90% of Spotify’s Revenue Comes from 30% Of Its Users

Spotify Plays Jenga

Is Spotify’s ‘free-to-paid’ thing sustainable?

89.9% of Spotify’s revenues come from just 31.4% of its users, according to more financial data now surfacing.  The 2015 filing, registered with EU regulators last week, showed that paying subscribers generated a hefty $1.96 billion in revenues.  By stark comparison, free, ad-supported users generated a relatively paltry $222 million.

That imbalance is the main reason for monstrous and continued losses at Spotify.  Indeed, ‘freemium’ remains a speculative and extremely expensive path for Spotify, a company that just raised more than $1 billion in loans to keep its high-overhead operation churning.  In 2015, losses topped $188.7 million, with cumulatively losses now approaching $700 million.

Apple Music, by comparison, remains premium-only with nearly 15 million paying subscribers after one year on the market (users are allowed a limited free trial).  Spotify, which first started in 2007-8, has 30 million paying subscribers and far more troubling business model.

Regardless, Spotify has been steadfast in its commitment to free, largely based on the believe that it’s a critical first step towards premium.  “We believe our model supports profitability at scale,” the filing declared.  “We have already proven that we’ve created real value for our users, and we know that the more time people spend with our product, the more likely they are to become paying subscribers.”

Behind the scenes, Spotify leaders like CEO Daniel Ek are reportedly adamant about keeping free, despite potentially ruinous financial consequences.  “We believe we will generate substantial revenues as our reach expands and that, at scale, our margins will improve,” the filing continues.  “We will therefore continue to invest relentlessly in our product and marketing initiatives to accelerate reach.”

That effectively translates into a cash inferno, with everyone seemingly benefiting… except for artists, a group witnessing deteriorating per-stream revenues over the past few years.  According to the same filing, rank-and-file employees are enjoying sharply-rising salaries, with average compensation now surpassing $168,000 per year.  At the upper end, top executives and board members are pulling down north of $1.3 million a piece, with stock options potentially minting billionaires after a successful IPO.

That is, if Wall Street investors see a model with actual potential to scale.

4 Responses

  1. KevinC

    Pretty normal stuff here.

    It’s called the 80/20 rule, the Perato principal. You can see that pretty much throughout life. 80% of your sales come from 20% of customers. 80% of the effects come from 20% of the causes, and from that 80/20 its 80% of 20% again…

    Reply
  2. Anonymous

    Paul, you’re once again playing amateur economist. this is completely normal.

    Reply

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