Spotify reported 96 million paid subscribers in the fourth quarter of 2018 and a reported average revenue per user (ARPU) of $5.51 (less than the headline $10 because of international pricing and family plans). That means annual premium subscription revenue adds up to $6.3 billion, of which Spotify pays record labels roughly 60%, or $3.8 billion a year -- about $3.31 per user per month. The resulting $3.8 billion pool of royalties gets divided based on each label and artist's share of total streams.
Those last two words are far more important than many executives realize. Using the numbers above, every 1,000 users generate $3,310 worth of royalties each month. But just over 20% of users generate about 80% of total streams, according to industry estimates. That implies that only about 200 of those 1,000 users will be responsible for distributing 80% of the royalty pool -- $2,648 -- while the remaining 800 will account for just 20%, a relatively paltry $662. In other words, each heavy user is responsible for allocating $13.24 -- 16 times as much as the rest! -- while the others only allocate $0.83 each. This is an inexact science, based on estimates. But even with a less skewed distribution, in which the top 30% of users account for 80% of the streams, those users would still be worth 10 times more than their less active counterparts.
Essentially, the heavy streamers determine what labels and other rights holders get paid. So although they generate no more revenue for online services than their less active counterparts, they're more important to labels that want to make money by an order of magnitude. Since streams largely determine chart success, which drives attention and radio airplay, reaching these fans creates a positive, self-reinforcing loop. And this strategy will become more important as the pool in which these fish swim grows: There are now 255 million paid music streaming subscribers worldwide, and industry analysts predict that number could grow by a factor of five over the next 10 to 15 years.
Heavy streamers act differently from the heavy downloaders of the iTunes era, but both groups love music, and the 80/20 rule also roughly held then. While music download ARPU was about $5 per month, the best customers were spending between $30 and $40 -- and thus accounting for the bulk of total revenue. Those heavy users who switched to Spotify, where they pay $10 per month (with an ARPU of $5.51), have been getting a sweet deal indeed. This suggests that many of them have money to spare -- and that, based on their iTunes purchasing habits, they may be willing to spend it. If streaming subscription prices can't be raised now, these consumers should be targeted with other such premium offers as exclusive content, early releases, concert tickets or merchandise.
The music business has always excelled at mass marketing -- on radio, MTV and, now, streaming platforms. But it's more important than ever to launch new projects with targeted marketing that properly segments consumers -- and to focus on the whales who determine chart success, allocate the vast bulk of streaming revenue and have money to spare.
Thomas Hesse is the former president of global digital business and U.S. sales/distribution at Sony Music Entertainment, an active angel investor and the co-founder/CEO of JAMM Music (www.jammmusic.com), a startup focused on a next-generation, gamified approach to targeting the most passionate music fans. The company is still in stealth mode.
This article originally appeared in the April 13 issue of Billboard.