Spotify is struggling to convert users into paying subscribers, with new figures released by the firm showing that it makes more than 80% of its revenues from just 8% of its users. Subscriptions made up 83% of Spotify’s EUR187.8m (USD235.7m) total revenues last year, up from 71.2% in 2010, showing that Spotify is reducing its reliance on advertising. However, just 2.6m of Spotify’s total registered user base of 32.8m subscribe to either its USD4.99 or USD9.99 tiers, meaning the vast majority of Spotify’s revenues are coming from less than 10% of its users. While many of that total registered user base may not be active, meaning that the proportion of its active user base that subscribe is higher, it highlights the challenges Spotify faces in convincing users to pay.
CEO Daniel Ek is brushing aside criticism of the firm’s model, insisting that Spotify is focused on user growth and expansion, but doubts remain over the firm’s long-term model. The firm lets users listen to tracks for free with ads, with the hope that enough will upgrade to its premium subscription packages to enable it to turn a profit. So far, this does not seem to be working, with the firm’s losses continuing to widen as the price of an ambitious international expansion programme over the past 12 months takes its toll. Net losses at the firm widened substantially last year, growing from EUR28.5m (USD35.7m) in 2010 to EUR45.4m (USD56.6m) last year and it looks increasingly likely that Spotify will need to raise another investment round to fund its plans.
On the positive side, Spotify’s revenues are climbing solidly, up 154% from EUR73.9m (USD92.8m) in 2010 to EUR187.8m (USD235.8m) last year. And increasing subscriptions are driving this growth, with revenues from paid membership soaring almost 200% year on year to EUR156.9m (USD197m) in 2011. The growth suggests that although the firm’s investment in international expansion is hurting its bottom line, it is at least paying off in terms of paid user growth. The same cannot be said for the company’s ad revenues, however, which are seeing much more modest growth, up by a quarter to EUR27.6m (USD347m) over the same period.
With Spotify’s high-profile US launch last year, the service is now available in 15 countries including the UK, Sweden and Australia, and it is reportedly considering launches in Canada, Singapore and Hong Kong as it attempts to grow its business into a global music service. Analysts remain divided over Spotify’s freemium streaming model, with some holding up the fact that 90% of Sweden’s music revenues now come from streaming services, as proof that the model can work. Others are reserving judgement on whether the firm will be able to achieve profitability until it scales back its costly international expansion programme and the associated costs of marketing and licensing.
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