August 24, 2012 at 1:51 pm

Guest Opinion: What the New Spotify Numbers Really Mean

Attorney and entrepreneur Mikael Pawlo wrote this guest post for Evolver.fm

“If music needed saving I’d die for it.”

That’s what Spotify director of product Michelle Kadir used to put in her Twitter bio.

Indeed, the music industry has been suffering ever since Shawn Fanning and his friend Sean Parker launched Napster back in 1999. Or did the problems start earlier? Perhaps with the tape recorder? Is streaming here to save it?

Back in 2000, the late, legendary Gnutella developer and car enthusiast Gene Kan wrote at CNET in a guest post much like this one:

“Music’s mechanization packs 500 audio CDs onto a hard disk smaller than my mobile phone, all downloaded from the Internet. The question is whether traditional recording companies will choose to be a constructive part of that experience. Technology’s march is random and unstoppable. Business employs Technology but cannot enslave it. The new economy is about shifting gears to embrace and exploit technologies as consumers adopt an Internet lifestyle. Anyone stuck in first will be left in the digital tire smoke.”

This week, Computer Sweden broke the news about Spotify’s annual report for fiscal year 2011. It showed massive losses, and a dependency on paying subscribers, according to Computer Sweden’s interpretation. Spotify streams music for free with ads, or for a premium fee without ads, which is known as the “freemium” model. The company launched in the USA last summer, and is now aiming for Canada, but it originally launched in Sweden late 2008, where it is now the dominant distribution system for digital music — that is to say all music. Founded by Daniel Ek and Martin Lorentzon, Spotify introduced a new way of streaming music through peer-to-peer technology, making a vast amount of songs available at your fingertips.

Back to the annual report: The figures unearthed by Computer Sweden are, as of today, splashed all over the Internet. In short, Spotify had a revenue of 187.8 MEUR (about $235 million)  in 2011; 32.8 million registered users; and 2.6 million paying subscribers (a number that has now exceeded four million). But these figures are not interesting per se. The interesting question is: Does it work?

The answer: It actually might.

There are a lot of challenges with a business model like Spotify’s. Users churn, labels might withdraw, license fees could go up, the margins are tight, mobile carriers and ISPs could charge for access, artists might think they get too little in compensation, technology offers its own hurdles, competition is fierce, and so forth. The big question, as with all disruptive business model is, however, do the users like the service? The figures in the annual report suggest that they do.

According to what a Spotify executive [whom Pawlo prefers not to name because this was an informal conversation, but whose identity is known to Evolver.fm] told me today in an informal interview, some 26 percent of active users convert into premium users [ed. note: indeed, 4/15 = 26.6 percent]. That is a staggering figure.

Computer Sweden’s calculation, based on the annual report, showed that only 8 percent of all registered users — including “churned” users, meaning people who registered but didn’t keep using it — converted into paying subscribers. Even that figure is unheard of in most freemium cases. In the music industry, all of a sudden, most of the income is coming from downloads and streaming. In Europe, Spotify plays a big part of that. In the USA, still services like Pandora and iTunes have a stronghold. Even so, digital music is happening, in a fashion hard to foresee back in 2000 when Gene Kan issued his warning.

Even though Spotify is still expanding at high cost, and will most probably need even more money, its model might work after all, despite the worrying of late about the 8 percent figure, which comes from registered and not active users. It is all a question of volume and perseverance. Artists will get paid, as will labels, and even Spotify might be able to keep a small piece of the pie, even though it’s mostly crumbles left.

Ultimately, Daniel Ek’s company might actually ending up saving the music industry by shifting gears, as Kan put it — and without Michelle Kadir needing to take any unnecessary risks.

This is a guest post by Mikael Pawlo (@mpawlo), whose last guest post for this editor was published eleven years ago this week. Pawlo is an Internet entrepreneur with interests in i-gaming (Mr Green), app gaming (Baudelaire’s Horse), cognitive behavioral psychology online (Wemind), dating (Happy Pancake), peer-to-peer video streaming (Peerialism) and load testing (Load Impact). He has steered clear of the music industry in his professional life, though. Too complicated. He used to debate copyright, but discovered life was too short.