I think it's interesting that they have 295 million ad-supported monthly active users, which accounts for a revenue of only 449 million euros in Q4, compared to the 2 717 million euros from their 205 million premium users. That means each ad-supported user is only worth around €1.52 per quarter, or around 50.7 cents per month. That's not a lot of money, so why even bother? Why not limit the free accounts in other ways to get an even bigger difference to the premium accounts, and remove ads completely? And why are Netflix adding an ad-supported tier when there's so little money to make from those users?
A break-even user is a low-risk opportunity to upsell in future and it’s the long term ability to starve your competitors of an audience. If Spotify cut-off ad-supported users today, another service would scoop them up which poses a risk to Spotify: what if the competitor discovers how to convert those free users to paid?
There’s complex dynamics at play when offering services to consumers that aren’t necessarily reflected in the numbers. For example, Netflix may believe they’ve reached a point where an advertisement-supported plan won’t cannibalise their higher value subscriptions and therefore now is the right time to do this when maybe it wasn’t right a few years ago.
Consumer behaviour is constantly changing, companies have to keep up with it (and even anticipate it) lest they fall out of favour.
I don't pretend to know anything about the intricacies of consumer behavior or service pricing, but I think it would be interesting to see what would happen with a different model. Instead of offering an ad supported free tier, you could have a free tier without ads, but other limitations like only shuffle, a time limit each day, no brand new releases, or similar. Then the no ads thing can be a benefit to other ad supported services, but if you want to listen to music all day you have to pay for premium.
I'm sure smarter people than me have found this model worse than what's already used, I just hate ads and was surprised at the low value they seem to generate. And all those ad-supported users must generate plenty of streams that means payments to the record companies.
A huge percent of the premium users likely started as free accounts, or heard about Spotify from someone with a free account, etc. It also gives more bargaining power, listener data, mind share.
Even if they lost money per free account, it’s worth it.
Haven't you heard? In startup land you don't need to be profitable as long as you're famous. All you need is investors to keep that runway going. Line goes up!
I think it's closer to 14%, no? 449 million out of 3166 million total.
How much does each of those ad-supported users cost each month? Those 295 million users account for as much revenue as 34 million premium users, but they probably cost a lot, not to mention that the ad sales and ad infrastructure isn't free either.
Perhaps it is more about ensuring advert supported competitors do not have an uncontested market. Better that Spotify gets a little bit of money, and that users that find Spotify via existing marketing, do not have to go elsewhere, which could result in a competitor growing into a sizable threat.
