Spotify’s decision to offer video content is a reminder of how tough it can be to make money with music subscription services — especially compared to the video subscription business.
On Wednesday, Spotify unveiled changes to its strategy, which now includes video clips from the likes of ABC, Comedy Central, ESPN and Vice Media. Spotify Founder and CEO Daniel Ek described it as a “deeper, richer, more immersive Spotify experience.” He could have added “more lucrative.”
It’s no secret Spotify would love for more of its users to pay $9.99 a month for ad-free music access. As of January, roughly 15 million people worldwide were paying for that access. And while that number had risen from 10 million paying subscribers last May, it only represents one quarter of Spotify’s total user base.
Everyone else uses Spotify’s free, advertising-supported service. Those ad rates are generally low. Introducing video content could help drive higher advertising rates for the free offering — especially if Spotify struggles to convince more users to become paying subscribers.
“The main purpose of Spotify’s free service is to convert users to paying subscribers,” said Larry Kenswil, former head of Universal Music Group’s digital business. “That’s how everyone makes money, including the music labels.”
Compare the Spotify model to the Netflix model. As of the end of its first quarter, Netflix had nearly 60 million paying subscribers around the world — a 30 percent increase from the year before.
“In our fragmented world, I love that Spotify has introduced high-quality video for the benefit of its users,” former Vevo CEO Rio Caraeff told TheWrap in an interview. “However, it remains to be seen if non-exclusive video clips that are available in other places are compelling enough to differentiate. Over time, having access to video (and audio) programming that is not available elsewhere is going to become much more important.”
Indeed, Netflix’s Chief Content Officer Ted Sarandos recently said at a media conference “Our appetite for non-exclusive programming is going down everyday.”
Since Spotify’s strategy lacks that exclusivity so many video providers crave, the risk is that it will just end up competing with YouTube.
“Going head-to-head with YouTube would not seem to be the best business plan,” Kenswil warned.