Yesterday (April 24), Spotify unveiled an upgrade to the layout, functionality and user experience of its ad-supported free tier, the first such update since the company made its free option available to mobile users in 2014. The redesign — which gives users the ability to listen to up to 15 algorithmic and editorial playlists on-demand for the first time and provides more options for personalization in playlists, among other updates — was an idea that had seen resistance for some time from Spotify’s record label investors and rights holders, who feared that upgrading the service’s free tier could cut into the incentive for users to convert to much more lucrative paid subscribers.
But that calculus has changed with yesterday’s announcement, which more closely aligns the free mobile experience with that of the paid premium service. And, Spotify’s global head of creator services Troy Carter tells Billboard, the reason is simple.
“The numbers don’t lie: 60 percent of our premium users came from the free tier,” Carter says, nodding to the 71 million global paid subscribers the service has accrued over the past decade. (Spotify has 157 million monthly users, 90 million of which utilize the free tier.) “So we know that the funnel itself works, and I think [it’s been about] being able to prove that to the labels. We know, just from the conversion rates, how important the free tier is. So the better the free tier gets, the more people we can get over to premium.”
It’s no longer a surprise that streaming has become both the dominant driver of both listening and revenue for the music business over the past few years. Just yesterday, the IFPI released its 2018 global music report, which found that streaming revenue ballooned 41.1 percent worldwide in 2017 (45.5 percent in paid streaming alone) over the year prior, spurring an increase of 8.1 percent overall and pushing digital revenue to over 50 percent of total revenue for the first time, accounting for 54 percent.
By the end of 2017, according to the IFPI, there were 176 million users of paid subscription accounts around the world, an increase of 64 million users over the year prior. (Spotify’s closest competitor, Apple Music, counts 40 million subscribers globally, meaning, by these metrics, the two account for 63 percent of the market combined.) The IFPI doesn’t differentiate between revenue from paid subscription streams and free ad-supported streams, but for the U.S. — the world’s largest music market — on-demand audio streams jumped 58.7 percent in 2017 to 400.4 billion streams, according to Nielsen Music, and the RIAA reported that revenues from paid subscriptions accounted for $4 billion in 2017, or 47 percent of the overall U.S. recorded-music revenues, compared to $659 million (7.6 percent) from on-demand ad-supported streaming.
Simply put, the revenue disparity for rights holders is significant, underscoring the labels’ long-held concerns about simplifying and upgrading the user experience on Spotify’s free tier. But Carter says that Spotify, in conjunction with their label partners, is not concerned about the possibility that a better free tier offering could deter those users from becoming paid subscribers.
“People want to reach as many fans on the platform as possible,” Carter says. “I think that’s the reason why you don’t see too many windowed releases on premium; there’s only a couple I can even think of really globally at this point that have happened since I’ve been here. I think both the artists and the labels understand the importance of being able to reach the broadest audience possible, and in order to do that, we have to create the best experience possible.”
The goal, Carter says, is fundamentally about educating non-streamers about the format, or appealing to those who can’t afford a subscription, and bringing them into the fold, which both increases the opportunity to convert them to paid subscribers, and gives Spotify a broader base — and, with this upgrade, more user-specific data — with which to appeal to advertisers. The sell there for the labels is that at least Spotify’s free tier is monetized; otherwise, Carter says, “[if] there’s no free tier available on these platforms, I think what happens is people go to other places to find free music” — i.e. piracy, or the music biz’s No. 1 frenemy, YouTube.
“We have a monetization strategy with our ad-supported tier, we know how big the current audio market is for advertising right now [and] we think there’s a lot of upside,” he adds. “And I think the rights holders at the labels have finally bought into that upside.”