Spotify loses money on every new user that takes advantage of its free service tier, but that shouldn't concern investors in the long-run, Spotify chief financial officer Barry McCarthy told investors on Thursday.
"The ad supported service is also a subsidy program that offsets the cost of new user acquisition," McCarthy told investors.
The Spotify service comes in two tiers: First, a free version, supported by ads. And then, there's the $9.99 ad-free Spotify Premium service, where the company makes most of its subscription revenue.
According to BusiunessInsider, while the free tier eventually leads many customers into eventually becoming a Spotify Premium customer, it's still a costly investment: After a customer moves from the free tier to Spotify Premium, it takes 12 months on average for Spotify to recoup the costs of all the music they listened to without paying.
The company attributes those losses to the music licensing fees and royalties that it has to pay on every song that streams on its service. That's added up to $10 billion in music fees since Spotify debuted in 2008. In 2017, it meant that Spotify lost $1.5 billion on $5 billion in revenue.
Spotify sees its free service as a marketing and acquisition expense, McCarthy said, and believes that it will pay off financially for Spotify once the company has the scale necessary to grow its margins.
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