Spotify, the latest revolution in online media. It’s fantastic - listen to any song you can think of, for free, any time. The software is a pleasure to use - it is blazingly fast, has super-neat features and delivers high quality streaming audio with no noticeable delays. So what’s the drawback? An audio advert is played every 20 minutes to offset the cost of your listening joys, that’s it. Oh, and in the UK you can only access 3 million tracks - a real shocker, right? So Spotify seems almost flawless - it has backing from the 4 major labels (which also hold ~30% stake in the company), it’s entirely legal and, most importantly, it’s free. But are they making a profit?
I’ve done a few sums, based on the current cost of advertising on the Spotify platform. After enquiring with their advertising department, I have learnt that the minimum cost of placing an advert on their system is £15 CPM (price per one thousand impressions). This is a LOT by any standard - in comparison, MuseLive.com currently earns of the order £0.10 CPM. Is this high CPM enough to yield a profit? My initial calculations say no.
I am assuming that an advertiser pays Spotify a set rate of £15 CPM for an audio advert. I am unclear as to what their rates are for traditional banner advertising, however I am lead to believe it is of the same order of magnitude. I will only be taking into account the profits earned due to “free” account holders, therefore the resultant value will be a minimum profit. I have not taken into account the exclusive contracts Spotify may hold with the individual record labels, and am therefore assuming that Spotify pay 1p for each on demand stream (this is an average price, split between the record label and the PRS). I have also noticed recently that two separate adverts are played every 20 minutes - one by Spotify and one by an external advertiser, bringing the total advertising time up to 1 minute, however keeping the same CPM (£15).
Using the above assumptions, let’s assume the average track length on Spotify is 4 minutes long. An advert is played to you once every 20 minutes. Spotify will earn £15 for every 1000 plays of that advert - so that’s 1000 (20-1) minutes of track playing, taking into account the 1 minute total advertising length. In this time you will have played approximately 4750 tracks, at a cost of £47.50 to Spotify. For every 4750 tracks played on Spotify (in the UK), they are theoretically making a LOSS of £32.50.
With an average of 10m tracks played daily, this equates to a daily loss of ~ £69,000. To recoup that much cash, they’d need just over 200,000 premium subscribers, not taking into account the loss of advertising from these customers (Spotify Premium is an ad-free service).
Bear in mind that this is a worst case scenario (using minimum CPM values, taking non exclusive on-demand streaming royalty values and ignoring standard banner advertising). Spotify have a significant number of premium subscribers which will give a healthy boost to their profits, hopefully pushing this figure into the black. It is worth noting, though, that this figure is sufficient enough to assume that free Spotify account holders ARE making a loss for the company. These accounts are obviously brilliant marketing tools, but it makes you wonder how long they can keep this up for.
Good luck, Spotify!