Warning: this is a LONG post.
As Spotify continues to grow, both in terms of the number of countries within which it operates and the number of users signing up for the service—(paid or free), I reckon its time to try and make some sense of the “mixed methods” that are being applied to reckon user base and conversion rate estimates and reports.
My final takeaway away will be that the conversion rates that matter should be between the registered user base and the active free user base, as well as the paid user base. Tossing out registered users from the calculation—as Spotify is doing by reporting metrics based upon active users— is leading to an over-estimate of the allure of these services in the context of the wide range of service options that might exist.
In other words, by reporting conversion rates based upon Active Free users, the music services market appears to be more attractive as presently priced and structured than that market might actually be.
Now, to be clear, Spotify is/are dealing with not only the expectations of license and investor agreements, but also the cliff of free users being, well, un-freed after their six months of free access to the service. These dynamics might lead to both the reported ratio of paid to free users and the reported number of registered and active users to move around. Regardless, the numbers that are hitting the news feeds are moving all over and we might as well be honest about how crazy this experience is.
NOTE: a robots.txt file within the certain folders of the Spotify site prevent a more directed inquiry into the “official” user numbers as reported, but comments to the press make a little backtracking possible.
First: Spotify now reveal(s) it’s free-paid conversion rate based upon a report of active monthly users and not registered users. This method is a bit wonky.
As a result of the method through which Spotify communicates conversion, as free users fall off the active user cliff—by being “un-freed” from the service—Spotify’s conversion rate will increase even though their actual conversion rate for users who have signed up for the service has not changed and may even be falling.
(A) I have 20 users of a service, two of which pay for the service while 18 use a free version. 10% of my total user base is paying for the service.
(B) I deny access to the service to 6 of the prior free users, leaving 12 free users. One of these free dropouts chooses to pay. I now have 3 paid users and 12 free users, for a total of 15 users. 20% of my total user base is paying for the service.
The conversion rate in this example increased from scenario (A) to (B) even though no newly registered users emerged and the total user base, in fact, fell in number.
Second, as a result of the switchbacks in metrics reporting, explicit or implied conversion rates for Spotify are all over the place.
Most recently, Spotify execs claims there were 3,000,000 paying users (at either of the two paying tiers) and that this user base was 20% of the total “active monthly” user base. Or, at least this is how Tim Bradshaw at the Financial Times interpreted the numbers as either presented or hinted to him.
If 3,000,000 were 20% of some larger number, that number would most likely be 15,000,000. Please feel free to check my math.
And so, we have reason to believe that Spotify now claims approximately 15,000,000 monthly active users. Where active users implies individual accounts that have used the service during the past 30 days. And their conversion of active users resides at 10%
Back in November of 2011, Spotify claimed 2,500,000 paid subscribers and an active user base of 10,000,000 users. This stat is repeated in many places, including an interview for Grammy Week. The quote from Ek the CEO:
You’re talking 10 million active users, 2.5 million subscribers — most of them paying $120 a year, which is double the amount of your average iTunes user.
And so, in November of 2011 it looked like 25% of the active user base was paying for the service, a seemingly higher conversion rate.
While back in March of 2011, the company reported 1 million paid subscribers and a mathematically wonderful figure for users as 6.67 million (or 6,666,666), suggesting a 15% conversion rate (or 14.9925….%).
Finally, the conversion rates that really ought matter—if we are to understand the attractiveness of these sorts of music services— would involve a consideration of the registered user base (i.e., everyone who has signed up and tried the service) as compared to the Free and Paid user bases.
The music industry needs to come to terms with the true appeal of BOTH the Free and the Paid versions of these music services. Focusing nearly exclusively on the Paid conversion of active Free users leads to a misunderstanding of both the purpose and the draw of these services in the market.
Additionally, when conversion to Paid users is measured as a function of active Free users, the limit applied to the time period for free usage will result in overstating the appeal (i.e., the increase in the conversion rate) of the Paid services as these Free subscribers drop out. And as these Free subscribers drop out, we lose them to other non-paying options.
As a result, it appears as if services such as Spotify are increasing in their appeal to the general public when, in fact, over time the appeal may have remained the same.
In September of 2010 the firm reported 10 million ”users,” which back then referred to registered users. At this point in time, there were a reported 500,000 paid subscribers and the country base for official users was limited to the UK, France, Spain, Finland, Netherlands, Norway, and home country Sweden. Let’s be honest, these numbers implied that 5% of the registered user based paid for the service.
Since 2010, the firm enjoyed not only expansion to additional countries, but also prime promotion through Facebook thanks to a investor family connection.
The number of paid subscribers has grown by a factor of six since the fall of 2010, from 500,000 to a reported 3,000,000. If the registered user base grew by a similar ratio, a total of 60 million users would have signed up. Given the tweaks in the free service limitation since initial launch, combined with certain growth trends and metrics along the way, it seems reasonable that the total registered user base grow by 4x over the period.
As far as I can tell, upwards of 40 million (+/- 5 million) people have signed up for a Spotify account since their launch. If I were to guesstimate their actual conversion rate for registered users to paid users that rate would be 7.5% (+/- 1.5%).
And so, when that conversion rate is measured as a function of registered users who have converted to paid users, this uptick in addressable market and promotion may have resulted in only a slight increase in the true conversion rate for the service. Something about these services are leading them to appeal to only a subsection of a subsection of the market.