Three or four mornings every week, I am on a treadmill or a stationary bike in my condominium’s gym, with music from Spotify or occasionally Apple Music streaming into my AirPods.
I am a premium subscriber of Spotify and I get Apple Music through my subscription of the Apple One bundle that includes News, AppleTV+ and Fitness Plus. Like the video streaming app Netflix, Spotify these days is almost like a utility for most people. Long-time readers of my Tech column might recall I wrote about Spotify’s unique direct public listing back in April 2018. Back then, it was a struggling music streamer with little or no visibility on profits. Now, it is a profitable music behemoth. In the last quarter, net profits surged to EUR274 million ($391.4 billion).
It’s been a roller coaster of a ride. Spotify shares opened at US$165.90 ($214) on the day of its direct public listing on Nasdaq six and a half years ago. This past week, the music streamer’s shares touched a new all-time high of US$389 even though it does not make artificial intelligence chips or, indeed, has anything to do with training or inference of large language models that most growth investors are rooting for. Spotify shares have doubled this year and are up more than 470% from their lows of November 2022 when the stock traded around US$68. In comparison, software supremo Microsoft shares are up 68%, search giant Google’s parent Alphabet shares are up 69% and iPhone maker Apple shares are up 51% over the same 23-month period.
The Swedish music streaming pioneer is Europe’s best-known Internet champion with a market capitalisation of US$75 billion, though it lags behind global peers like Alphabet (market value US$ 2.1 trillion) and e-commerce pioneer Amazon.com (US$2 trillion), both of which compete with Spotify with their own music streaming offerings, YouTube Music and AmazonMusic Prime. Spotify now has 626 million monthly active users, up 14% over the past year. It has 246 million premium subscribers and 393 million ad-supported subscribers (up 15% over the past 12 months). Rival YouTube Music and Apple Music both have over 100 million paid subscribers. A fourth fast-growing competitor, Amazon Prime Music, has so far focused on growing its user base to attract advertising rather than subscriptions.
In the April-June quarter, subscription revenues annualised 21% to EUR3.35 billion, while advertising grew by 13% to EUR456 million. Spotify has gross margins of 31% on subscriptions and 13% on advertising. Though less than 40% of Spotify’s total active user base eventually converted to its paid tier, Premium subscriptions account for over 88% of Spotify’s revenues and 93% of its gross profits.
Spotify is riding the booming music streaming market wave. After nearly two decades of plummeting revenues, the global music market began turning around in 2016 in part due to the rapid growth of streaming. Worldwide music business revenues peaked at US$23.8 billion in 1999 at the height of the CD boom, then plummeted to US$16.9 billion in 2008 when Apple iTunes downloads were all the rage. The global recorded music market grew 10.2% last year to US$28.6 billion, of which US$19.3 billion was global music streaming revenues. Subscription streaming alone grew by 11.2% and now makes up 48.9% of the global market. Music industry analysts expect the worldwide music market to grow about 11% this year on the back of successful global concert tours like Taylor Swift’s Eras tour. The US makes up about 40% of the global streaming market.
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Americans spend a lot of their time listening to music or an average of 26.9 hours per week enjoying their favourite tunes, down from 28.3 hours per week in 2018 and 32.1 hours per week in 2017. Because the world’s music catalogue is now available on demand, consumption habits have dramatically changed. Knowledge workers, for example, often listen to music throughout the workday. Unlike TV or movies, which require much more attention, music consumption often overlaps with other activities such as walking, commuting, running, working or training at the gym. Music is everywhere you go, in malls, cafes, bars, stadiums and airports.
Turning music streaming into a viable business model is easier said than done. Music content is highly commoditised and it is hard to get hundreds of millions of subscribers to pay US$11.99 a month for Premium subscription. A key secret sauce in Spotify’s popularity is its ability to personalise your music. The premier music streamer’s curated and personalised playlists are a key distinguishing feature that sets it apart from rivals like Apple Music and YouTube Music. Spotify not only predicts what you might want to listen to next, but it is also constantly pushing new playlists of music you might want to listen to.
I have more than 20 paid subscriptions — video streaming, music, online news sites, substacks and so on. Every other month or so, I evaluate whether I should cancel the subscriptions that I don’t really need.
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Spotify is one of the stickiest of the subscriptions I have. Netflix and Spotify are probably the last subscription that I will cancel. According to Hub Entertainment Research, the average US household uses nearly 13 sources of entertainment across video, music, gaming and social media platforms. Hub asked 3,000 American consumers which media subscriptions they consider ‘must-have’. Seventy-five per cent of respondents said that they would not cancel their subscription of Spotify or higher than 66% of those who said they would hold on to their Netflix subscription.
Here is how the music business works. Record labels such as Sony Music Entertainment, Universal Music Group and Warner Music own sound recordings of tracks performed by artists such as Swift, Justin Bieber or Drake — called “master recordings”. Publishing companies own the copyrights of the music — both composition as well as lyrics — and collect licences whenever the music is recorded or performed on stage.
And here’s how the economics of music streaming works: For every Euro (or dollar) that Spotify gets from streaming subscribers or advertisers on its platform, 58% goes to the song owner, usually labels like Universal (which distributes the music of Swift, Bieber, Lady Gaga as well as K-pop band BTS), Sony (Beyonce, Michael Jackson and Mariah Carey) or Warner (Coldplay, Luis Miguel and others) 29% goes to Spotify itself, 6% goes to whoever owns publishing rights (like the songwriter or the publishing company) and another 6% goes to whoever owns the mechanical rights (usually the songwriter). Of the 58% that goes to the labels, artists typically get about 10%. Swift can collect 10% of whatever Universal earns from her songs being streamed on Spotify and, on top of that, collect up to 12% as a songwriter.
Of course, stars like Swift make a big chunk of the money these days from concert tours. And more from endorsements and other side hustles. Swift currently has a worth of around US$1.3 billion. Rihanna (full name Robin Rihanna Fenty), much less popular than Swift, is, however, worth US$1.4 billion and rapper Jay-Z is worth US$2.5 billion. While Swift’s wealth is mostly derived from her music, Rihanna has made most of her money from her fashion business and endorsements. She co-owns make-up brand Fenty Beauty with French luxury retailer LVMH. More than two-thirds of Jay-Z’s wealth is derived from his investments. He currently owns over 1% of ride-hailing firm Uber (market cap US$158 billion). Just Jay-Z’s Uber shares are worth over US$1.6 billion.
You might wonder how much a music star like Swift makes every time one of her songs is streamed by Spotify or Apple Music or YouTube Music or Amazon Music Prime. The average payout at Spotify is US$0.0033 per stream. That means your song would have to be streamed 303 times for you to collect just one US dollar.
Swift, however, is not your average singer. She is the biggest music star on Earth right now. She probably has agreements in place that guarantee her far more royalty than any other singer on Earth. Yet, even if she is earning three times the royalties than the average singer, her songs would have to be streamed at least 100 times for her to make just one US dollar. Streamers like Spotify or Apple Music don’t pay artist royalties according to a per-play or per-stream rate. What artists like Swift or Justin Bieber get depends on how their music is streamed or the royalty clause they have in their agreements with labels like Universal or Sony or Warner Music.
Unlike Netflix, which makes a lot of its own content, movies, TV serials and documentaries, Spotify doesn’t own most of its content. That means the lion’s share of its revenues is paid out to music publishers. Over the past six years, Spotify’s monthly active users have grown over fourfold but its gross margins have remained low because it needs to keep paying out to music publishers. At the end of 2018, Spotify had gross margins of around 27%. That’s grown to 29% in the quarter.
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Founder and CEO Daniel Ek has been trying to grow advertising to extract better gross margins but hasn’t had much success despite 393 million users on its ad-supported platform. The irony is that advertisers want to chase high-end or affluent users who are on premium platforms which don’t take ads, while Spotify wants them to advertise on its free platform with low-end users.
Average revenue per user, or ARPU, was around EUR1.15 per user in the April-June quarter. Peers like Meta Platform’s Family of Apps delivered an ARPU of US$11.89, Snapchat had an ARPU of US$2.86 and Pinterest US$1.64 in the same quarter.
Until late last year, Spotify was trying to imitate Netflix by becoming the audio version of the video streaming giant. But the music streamer didn’t want to compete with its biggest customers, the music labels. So, it strived to become the King of podcasting. Apple has nearly 50% share of the global podcasting market. Spotify spent billions trying to woo top podcast talents to overtake Apple. It signed up top podcaster Joe Rogan for US$250 million in a multi-year contract. Among other podcasters were former President Barack Obama and his wife Michelle, who were lured with a US$25 million contract and Prince Harry and Meghan Markle, the Duke and Duchess of Sussex, who were paid US$20 million. Obamas, the Sussexes and other podcast stars have long gone. Joe Rogan is the only major star still being paid by Spotify.
These days the music streamer is focused on touting the growth of video podcasts along with its audio podcasts and music streams. CEO Ek now wants Spotify to be the “TikTok of audio”.
Ironically, TikTok, the King of short-form video, is trying to imitate Spotify. With its huge fan base, the Chinese-owned video app is wooing young fans around the world to try its platform as a music discovery tool as well.
TikTok’s Chinese parent, ByteDance, launched the TikTok Music app in beta in Australia, Brazil, Mexico, Singapore and Indonesia earlier this year, offering a music catalogue that competes with Spotify and Apple Music in partnerships with major record labels. With its growing army of fans or over one billion monthly active users outside China, TikTok has an incredible distribution network that it can use to challenge Spotify, particularly for its ad-supported free tier.
Whether TikTok emerges as a strong challenger to Spotify’s ad-supported tier, one is clear: With over 246 million paid Premium subscribers, Spotify isn’t about to disappear anytime soon.
Assif Shameen is a technology and business writer based in North America
