Business Matters: A $3 Billion Valuation Brings Spotify Expectations Back to Earth
Business Matters: A $3 Billion Valuation Brings Spotify Expectations Back to Earth

Spotify now has 15 million active users and over 4 million subscribers. The new numbers were revealed by chief content officer Ken Parks at the Global Business Summit on Creative Content in London.

Put another way, Spotify added over 1 million subscribers in about six months. Using only the dates of news reports to calculate elapsed time, Spotify needed about four months to go from 2 million to 3 million subscribers. The company had reached 3 million subscribers in late January, according to a Financial Times report, and surpassed 2 million subscribers in September.

Reaching 4 million subscribers is arguably more important than having 11 million users of its free, ad-supported service. Paying users are more valuable than non-paying users. And labels are known to pay close attention to the rate at which Spotify converts users into paying customers. At the new numbers, Spotify has about a 27% conversion rate, just below the 30% conversion rate the company has typically boasted.

Although user growth is very encouraging, CEO Daniel Ek's stated goal of nearly $900 million in 2012 seems out of reach. At this rate Spotify could reach 5 million subscribers by the end of 2012. Those 5 million people would account for roughly $600 million of annual billing (at $10 per month per subscriber). But the company would average far fewer than 5 million subscribers during the calendar year (subscribers 4,000,001 to 5,000,000 hadn't started paying by the middle of the year). If Spotify gets to 5 million subscribers by December 31, it could get somewhere in the area of $360 million in subscription revenues. All other revenue would come from advertising and sponsorships.

Spotify's rate of subscriber growth slowed a bit from 3 million to 4 million. It needed 127 days to add its third million and added its fourth million in 187 days. The difference could be easily explained by seasonal variations seen elsewhere in the music business (sales slow down when school gets out and peak during the holidays).

The company has been quite active since hitting the 3-million mark in January. Spotify had a dominant presence at SXSW in March. It launched in Germany, Australia and New Zealand. It debuted its Play button for web pages in April. And it added free radio on the mobile app (iOS in June, Android for U.S. users today).

Business Matters: Is Spotify Labels' #2 Source of Revenue? Probably Not

l account for major labels, but streaming is hardly their second-largest source of revenue. In fact, it's unlikely that any single subscription service provides to labels more revenue than Walmart does in the U.S. alone.