How Spotify Makes Money

Spotify makes money through advertising oriented, and premium subscriptions

Last Updated July 23rd 2021
7 Min Read

These are times when the foremost manner in which music content is consumed is in the digital form. Gone are the physical icons like LP records, cassettes, CDs and DVDs and it is all in the super convenient digitised form. With broadband speeds getting faster each year, streaming is the de-facto mode in which music gets dished out. 

It is in this space that Spotify has, over a decade and a half since its launch in 2006, taken centre stage. Streaming platforms have increasingly proved that they are here to stay and that the era of music being bought in physical form is over. According to the Recording Industry Association of America, an emphatic 93% of revenue from music came from the streaming channels. 

Spotify itself has been, arguably, the most popular music streaming service on multiple counts. The 70 million plus library is all that any music lover needs and the app’s easy interface takes the pain off finding and listening to one’s favourite track. The free user has nearly the entire collection before him and at just under $10, the premium subscription adds so much more in terms of ease of use and features. 

The Luxembourg domiciled Spotify has its headquarters in Stockholm, Sweden and has come a long way from its beginnings as a replacement for Napster. As of December 30th, 2020, Spotify is present in 94 countries and 178 markets. With 345 million active users every month, the subscriber base itself stands at 155 million. 

Besides having the largest digital library of music, Spotify has also occupied a prominent space in the podcast market. With over 2.2 million titles, there is a wide variety of content here that appeals to a substantial base looking for quality podcasts.

The company also has been actively acquiring partners and content creators. Using superior ad technology, they have been able to demonstrate data and statistics on the consumption of podcasts.

Anchor, Ringer, Parcast and Gimlet Media are some of the better-known picks that Spotify has acquired. High profile names like Michelle Obama and Kim Kardashian are among a portfolio that also includes exclusive rights to the $100 million valued podcast of Joe Rogan. 

Spotify went public with its IPO in 2018 when it opened at an impressive $165.90 in the New York stock exchange. 

That is not to say that Spotify has not had its ups and downs. In fact, it has had more years with net losses posted than net profits. Even in 2015, the year where its revenue crossed a staggering $2 billion, the net loss stood at $197 million. Just two years later, in 2017, Spotify had a particularly difficult pre-IPO year with a $1.4 billion loss, before taxes. 

How Spotify Makes Money

Spotify has had a fairly straightforward and uncomplicated business model comprising of primarily two revenue streams. These are a) advertising oriented, called Ad Supported Service, and b) premium subscriptions, that is marketed as Premium Service. 

Ad-Supported Service

The Ad Supported Service or the Free version is the easy and free way to enjoy Spotify. Of course, by downloading the app on to your mobile or desktop, it is possible to access the entire library. But there are a few features missing here that anyone paying for the Premium version gets. 

In the free version, a user will have to bear with ad breaks and interruptions. The quality of the sound too is a differentiating point with the bit rate on the free version capped at 160 kbps on mobile (128 kbps on desktop) as against a much higher 320 kbps on the premium. Another useful feature that the premium version has over the free is the ability to skip unlimited number of tracks. 

Premium Service

The more prominent of the two streams is the Premium Service with its 155 million subscribers. This comprises of a strong value proposition that enables a paid subscriber to the largest music repository in the world. Over 70 million tracks are available both online and offline on an on-demand basis. Besides, there is also a podcast streaming facility. 

It is a testament to the Premium service and its features that Spotify has been able to achieve such a healthy conversion rate from free to paying customers.

The best in class sound quality with the higher bitrate is a big hook to audiophiles. That combined with the vast library of over 4 billion playlists means a user does not have to look elsewhere for music. Add to that the ability to have complete command of the playlist and navigate through the app intuitively helps increase subscriber addiction to the platform. 

The Ad-Supported account was restricted to 20 hours per month; this drove listeners to subscribe to Premium. This community-centric strategy helped Spotify to reach 1 million users by March 2011 and by August 2012 they had 15 million MAU and 4 million Premium users.

Besides the free and premium categories, Spotify also offers Student and Family plans. Given how popular the app is among the youth, the Student plan is more affordable and the Family plan makes it easy for multiple users within a household to enjoy the premium version. 

Spotify was launched way before cloud computing and streaming had become a reality.  When we look back, Spotify’s service, when compared to other digital music platforms has been very different. Their main emphasis has always been user engagement. And, unlike many of their competitors, Spotify had never meant to provide ‘free’ service supported by ads.

One of the reasons why Spotify is able to have a wide collection of music is also the dynamics they have with artists. A portion of the revenue earned is paid to music creators though the percentage may not be high and there has been criticism of the lower streaming pay rate. This is true for lesser known artists as they also see the brand as a vehicle for visibility. 

Despite its phenomenal growth and popularity, Spotify is not without competition. In fact, its immediate rivals are none other than the big 3 of international digital content. Google, Apple and Amazon also have their own music streaming platforms and with a distinct advantage too. 

All three of these behemoths have their own devices that come with the streaming software preloaded. 

The question as to what the future holds for platforms like Spotify is just as relevant as the one on how they make money. The internet is here to stay and so are streaming platforms. The business model and the brand pull make a good case for Spotify to be a strong contender in the space it has come to occupy. 

When launched in 2008, Spotify was an invite-only service. Though the open usage of the platform was available in UK, they reverted back to invite-only in order to cope with a surge in the number of people signing up to use the service. The invite-only strategy helped the company build a strong brand and use word-of-mouth marketing to drive its exponential user growth.

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