Industry leader Spotify has been making big waves in the music streaming sector in recent years, but how exactly does the company make money?
Jan. 30, 2020
Regardless of your taste in music, it’s likely that you have heard of Spotify (NYSE: SPOT) — the world’s most popular audio-streaming platform. The company launched in 2006 in a bid to save a music industry that was suffering from piracy and is now the single biggest global music streaming service. Company founders Daniel Ek and Martin Lorentzon created the platform which allowed users to legally stream music for free while listening to advertisements or by paying a subscription fee for a premium service.
Spotify is an industry leader with up to 113 million paying users across the globe at the end of September 2019, a jump of around 31% year-on-year. There was revenue growth of 20%, with the streaming company posting an operating profit of around $60 million on $1.9 billion at the end of the third quarter of 2019. The report also revealed that the business grew its total monthly active users to 248 million, an increase of 30% at the same time last year.
The streaming giant generates revenue in two main ways;
Firstly, if users want to listen to tunes on the platform for free, then they have to listen to advertisements while using the service. Advertisers pay Spotify to use the platform to showcase their product, which in turn funds the royalties the company pays artists. However, Spotify’s advertising revenue was less than 11% of its total revenue in Q3 of 2019, with ad-supported revenue of close to $190 million.
Secondly, a paid subscription allows users to have access to unlimited music across the platform and devices. Monthly subscriptions range from $4.99 for students, $9.99 for standard accounts, and $14.99 for family accounts. The company’s premium revenue was up 29% at $1.73 billion.
Spotify in the spotlight
Back in 2017, Spotify pumped around 70% of its revenue back to artists, record labels, distributors and publishers. This resulted in a $460 million loss for the company. While in 2013, Spotify revealed it paid record labels between $0.006 and $0.0084 per play, while the artists themselves pocketed even less. Despite the company’s pledge to combat online piracy, the company has been at the center of a number of claims of not compensating artists properly. These include big names like Radiohead, The Black Keys, and Taylor Swift. Following Swift’s move to pull her entire music catalog from the streamer, Spotify has since limited it’s offering to free ad-supported tiers. Spotify now pays the artists by stream shares, for instance, if there are one-million streams in a month overall and you get 100,000 on your song, then you get 10%. Spotify now has the support of Swift once again. However, this hasn’t fixed all the problems as a signed solo artist will need more than a million streams on the platform to make the minimum wage, and an unsigned artist needs over 170,000.
At Spotify’s third-quarter earnings call, CEO Daniel Ek said: “We believe monetization of podcasts remains a huge opportunity, and it is something that we’re going to start looking at in 2020.” While the company is at the top of the chart for podcasting platforms, it only reaches a small portion of its users, with less than 14% listening to podcasts. The Swedish giant has also purchased two major podcasting companies — Anchor and Gimlet Media. Spotify recently announced podcast ads generated by streaming ad insertion at the Consumer Electronics Show earlier this month, although this is currently only for originals and exclusives.
While the company has openly spoken about its plans to experiment and possibly launch its own smart speaker, it could be gearing closer to reality, with leaks of designs reported online. Should Spotify step into the smart speaker business, it will be up against some of the biggest names in the tech world such as Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOGL), and Apple (NASDAQ: AAPL).
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Written by Alsha Coppilina