Apple's Deep Pockets Affecting Spotify Contract Renewals

[ftaok]

its really not that cut and dry in the business world. there are a lot of variables going into cutting of services, even if those services are not profitable

at the end of the day, maintaining the losses on the free tier, might be better financially for them than cutting the free tier entirely.

The company will have do some really big budget planning. but the math would look similar to this using rounded fake numbers for clarity:

With Free Tier

Free Tier Revenues from Advertising: $50
Revenues from Normal tier: $100
Tot Rev: $150
Total costs of music: $200
Losses; $50


Without Free Tier: Assuming 10% of "free users" migrate to paid instead of going elsewhere

Revenues: $110
Total cost of music: $200
Losses: $90

So, despite losses, its not clear that killing the free tier would save / fix their financials, when in reality it could make it worse, Especially short term where there are already contracts in place by Spotify to the industry that couldn't just be walked away from.

its not such a cut and dry decision to just kill the free service. What spotify really needs to do is completely re-work their entire business model. Thats no easy feat to do when you've got a long established business.

Why would the total cost of music remain at $200 in the second scenario? I thought the royalties were based on number of songs streamed. If they have fewer users (and they would since 90% of their free-tier users left), you would think they would stream fewer songs.

If you assume that half of their streams come from paid and the other half from free, then they would end up breaking even-ish, versus losing $50.

EDIT - dammit. didn't read your reply. Interesting tidbit about the contract for free-tier.

 

[Michael Goff]

Again, you missed the point entirely

Spotify has contracts in place for revenue for that free tier. That revenue would go to 0. but in the short term, they have contracts for that music, while those contracts in place, they will have to pay no matter what. The costs associated with it will still be present, but now without the revenue.

you cannot just say "drop the free tier" without fully looking at their budgeting and knowing exactly how much revenues/costs are associated with the product.

Sure, sounds simple to ditch the free tier, but there's so much more to it. If Spotify went to drop the free tier, it would likely require a complete re-shuffling of their entire business model, and a complete renegotiation of their contracts.

The only way just dropping the free tier is profitable is if enough users switch to the paid service to make up for all the costs. And I doubt (likely Spotify also doubts) that enough users would do so to make up for the costs, and therefore, losses would be even higher. it is up to the management to be profitable, but it's also up to them to minimise potential losses. And right now it seems like keeping the free tier up and running is "cheaper" from the loss column tha just dropping it

If even 1/10 of the free users moved to paid, that'd be huge. There's a reason why free users accounted for 9% of revenue in 2015 while accounting for 75% of useage.

 

[Abazigal]

its really not that cut and dry in the business world. there are a lot of variables going into cutting of services, even if those services are not profitable

at the end of the day, maintaining the losses on the free tier, might be better financially for them than cutting the free tier entirely.

The company will have do some really big budget planning. but the math would look similar to this using rounded fake numbers for clarity:

With Free Tier

Free Tier Revenues from Advertising: $50
Revenues from Normal tier: $100
Tot Rev: $150
Total costs of music: $200
Losses; $50


Without Free Tier: Assuming 10% of "free users" migrate to paid instead of going elsewhere

Revenues: $110
Total cost of music: $200
Losses: $90

So, despite losses, its not clear that killing the free tier would save / fix their financials, when in reality it could make it worse, Especially short term where there are already contracts in place by Spotify to the industry that couldn't just be walked away from.

its not such a cut and dry decision to just kill the free service. What spotify really needs to do is completely re-work their entire business model. Thats no easy feat to do when you've got a long established business.

Why would the cost of music remain the same?

Spotify is charged according to the amount of music streamed. If the free tier is axed, the number of people streaming their music would also decrease, together with the amount you have to pay out to the labels.

So in your example, revenue increases to $110, costs deceases to $80 (assuming 30% paid user base increases to 40%, meaning the other 60% leaves), resulting in an immediate profit of $30.

The downside is that you lose a large user base who *might* one day migrate over to paid, but keep this up and Spotify might never last till that day when they finally have enough paid users to see a profit.

 

[marty11]

I doubt it's collusion. Apple is just offering more money and companies are accepting more money. It isn't that hard to understand.

Apple's reputation in media distribution precedes them. I cant give them the benefit of the doubt.

 

[milo]

You woould care if Apple were the only provider who is able to lose money on the streaming side because of their income on the hardware and services side and have autonomous control of not only what they charge customers, but what they pay artists (which seems to be a concern of yours).

These protections are a there for a reason. You should respect them.

Not sure what you mean by "protections".

And I still wouldn't care if Apple was able to lose money. You seem to be imagining a situation where all the other streaming services go under and Apple is losing money. If that were the case, Apple wouldn't keep operating something that's losing money indefinitely. They'd likely shut it down. Overall I don't see the streaming business as sustainable long term.

 

[marty11]

Not sure what you mean by "protections".

And I still wouldn't care if Apple was able to lose money. You seem to be imagining a situation where all the other streaming services go under and Apple is losing money. If that were the case, Apple wouldn't keep operating something that's losing money indefinitely. They'd likely shut it down. Overall I don't see the streaming business as sustainable long term.

What do you see replacing streaming? The format is the now and future IMO.

 

[milo]

What do you see replacing streaming? The format is the now and future IMO.

No question it's what consumers want, but it seems like they aren't willing to pay a price that keeps the companies and artists in business. It's possible for it to just fail, whether something else replaces it or not. And it certainly seems like the future but it won't be if nobody can come up with a viable business model.