You can say what you want about Spotify – and plenty of people do – but you can’t say that it isn’t successful. While you could argue that any entertainment streaming platform should be expected to do well in the face of a global pandemic that has so many people stuck at home, Spotify has excelled itself. It was already enjoying record growth levels throughout 2020 as we approached the final quarter of that accursed year. Now it’s published its end-of-year report and confirmed how much additional business it did during the final three months of the year. For the first time, Spotify hasbroken through the 150 million paid subscriber barrier. The number of people paying to listen to Spotify every month now stands at 155 million out of 345 million total users.
Even Spotify is slightly surprised by how well it’s done. It’s around five million users above its internal targets for both ‘free’ and paid accounts. We can put part of this down to the recent diversification of the service. When Spotify first got started, it was so far ahead of the crowd that it was almost peerless. Now it faces competition from several companies -many of them large, household names – that do the same thing. This is similar to how we’ve seen online slots websites respond to changes in their sector. Back when online slots were a new concept, websites could attract business by having one or two featured attractions like the popular “Great Rhino” UK slot available. When everyone else caught up with the early pioneers, having one or two popular online slots was no longer enough to hold people’s interest. They needed to find new ways to stand out, and so the more forward-thinking slots sites added additional features and casino games. Spotify has followed suit by adding podcasts and even some video content to its millions of songs, and the move appears to have been welcomed by customers.
Not everybody is happy with Spotify’s spectacular quarterly numbers, though, and unfortunately, some of the people who are most unhappy with them work on Wall Street.
That’s because although subscriber numbers and listeners are up, revenues are falling short of expectations. The company is currently forecasting $10.8bn in sales for 2021. Wall Street expected a figure closer to $12bn and has expressed concern that the company is practically giving away subscriptions to boost customer numbers. This is because the average ‘paying’ subscriber is paying less than five dollars per month for their subscription thanks to giveaways, cross-promotions, and other incentives. The service reaches more people than ever before thanks to its recent expansion into Russia, but that won’t count for anything unless these new customers start to pay full price for their subscription. The company immediately announced a price hike in Canada and the elimination of the free tier In South Korea in an attempt to redress the balance, but that didn’t stop share prices from dropping nine percent to $321.25 per share on the morning the figures were announced.
This isn’t the first time we’ve seen Spotify’s stock take a dive in recent months. The same thing happened in September 2020 when Amazon Music announced it would follow Spotify’s lead by introducing podcasts to its service. On that occasion, it was a fall of less than 1.5%, and the stock quickly recovered, allowing it to finish 2020 with double the value it had at the end of 2019. This drop is steeper and might not be quite as easy to shake off until investors start to see evidence that more listeners will generate more revenue. For the first time in history, it means that Spotify’s investors are singing from the same hymn sheet as the people who supply it with music – albeit for different reasons.
The controversy about the minuscule royalty payments that Spotify sends to the artists who are featured on its platform might get less press attention than it used to, but it has never gone away. Several big-name artists have complained they’re paid less than one hundred dollars for every million streams their songs get on Spotify, which sounds farcically low. Musicians unions and other activists have been complaining for years that it’s high time Spotify paid musicians a fair share and have pushed the company to increase prices to enable them to do so if they can’t do so out of their own resources. Wall Street would now also like Spotify to increase its prices but is more interested in seeing the proceeds of any price hike passed on to investors rather than distributed to the people that supply Spotify with the material it sells. Spotify is already caught between a rock and a hard place trying to deal with those contrasting interests and faces a third rocky reception from subscribers if it does indeed decide to push prices up in its biggest markets.
One alternative the company might consider is charging more for adverts because adverts can now reach more subscribers than ever before. Almost two hundred people are listening to the ‘free’ (and therefore advert-heavy) version of Spotify every month, and that’s led to advertising accounting for more than ten percent of Spotify’s revenue for the first time in company history. The new raft of Spotify-exclusive podcasts is likely to be a prime target for advertisers, and so it’s not unrealistic to think that advertising could be pushed close to twenty percent of revenue in years to come without upsetting existing customers. There would still be an argument about whether the additional revenue ought to be spent on royalties or shareholders, but that’s an easier conversation to have with shareholders when stocks are performing well. They aren’t right now.
All told, Spotify lost $125m in 2020. That’s down from a loss of $209m in 2019. Losses are to be expected in the short term as the company continues to invest heavily in growth and development, but an increasing number of investors would like to see them begin to make money sooner rather than later. It’s been a record-breaking year for Spotify, and that would usually set a company up for a prosperous year to come, but Spotify might find 2021 its most challenging year to date despite its ever-increasing audience.
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