At SXSW, Napster founder and prominent Spotify backer Sean Parker made a bold claim: “If we [Spotify] continue growing at our current rate in terms of subscriptions and downloads, we’ll overtake iTunes in terms of contributions to the recorded music business in under two years.”Long term, we’re very bullish on Spotify, as we’ve explained in our briefing dissecting the company’s business model. But two years to replace the dominant digital music platform is a big undertaking.
How much money does iTunes make for the labels? Apple doesn’t disclose that, nor how much music revenue the iTunes store generates–iTunes is also TVs, movies, books and apps. We can estimate iTunes’ music payouts from the bottom-up. Warner Music Group generated roughly $800 million from digital downloads in 2011, most of which are from iTunes. Since WMG has roughly 20% market share, we can estimate for these purposes that iTunes paid approximately $3.2 billion to record labels in 2011.
Can Spotify match that?
Spotify’s 2010 financials are public, and in 2010 Spotify paid out roughly $100 million to record labels. So, assuming iTunes payouts stay constant (the industry is moving away from downloads and toward streaming so that’s not crazy, although it should keep growing modestly as iOS device-buyers are sucked into Apple’s content ecosystem), Spotify would have to grow by over 30X in 3 years to approach that amount.
That seems impossible. But, let’s think about it. After all, Spotify is growing very fast. Revenue grew an incredible 458% from 2009 to 2010. And those 2010 numbers were from before Spotify entered the enormous and all-important US market, where it was received very well, and before Spotify integrated with Facebook, which supercharged its distribution.
So, how big would Spotify have to get to be bigger than iTunes?
We will assume Spotify pays 100% of revenue to labels, which is actually optimistic, because in previous years Spotify actually paid more than 100% of revenue to labels.
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Let’s focus on subscription revenue, which is the overwhelming majority of Spotify’s revenue. Spotify has premium plans at $4.99/month and $9.99/month, so we’ll assume that Spotify generates on average $7.5/month, or $90/year per paying user.
To generate $3.2 billion of subscription revenue to pay out to record labels, Spotify would need to have more than 35 million paying users. That’s 35 million people willing to pay a yearly subscription fee for digital music.
How many free users would Spotify need to attract to get that amount of traction?
Thankfully, Spotify has some of the best conversion rates in the industry, currently around 15% of active users. That number should actually only go up, because Spotify is a product whose value increases the more you use it. As time passes, therefore, cohorts of old users upgrade from free to premium, bringing the whole average up. (We go into this in detail on our note on freemium business models here.) So in a few years it might be up to 20%. This is an extraordinary number, but Spotify’s current 15% is equally extraordinary.
That still means that Spotify would need 175 million active users. Those are monthly active users (MAUs), by the way, not just registered users.
How big is that? By way of comparison, Twitter today has about 100 million MAUs. Twitter is enormous, and yet it’s only a fraction of how big Spotify would have to be in two years. And Twitter is available everywhere. And Twitter gets free advertising all the time in the form of mentions in every other TV show.
Because Spotify is integrated with Facebook and usage numbers of Facebook apps are public, we know that Spotify right now has close to 17 million monthly active users.
So for Parker’s prediction to come true, using generous assumptions, Spotify would have to grow by 10X in two years.
That seems crazy.
Is it crazy?
It’s probably crazy.
But it’s not completely crazy.
After all, Spotify has enjoyed enormous growth, propelled in part by its Facebook integration. According to AppData, while Spotify has 17 million MAUs today, it had 14.5 this time last month. That’s an astounding growth rate—around 15% per month.
Just for fun, we extrapolated Spotify’s growth using that rate, and if it holds steady and compounds, it would lead to Spotify having 487 million MAUs by this time in two years.
In this sense, at least, if that’s what he meant, Parker is correct, since he caveated his prediction with “if we continue growing at our current rate.” That almost certainly won’t happen, though. The growth rate will slow down at some point.
Then again, many would have thought Sean Parker was crazy if he’d said Facebook would one day encompass 1/7th of the world’s population.
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