Update: Surprise! Rdio just announced its own free, unlimited streaming service. The same logic applies.
Spotify has a subscriber problem. Let me rephrase that—Spotify has a lot of problems. Refreshingly, none of its woes manifest in its end product—instant, glorious delivery of every song imaginable, right into your earbuds.
Unfortunately, its big problems—big like recording industry big—all throw the sweet, sweet tune of its on-demand digital jukebox into jeopardy.
On Wednesday, Spotify announced that it would lift the ceiling on how many hours of music you could stream for free each month. Previously, the free, ad-supported membership tier allowed six months of unlimited Web streaming before kicking in with a time-limit cap. Now, ad-supported streaming on the Web has no limitations. (Mobile users, by contrast, can listen to unlimited music only if it's "shuffled," making it more like radio—or Pandora.)
Great news, right? Not so fast.
The Numbers Don't Add Up
For Spotify users, or would-be Spotify users, the latest move is just another awesome perk for a service that’s so chock-full of awesome perks that it’s basically just one big totally awesome perk. From the outside, things look great—you can listen to whatever you want (almost) for as long as you want (really)! In late 2013, Spotify got a $250 million shot in the arm, but its business model still can’t turn a profit if it doesn’t scale way up—and fast.
Spotify pays out more than 70% of its revenues to rent the music it in turn lends out to subscribers. With its major record labels deals secured, Spotify is playing in the big leagues and paying through the nose for it. The company issued a lengthy blog post in December, detailing its goal of reaching 40 million paid subscribers—a wildly unrealistic figure. As of March 2013, Spotify had around 6 million paid and 18 million unpaid subscribers (24 million total).
To start making a profit, the company needs to convert free users into monthly paid users. It also needs a lot more users to make things scale at all, hence all the cool freebies. By all accounts, the math is a long way from making sense or making real money—enough real money to make a dent in that massive 70% figure.
So Spotify had 6 million paid users by March 2013. A year later all we know is that Spotify has “over 6 million,” which basically means “fewer than 7 million or we would have issued a press release.” (A Spotify spokesperson confirmed that the company hasn't updated its subscriber numbers since March.)
The company said it added one million paid subscribers between December 2012 and March 2013 … but then what happened? The competition is stiffer than ever and naturally everyone’s fighting over the same piece of pie: paid subscribers. The timing of Spotify’s hourly limit lift isn’t a coincidence, either. Direct competitor Deezer hit 5 million paid subscribers in November 2013. Worse yet, Beats Music comes out swinging in less than a week, asking the same $10 a month for its hip, heavily-branded digital DJ service.
No New Paid Users? That's Bad News
Companies are notoriously tight-lipped with numbers that won’t wow you—but hey, look over here, free music! It’s tough to say how well Spotify’s freemium conversion plan is going, but you can be sure any cash in its pockets (like say, an infusion of $250 million) is going straight toward getting more listeners in the door in a hurry. For Spotify, once you get them in and show them around, they might like the place enough for fork over monthly payments. That’s the idea, anyway.
But the pool of potential paid subscribers is ever-shrinking. It’s understandably difficult to find music listeners enthusiastic enough to actually pay to hear music when they can find it elsewhere for free—and hey, maybe you’re even the one giving it to them.
The elusive paid users must be serious enough about music to pay (a little) for it, but casual enough about music to listen to it on a streaming service to begin with. Count out vinyl devotees, anyone who makes a living in the music industry and anyone who misguidedly thinks streaming services are screwing artists (hint: look higher up).
While Spotify casually stuffs cash into its already excellent, cash-glutted product in order to attract new users, it seems blissfully unaware that the mythical paid subscriber might just prove to be its white whale.