The Bundle Deal: The Miracle of Spotify’s Paid Subscription Numbers

We all knew it was coming.

Of course Spotify was going to answer back the big ballyhoo of Apple Music’s underwhelming unveiling. It came today as Spotify announced 1) that it now had 20 million premium users 2) that it was paying more than ever for content ($300 million in the first three months of 2015!) and once again, tried to clear up the misconception of free music. As we all know, Spotify has been in the woodshed for months on end because of its free music scheme to sign up paid users. What brilliant strategy did our Swedish friends cook up this time? Well, when you are facing tough problems, do what everyone turns to: animation!

After watching this extremely informational and entertaining clip, I felt so much better.

Since Spotify has been announcing numbers, it’s mentioned the same conversion rate. Twenty five percent of their entire base is paid. This hasn’t changed in any announcement, year after year. The remarkable consistency of Spotify’s conversion, regardless of the different markets it launches with different consumers and behaviors and competitive pressures, truly boggles the mind. It actually twist credulity.

After word of this came out this morning, a friend who’s a longtime digital music veteran texted:

“36 percent of the users are paid? C’mon! Now that’s insane conversion. Has to be cooked with some underwater bundle deals. I am disgusted.”

It got me thinking about what a paid customer is, and how do we judge one.

The prevailing winds in the industry bends towards thinking that a paid user is good, and all free users suck. Well, maybe not all paid users are the same. You have customer who use mobile and pays $10 a month. You have customer who only has web access and pay $5 a month. And then you have my disgusted friend’s bundled users.

The Bundled Wars

It’s an open secret that there has been a battle between services to bundle on-demand services with cell phone companies. Spotify, Beats, Deezer and Rhapsody have been trading body blows to sign these deals. They are considered the crown jewels of the services because:

  • It provides a huge base of users that you don’t need to worry about billing, since the fee is bundled into the monthly cell phone bill.
  • The cell company will do the heavy lifting of marketing.
  • Cell companies just bake the service in for everyone in a tier. So if someone signs up for the All You Can Play plan, you get paid, regardless if someone uses your service or not!

But these customers also have drawbacks. The service only sees a fraction of the revenue per user than it does for the retail customer. As I have written about before, these deals are complicated because you have more than one party involved. On one side, you have the supplier–the content owner, in this case, labels. On the other side you have your distributor–cell companies. In the middle you have ‘lil ole digital music services, who have to convince these two big bad boys to take a discount to make the deal work.

In theory it all works. Customers get music at a discount. Labels get access to revenue they’d never get. Cell companies get premium services that leads to more loyal customers. And the digital services get lots of users, even if they’re only making a buck a month instead of three a month. Except for one, small issue.

Competition.

These deals have become extremely competitive over the past couple years. All the music services are working hard to land carrier deals and take further discounts off already paltry margins. There have been rumors that Spotify has been the most aggressive of all the companies to close, or at least disrupt, deals. So my disgusted friend wonders how many millions that Spotify loses money every month on, just to say it has more paying users. It’s an excellent question.

Drain The Swamp

There’s an old saying in politics that to get rid of mosquitos (or alligators), you’ve got to drain the swamp. The concept is that once you get rid of the cause of your issues, all your annoyances go away. It could be that Spotify is trying to get rid of its competition by taking a loss on bundled customers to get the deals (the swamp in this instance). Additionally, it doesn’t hurt the PR cause to say you have more subs, because, you know, paid subs are GOOD!!!!

As we get smarter about subscription music, we’ll figure out better questions to ask. My contention is that these bundle deals will need to come under increasing scrutiny as services start to mature. Many in the industry believe the bundle is the answer to all of our problems. But the baggage the bundle contains might make it not worth the trouble.

3 thoughts on “The Bundle Deal: The Miracle of Spotify’s Paid Subscription Numbers

  1. Interesting read. One stat that jumped out was that 80% of premium users start as free users. Assuming Spotify isn’t counting bundled subs as free during some initial trial period, that suggests that bundled subs aren’t more than 20% of paid and likely substantially less.

    1. Hmm, unless they aren’t counting their bundled customers in as part of that stat Andrew. I know at my time at a streaming service we counted retail customers in a different tier. And when we reported overall numbers we’d total them all up. As you might have been able to pick up from the article, I’m skeptical of spotify’s unverifiable numbers.

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