Spotify, the digital music service, is claiming a milestone in the development of its business model after reaching 1m paying subscribers across Europe.
The Anglo-Swedish company, which is in the process of raising a large new round of funding at a $1bn valuation, believes the figure makes it the largest online music subscription service in the world, as it prepares to launch in the US.
Daniel Ek, Spotify’s chief executive, told the Financial Times that 1m subscribers represented 15 per cent of its active user base of 6.67m people.
“For any kind of ‘freemium’ business, that is a really, really good number,” he said, referring to the model of offering a free service supported by a premium, paid-for product. “It’s safe to say we are growing up. We are still a toddler, but we are growing faster and faster every day.”
Spotify’s profitability depends on converting enough free users to monthly subscribers, paying €5 or £5 ($8) to remove the adverts or €10/£10 for premium features, such as being able to listen on smartphones.
The group’s long-standing plans to launch in the US have been held up by concerns from some music industry bosses that it had failed to demonstrate it could persuade enough users to pay, although some agreements with US labels have been secured. Based on previously available figures, analysts had estimated that only 7-8 per cent of Spotify’s users were subscribers. Spotify has to pay a levy to record labels and royalty collection services every time a track is played on its service. Covering that outlay is harder with income from advertising than subscriptions.
Music Ally, a consultancy, reported in October that Spotify paid €30m ($42m) to rights holders in the first eight months of 2010, when it had fewer than 750,000 subscribers, leading analysts to assume that Spotify remained lossmaking on a monthly basis.
Accounts published last year for 2009 showed Spotify lost £16.6m in the UK on revenues of £11.3m.
Just two years ago, Spotify was celebrating reaching its first 1m registered users. Although more than 10m people across Europe have registered for Spotify’s free service since its launch in October 2008, not all of them are still using it.
Mr Ek has always insisted that having a large base of free users was the best way to attract paying customers. “We are trying to experiment with new ways to increase monetisation on free as well as paid,” he said. “We are constantly trying to get people to pay but we prefer using carrots rather than sticks.”
Recent months have seen twice as many people sign up for Spotify’s paid services than to its free product, as it secures partnerships with other digital music products and services such as Sonos and Shazam.
Even though it remains locked out of the world’s largest music market, Spotify believes it has built the biggest challenger to Apple’s iTunes, which remains the dominant provider of digital music.
“If you look at some of our peers in the US, some of them have been around for almost 10 years and they don’t have that figure [of 1m subscribers],” Mr Ek said. “That has to count for something. When we started talking about entering the US, that number was considerably lower.”
Rhapsody, one US competitor, said in January it had 750,000 paying users while Napster had 760,000 when it was acquired by Best Buy in 2008, its most recent published figures.
Spotify declined to comment on the timing of the US launch or on reports of its plans to raise $100m at a $1bn valuation from investors including Digital Sky Technologies Global and Kleiner Perkins Caufield and Byers.