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Spotify sees ad revenue double

News, 25 May 2016

STOCKHOLM: Spotify, the 10-year-old Swedish music streaming service, has reported an 80% increase in revenues to €1.95bn (c. $2.2bn) for 2015, but there are questions from some observers about whether it is overly reliant on paying subscribers.

According to a regulatory filing in Luxembourg, Spotify revealed that it had 89m active monthly users at the end of 2015, of whom more than 28m were paying subscribers, the BBC reported.

Even though subscription revenues rose 78% and advertising revenues nearly doubled to €195.8m, the company still made a loss of €173m.

This was partly because Spotify's biggest cost comes from the royalty and distribution fees it pays for the use of songs, and these fees rose 85% to €1.63bn.

There was a mixed reaction from industry observers, with Recode saying that, despite the losses, Spotify had achieved a much better performance than in 2014.

"If Spotify can keep it up, then it will have pulled off something special by showing it can run – and grow – a streaming music service at scale," said Peter Kafka of Recode.

However, Amy Wang of Quartz warned that Spotify's 28m paying subscribers amounted to just a third of its total active users and this could make the company overly dependent on them for revenue.

"If the company is to continue expanding at its current rate, that – in conjunction with the free tier's meagre profits – could be cause for some more concern," she said.

For its part, Spotify seems to recognise that it needs to encourage advertisers to embed the platform into their media plans when seeking to reach fans of streamed music.

In a recent interview with The Drum, Jeff Rossi, Spotify's global director of business marketing, outlined what he considered to be the special qualities of the platform for advertisers – especially in the field of "state of mind" marketing.

He also argued that one of its great benefits for advertisers is its capability to provide reliable first-party data to help with their ad targeting.

For example, if a Spotify listener has two playlists – one for "chilling at home" and the other for "working out" – then advertisers could hone their offerings based on the listener's likely state of mind.

"We've always had a native advertising experience, but our weakness has been when we've tried to just sell banner ads at a higher premium because people would say, 'why would I buy that?'" Rossi said. "Now we can forget about the screen and start thinking about the mindset the consumer is in."

Data sourced from BBC, Recode, Quartz, The Drum; additional content by Warc staff