Recent bit of research implies Spotify may be ending its growth run....
PaidContent
Music industry analyst Mark Mulligan, presenting at Future Music Forum in Barcelona on Thursday, sounded a note of caution…
“There is a natural ceiling of adoption of the people who are willing to pay $9.99 a month for music they don’t own. If you look at growth from launch, Spotify is – at best – on par with where we should be. The likes of imeem were the future of the music industry once, too. The most Vodafone (UK) got to was about 600,000 customers – Spotify’s (UK) paying subscriber count is about 600,000 to 800,000. This market should be much more dynamic than where we are now. It’s a niche proposition. The majority of mass-market consumers are still not interested in that pricepoint.”
So, is there a natural limit of about 800,000 people who pay for this sort of music? If not, where is it?
At £9.99 a month that's about £120 pa that Spotify charges. When we looked at the UK music industry a few years back (to help a client work out the viability of music on smart mobiles, oddly enough - and I'm too lazy to look up the latest data as I doubt things have changed a lot in numbers or propensity), it bifurcated into 2 markets - "singles" and "albums". These few years back, "singles" buyers were about 5m people in the UK and spent c £12 pa, so this demographic are not Spotify paying customers. There were about 15m "album" buyers who spend c £80pa on average, so the higher spending of them are the potential customers. But £120 pa is c 50% higher than their mean spend of £80, so how many of the 15m will pay it?
Allow me a quick blog-packet calculation. Assuming a standard normal distribution curve (a bell curve), only about 2% of all users lie outside the 2 standard deviation level, and about 16% outside the single standard deviation limit. Making the assumption that a 50% increase in the mean price is outside the 2 standard deviation limit one can estimate that the total UK market for Spotify customers is about 2% of 15m, or c 300,000 people. If its above one standard deviation there are c 16%, or 2.4m people, who are potential customers. This is not to say that all
will be customers, of course - converting 50% of all these higher end album buyers to Spotify yields a market ceiling of 1.2m people (remember that Apple and various others are also in the hunt for this spend, never mind the people who just won't want to pay hard cash for music they dont own), at 1 standard deviation. (I find it hard to believe that a 50% higher price point above the mean is much less than 1 standard deviation). If you believe that they can only convert less that 50%, or that the price of £120pa is greater than 1 standard deviation from the £80 mean, then that number starts to fall quite fast (for example, 1.5 standard deviations is a mere 7% or c 1m potential customers in total).
If you assume instead its a power law operating (say the 80/20 spread), then you believe that the top 20% will spend 80% of the money, so about 3m people will spend about £360 a head -so for them, paying for Spotify is a bagatelle. But how many of them wiill spend it? Again, assuming a 50% penetration only yields about 1.5m users. Now to be sure, there will be a few from the next 20%, but not many - power laws recede very fast, the next 20% spend only 12% of the money, so its about a £50 mean spend for this quintile - clearly most of them are not Spotify paid users. Now you can play with various distributions, but the fact remains there are not a lot of people who are going to spend £120 pa on music, no matter which you use, and much fewer of those who will buy it from Spotify (or any of the streamers for that matter, I merely use Spotify as it was the one commented on).
In summary, Mark is probably right, at this price point there is not huge room for further growth.
The other thing that came out of this piece was even more "interesting":
Spotify is having to acquire 1.9 million new customers a month in order to retain 400,000. It’s a huge, huge marketing problem. The average pay TV service would want to see churn rates in the low single-digit percent.
Never mind the cost of new customer capture.....
But to my mind the fundamental threat they face is from good old offset funding, from good old offset funders like Google (who is a fairly regular player in this offset funding game) with YouTube - as Mark says:
And all of their cases are challenged further by an uneven playing field. While all those music services have to charge for mobile access and have some gaps in their catalogues, YouTube provides unlimited access, on all mobile devices, with the world’s largest music catalogue, with video, for absolutely no cost at all to the consumer. As far as streaming goes, there is one rule for YouTube, and another for the rest. Until that anomaly is fixed, the rest will be swimming against the tide.
The only thing that has stopped YouTube from being the category killer yet is that no one has written a music playlist playout UI as good as Spotify's yet.
I was an early "Free" customer. Would I pay £9.99 a month? - No, but mainly because I know that its $9.99 (about £6.70) in the USA a and Euro 9.99 (about £8) in Europe. Comparison shopping ftw....my price point starts at the same deal everyone else is getting.
