MBW Reacts is a series of analytical commentaries from Music Business Worldwide written in response to major recent entertainment events or news stories. Only MBW+ subscribers have unlimited access to these articles. The below article originally appeared in Tim Ingham’s latest ‘Tim’s Take’ email, issued exclusively to MBW+ subscribers.
I run a popular burger restaurant… with two types of customers.
The first pay proper money for proper burgers from our proper menu. They can design their own deluxe toppings, and their cash constitutes most of our profit.
The second get free mini-‘taster’ burgers with limited toppings, and have to sit in uncomfortable seats. They’re usually teenagers, and don’t have much cash to spend.
To date, our free burger strategy has kind of worked because:
- (i) The free burger people enjoy our restaurant, despite the cheap seats, and often upgrade to become paying customers;
- (ii) We sell display advertising to brands who like the fact our restaurant is always teeming with non-paying youngsters.
In recent times, however, our ‘free burger’ ploy has started to falter.
Brands are questioning the effectiveness of burger restaurant advertising, and their ad spend is sinking as a percentage of our overall revenues.
Oh and these kids, they don’t know they’re born.
They’ve started flocking to TikTok’s ‘burger bites’ truck down the road. Also free, much quicker to eat, no need to sit down and actually spend three minutes consuming.
So… what should I do?
Our biggest suppliers say it’s finally time to make the ‘free burger’ people pay something. Giving away costly produce for an unlimited amount of time is economic insanity, they say.
After all, how can you expect people to actually pay for burgers when the next generation is becoming accustomed to getting them for free, whenever they like, forever?
My CEO argues different. Fixated on the potential for blue chip advertising, he says we now need to give the no-money burger crowd more choice, more comfort, more volume.
More free.
Keep them in the restaurant, he says – at all costs.
Welcome to McSpotify – the best analogy I have for the dilemma currently taxing the world’s largest subscription music platform.
Last week, Spotify announced that mobile users of its ‘free’ tier would be getting a more Premium-like experience, via manual search and the ability to press play on individual tracks.
Previously, free users were locked in to a ‘shuffle-only’ model that didn’t allow them to select songs they wanted to hear.
Spotify is making this ‘more free’ move following two related trends:
- (i) Its advertising business is in decline as a percentage of its revenues (see below); and
- (ii) Younger free Spotify users are becoming frustrated with ‘shuffle-only’ and bouncing off to YouTube and/or TikTok.
”Gen Z and teenagers… felt like the old Spotify free experience on mobile was almost broken, in the sense that they tried to tap on things and it didn’t work,” Gustav Gyllenhammar, Spotify’s VP of Markets and Subscriptions, told MBW.
He added: “We keep our finger on the pulse of young users… and we’ve seen user behavior, both on social media and other video streaming platforms, where consumers expect the ability to choose what they consume.”
Yet in some ways, Spotify’s latest move is the antithesis of the ‘music has value’ philosophy that underpins music rightsholders’ modern fixation with ‘superfans’ and potential ‘super-premium’ streaming tiers.
Spotify argues that its ad-supported tier remains a key conversion funnel for Premium subscriptions – and that keeping ‘free’ users on the platform is therefore essential to fuel tomorrow’s cohort of new Premium subscribers.
Indeed, the company claims that 60% of its Premium users today started life as ‘free’ users.
Other stats, however, suggest Spotify’s free tier is becoming increasingly bloated, user-wise, vs. those paying for its platform.
Look below: in the past seven years, the percentage of Spotify’s total active users not paying for Premium has gone up and up.
Various factors contribute to this, including SPOT’s rapid expansion into ‘emerging’ markets, plus subscription growth in mature markets like the US slowing down.
But the bottom line?
Today, nearly two-thirds of Spotify’s active users pay nothing to use the service.
And now the platform is giving them more, for no charge.
Instinctively, I find myself aligned with the view of Rob Stringer, Chairman of Sony Music Group, who last year suggested that the music business should “ask consumers using ad-supported services to additionally pay a modest fee”.
Stringer’s concern was a logical one: as services like Spotify continue to increase the price point of their Premium tiers, so the monetary gap between ‘free’ and ‘paid’ users also widens.
One way Spotify could “close that gap”, noted Stringer, is to follow Netflix and its ‘Standard With Ads’ offering.
In other words, Spotify could shut down its ‘free’ tier in markets like the US, and instead launch a budget subscription offering – one that cost significantly less than the main Premium tier, but carried ads.
Spotify’s ‘more free’ move suggests it never once countenanced this suggestion. If you want to know why, peruse this quote, from Spotify’s annual investor filings:
“Our ability to maintain and increase advertising revenue depends on a number of factors, including… increasing the number of Ad-Supported Users and the level of our users’ engagement with content.”
Spotify’s investor filings further note that “a large percentage” of its ad-supported users are “between 18 and 34 years old… a highly sought-after demographic that has traditionally been difficult for advertisers to reach.”
As such, Spotify has opted to remove friction from the user experience of its ad-supported tier to make it ‘stickier’ for younger listeners.
This is a shame, as adding friction for free users – with the target of force-upselling them to pay something – would likely be a lucrative move.
MBW analysis last year suggested that if Spotify followed Rob Stringer’s advice, it could add substantial heft to the streamer’s yearly revenues (the bulk of which, of course, would then get paid to music rightsholders).
Our conclusion: If Spotify dumped free and started charging $2.50 per month for access to ‘Premium with ads’ in just North America and Europe, and if just 25% of current ‘free’ users upgraded, it would result in a ~$1 billion annual windfall into Spotify’s coffers.
(See below, based on SPOT’s latest global investor data.)
Spotify has completed licensing renewal deals with all three major music companies this year, suggesting that its ‘more free’ strategy has been signed off by its biggest suppliers – no doubt in exchange for other rightsholder perks (baked-in price rises, ‘Super Premium’ guarantees etc.)
I do, though, have one suggestion.
When you buy certain new cars in the United States – a Mercedes Benz, for example – SiriusXM offers you six months of subscription for no charge.
The hope on Sirius’s part is that its product becomes so behaviorally innate in your every journey, that when your sub expires you’ll gladly pay not to live without it.
Why couldn’t Spotify try a similar time-based friction plan for its newly improved free tier?
Daniel Ek has just given more choice and more comfort to non-Premium users. Maybe a countdown clock for those same customers might be a smart move.
Everyone loves free burgers.
But there’s a difference between a restaurant that gives you six months to get hooked – and one in which you never have to reach for your wallet.
Music Business Worldwide
