How does Spotify really work?
How does Spotify make money?
Spotify makes money from two sources: a free tier supported by advertising and a paid subscription premium tier.
Spotify has two tiers which are free to use: one for desktop and tablet computers and one for mobile.
The desktop and tablet free tier allows users to play any song in our catalog on-demand but users must view and listen to advertisements that interrupt their listening.
Users on our mobile (smartphone) free tier can only play music in “Shuffle mode”. They can not play songs on-demand or offline and face a number of other restrictions including limited song skips as well as being interrupted by advertising. For more information on our mobile free tier, please see this blog post.
Advertisers pay Spotify for exposure to users on our free tiers and in-turn fund the royalties that Spotify pays out for listening that occurs in these tiers.
Spotify’s Premium tier gives users unlimited music across all of their devices including smartphones, tablets and TVs. Users can also temporarily download songs to their devices for listening on subways or airplanes, play music at the highest quality and they are never shown advertisements. This tier costs $9.99 per month.
Spotify’s total revenue comprises money received from advertising on the free tier and subscription payments on the premium tier.
How we pay royalties: an overview
Spotify pays royalties for all of the listening that occurs on our service by distributing nearly 70% of all the revenues that we receive back to rights holders. By “rights holders,” we are referring to the owners of the music that is on Spotify: labels, publishers, distributors, and, through certain digital distributors, independent artists themselves. How does this work? Below is an overview of the royalty system Spotify employs. Please also see the next section for additional detail.
We pay out nearly 70% of our total revenue to rights holders. We retain approximately 30%:
How is Spotify contributing to the music business?
Spotify’s model aims to regenerate this lost value by converting music fans from these poorly monetized formats to our paid streaming format, which produces far more value per listener. The chart below shows the money a Spotify Premium customer spends per year compared to the average spend of a US music consumer who buys music (not including those who spend $0 on music).
A Spotify Premium user delivers more than 2 x the amount of revenue to the industry (per year) as the average US music consumer currently does. Spotify’s goal is to convince millions of people around the world to become Premium subscribers and by doing so to re-grow the music industry. The next section shows Spotify’s progress in achieving this so far.
Spotify’s progress so far
Spotify has already made considerable progress towards restoring the value lost to piracy and other less well monetized forms of music consumption. As of November 2015, Spotify had over 75 million monthly active users with more than 20 million people paying a monthly subscription to use Spotify’s Premium tier.
The chart below shows Spotify’s rapid user growth over the past few years:
The important fact to note is that for every new Spotify user, we increase the amount of revenue we receive and, in turn, the amount of royalties we pay out to the industry (see section below on how Spotify’s royalties relate to revenues). The chart below shows how our user growth has resulted in rapid year-on-year growth in the amount of money Spotify pays out in royalties. In June 2015, Spotify’s CEO Daniel Ek announced that we have now paid out over $3 billion in royalties with $300m of that coming in the first 3 months of 2015 alone.