Spotify – Free foundation

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Apple Music still making no dent.

• Spotify has crossed 60m paid users and while its absolute level of growth is slowing due to the law of large numbers, it is still adding paying subscribers at the very healthy rate of 2m per month.
• In September 2016 Spotify hit 40m, passed 50m in March 2017 and hit 60m at the end of July 2017.
• For the last 18 months, Spotify has been steadily adding subscribers at around 2m per month which is showing no signs of slowing down.
• This has held steady for the last 5 months indicating that Apple Music is having very little impact on Spotify despite the substantial advantage Apple has in owning the App Store and having complete control over the iPhone.
• I continue to believe that this is for two reasons
  • First:  Spotify remains fundamentally a better service.
  • This is driven by the fact that the music is now incidental in that anyone can create a service with 40m tracks and a search box.
  • Where Spotify is different is that it uses the data that it collects from all of its users in order to make its service better.
  • Apple also does this but Spotify’s AI in music continues to meaningfully outperform Apple’s.
  • By understanding the characteristics of the music offered by its service and the preferences of its listeners, it can accurately match the two together.
  • This also allows it to come up with innovative services that keeps its service fresh and one step ahead of the competition.
  • Second: Spotify has a large and engaged free tier of users that serve as the funnel for conversion into paid users.
  • Free users get to spend time with the service without paying for it, making it much easier to make these users understand why the service is better than anything else available.
  • This meaningfully offsets the disadvantage that Spotify has compared to Apple when it comes to marketing.
  • These free users generate data which Spotify can use to train its algorithms which can in turn be used to make the service better.
  • Apple also has a lot of data but has not been nearly as good at turning raw data into actionable intelligence with which it can improve its service.
• The net result is that Spotify’s position is strengthening with every new user that it adds and between them, Apple and Spotify account for almost all of the growth in the recorded music industry.
• Consequently, I remain unconcerned that Apple will be able to put real pressure on Spotify and think that its path to better profitability remains clear as the labels increasingly need Spotify more than Spotify needs the labels.
• This position is becoming clearer as Spotify was able to strike a better deal with Universal (see here) and the outlook is that the rest of the industry will be signed on similar terms.
• I still think that the key issue for Spotify going forward is to maintain momentum of growth of its free users.
• It is the free user pool that has been the foundation of its outperformance of Apple, meaning that the free tier will be critical to keep the paid tier (where the real money will be made) increasing at this very healthy rate.
• I continue to think that there is enough space in this market for 2 big players and with those spots filled, it is the fortunes of Pandora, Tidal, Deezer and so on that trouble me now.