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March 09, 2011
Spotify has announced it has reached 1m paying subscribers, making it the first full track subscription service to hit the 1m milestone. The company has revealed that paying subscribers make up 15 per cent of its active userbase (users who have accessed the service in the past 30 days). Launched officially in 2008, Spotify had 750,000 paying subscribers in December 2010 and operates in seven European countries including Sweden, Finland, Norway, France, Spain, the Netherlands and the UK. It has been confirmed that Spotify has reached US licensing agreements with two major record labels, EMI and Sony, suggesting the company may be getting closer to its long awaited goal of launching its service in the US.
Spotify's Paris-based competitor Deezer has also released a new paid subscriber milestone: the company has reached 800,000 paying subscribers less than two months after hitting 500,000 subscribers in late January 2011. Although Deezer has been active in the space since 2006, the company has only launched its current iteration of the subscription offer in August 2010 in partnership with Orange.
IHS Screen Digest believes that the success of Deezer is largely attributable to successful bundling strategy with mobile and internet offers of Orange in France (the service is available free to subscribers to certain high-value packages and is discounted to half price with mid-range packages; the service is also actively promoted to other Orange subscribers). This is the strategy that has worked for Danish incumbent telco TDC, whose bundled music subscription service (enabled by 24-7 Entertainment) hit 250m track downloads in November 2010 - equivalent to 45 downloads per head of Denmark's population. By contrast, Spotify is still standalone subscription (it has promotional deals with TeliaSonera, but is not bundled with the telco's packages beyond some time-limited promo offers).
Spotify has ignited interest for subscription model in a region that has historically been apathetic to such propositions: Napster and Rhapsody have recruited the majority of their userbases in the US (which peaked with 830,000 subscribers in 2007 and 800,000 subscribers in 2009 respectively). While none of the elements offered by Spotify are innovative in their own right, the company has managed to combine an appealing introductory free tier with seamless user experience on portable devices offered to premium tier subscribers. This stands in marked contrast to Rhapsody and Napster: both companies maintained paid basic PC-based tiers (with the exception some promotional activity from Rhapsody and the now defunct Napster Free, which was crippled by the three plays per track limitation), while their initial mobile subscription components were rendered difficult for users by the problems associated with getting different implementations of the PlaysForSure DRM to work (both companies have started offering app-based mobile access after the rise of second generation subscription services such as Spotify and Deezer).
However, despite the sustained growth of Spotify's paid subscriber base, the question whether paying subscribers can compensate for the ballooning costs of per-play royalties on the free Spotify tier remains (the company's UK arm, for example, made an operational loss of £16.4m in 2009). It is important to note that this is the first time Spotify has revealed its active user base number - previously the company was announcing registration milestones (with 10m reached in September 2010). That means that in terms of registered users, Spotify's conversion ratio is still below 10%.
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