases the size and scope of user pools targeted by advertisers, which improves our ability to deliver relevant advertising to those Users in a manner that maximizes our advertising customers’ return on investment and, ultimately, demonstrates the effectiveness of our advertising solutions and justifies a pricing structure that is advantageous for us.”

The company further added that:

Given that Premium Subscribers primarily are sourced from the conversion of our Ad-Supported Users to Premium Subscribers, any failure to grow our Ad-Supported User base or convert Ad-Supported Users to Premium Subscribers may negatively impact our revenue.

Curated playlists

The company said that it is no longer just a streaming service, but rather a discovery platform, and playlists have become a key tool in this.

Our playlists have become a key discovery tool for users to find new artists and new music from their favorite artists. Given the success of our playlists in driving music discovery, they have become one of the primary tools that labels, artists, and managers use in order to boost artists and measure success. Many of our users also rely on Spotify to help soundtrack their day, through editorially-curated playlists like RapCaviar or personalized machine-generated playlists like Discover Weekly, Daily Mix, or Release Radar.

Currently, Spotify programs about 31% of all listening on the platform across such playlists, up from less than 20% two years ago.

Threats posed by Apple, Amazon and Google

Spotify has quite candidly said that:

Some of our competitors, including Apple, Amazon, and Google, have developed, and are continuing to develop, devices for which their music streaming service is preloaded, which puts us at a significant competitive disadvantage.

With the entry of Amazon Prime Music in India, music streaming players in the country will also have to contend with this reality. The value proposition that Amazon Prime Music currently offers is unmatched by any other player in the market. A user needs to pay Rs 999 for an annual Prime membership and get access to both Prime Video and Prime Music, besides offers and special delivery options while shopping on Amazon India’s marketplace. In comparison, Saavn comes at a yearly fee of Rs 1050, Times Internet’s Gaana at Rs 1020, Apple Music comes at Rs 1200 per year, and Google Music is priced at $9.99 (over Rs 600) per month.

Plus, Amazon Prime Music is pre-loaded on its Echo devices.

Dependency on licenses and rights holders

As of December 31, 2017, Spotify has paid over €8 billion in royalties to artists, music labels, and publishers, since its launch in 2008. In 2017 alone, the company’s expenses towards rights holders increased 27% YoY. The company also mentioned that company also has an estimated future minimum guarantee commitment of €1.7 billion for the license agreements it currently holds. Note that at the end of 2017, Spotify had 35 million tracks.

This poses a major financial burden on the company, but more importantly hinders its ability to innovate or implement changes quickly. As Spotify explains:

The provisions of certain of our license agreements may require consent to implement improvements to, or otherwise change, our Ad-Supported Service. We may not be able to obtain consent from our rights holders to add additional features and functionality to our Ad-Supported Service or our rights holders may be delayed in providing such consent, which may hinder our ability to be responsive to our Ad-Supported User’s tastes and preferences and may make us less competitive with other services.

Note that music licensed from Universal Music Group, Sony Music Entertainment, Warner Music Group, and Merlin accounted for about 87% of the streams on Spotify, at the end of December 2017.

In this regard, Indian music streaming service Saavn’s strategy of increasingly focusing on original content and promoting more local talent seems to be the right approach.

  • In May 2016, Saavn launched a series of live acoustic shows and interviews with popular international and Indian artists dubbed Live@Saavn.
  • The company launched nine original audio shows in April 2016.
  • In August 2016, it introduced podcasts on the platform through a partnership with AudioBoom.
  • In March last year, it partnered with One Digital Entertainment to launch an audio show called Hip Hop Highway, which features in-studio sessions and on-site interviews with Indian artists, promoters, labels, producers, and upcoming talent.

Note that Spotify did mention it is looking to expand its non-music content library as well:

We are an audio first platform and have begun expanding into non-music content like podcasts. We hope to expand this offering over time to include other non-music content, such as spoken word and short form interstitial video.

Oh, and it looks like Spotify might be coming to India soon

In the filing, Spotify mentioned that it has leased office space in India, and it indicated that it has dedicated employees in India as well, though the company didn’t mention any number. In regards to the process Spotify follows before entering a new market, it said:

Before launching in a new market, we typically optimize the local Spotify experience for local music preferences. We seek to obtain the rights to popular local content and have local curators where it makes sense.

Download: SEC filing