Should Spotify, Others Increase Them? – Billboard

[ad_1]

With some high-flying markets falling to single-digit recorded-music revenue growth in 2022, there are rising expectations that Spotify will follow Apple Music and Amazon Music and raise the price of its individual plans in the United States and other major markets.

Last year, growth in U.S. music subscription revenue fell to 7.2%, down from 22.2% in 2021, according to the RIAA. It was the lowest annual rate since the subscription market grew just 2.9% in 2010 — a year before Spotify launched in the United States and transformed a business that depended on downloads to one ruled by streaming. With subscriptions now accounting for 57.9% of U.S. recorded music revenue, overall revenue growth slowed to 6.1% from 23.2% the prior year. A similar scene played out in the United Kingdom and France, the world’s third- and sixth-largest recorded-music markets, respectively; growth of paid-subscription revenue dropped from 13% to 4.8% in the United Kingdom, according to the BPI, and from 15% to 11.4% in France, according to SNEP, France’s record industry trade group.

The sudden slowdown could have a number of causes. Most markets stayed healthy in 2021 as the pandemic boosted music subscription services. But there’s increased competition in the attention economy: SNEP suggests TikTok is at least partially responsible for the softer growth. SNEP’s 2022 annual report revealed that 77% of 16- to 24-year-olds say they discover a lot of new artists on TikTok, and 45% of this group now spend more time on the app — which is not monetized well — than on music services such as Spotify.

The industry’s 2023 revenue will get a boost from price hikes by Apple Music, Amazon Music and Deezer in the United States and other major markets of about $2 on family plans and $1 on individual plans. But the industry could get even more: Spotify, the largest subscription service, raised prices on family plans in the United States in 2021 but has kept the individual plan at $9.99 since the platform launched in the United States in 2011.

Raising rates will create new revenue for rights holders, creators and digital services just as growth is slowing in many major markets. Barclays estimates that a 10% price bump by all subscription services would increase the earnings per share of Universal Music Group by 13% and add 400 million euros ($430 million) of revenue and 240 million euros ($258 million) of gross margin annually. Barclays believes the same price increase would improve Warner Music Group’s earnings per share by 21% and add $256 million of revenue and $158 million of gross margin. JPMorgan Chase analysts said in a March 8 report that a Spotify price increase for U.S. individual plans — expected “in the coming months” — would create incremental annual revenue of about $200 million.

WMG CEO Robert Kyncl, a former YouTube executive, pointed out at a Morgan Stanley conference on March 8 that the price of YouTube TV doubled “because they have a superior product,” while music subscription prices have barely budged. “That doesn’t seem right,” he said. “I’m amazed we’re paying the same today as we did for Rhapsody in 2003,” says MusicWatch managing partner Russ Crupnick about one of the first music subscription products. Rhapsody cost $9.95 per month in 2003. Adjusted for inflation, that’s equal to $16.25 today — 63% above what Spotify is charging and 48% more than Amazon Music and Apple Music’s recently increased individual rates. After Rhapsody, most on-demand subscription services adhered to the $9.99 monthly fee: Sony’s Music Unlimited, Rdio, SoundCloud Go, Pandora Premium and Spotify, among others. One notable exception was Microsoft’s Zune, which launched in 2006 at $14.99 per month.

Spotify, for its part, seems confident its product could withstand a broad price increase. “We obviously know our competitors have raised prices, and we think we have a better product than most of our competitors,” Spotify CFO Paul Vogel said at the Morgan Stanley conference. “So if our competitors are able to raise prices, and we think we have the best product in the business, it obviously bodes well for our ability over time for pricing.”

But Spotify also takes the stance that keeping rates low is good for business. As CEO Daniel Ek explained in a Jan. 31 earnings call, Spotify has two strategies to choose from: grow the number of subscribers or increase the revenue per subscriber. Generally, “our approach when we’re early in a market is to try to grow the number of participants” by maintaining “a competitive price,” Ek said. Over time, he added, more of the revenue growth “comes from price increases” as the market matures. But because it operates in 184 markets, Spotify doesn’t have a single approach. “In some markets,” Ek said, “we’re mostly focused on growth.”

In a healthy economy, music services appeared flat-footed, while on-demand streaming video services seemed to be making the right decisions: They had differentiated services that attracted subscribers with exclusive content and raised prices as consumer demand strengthened. The onset of the coronavirus pandemic was a boom for streaming services. Suddenly, people had more time to stay at home, and they spent much of it online. Netflix subscriptions ballooned 27.3% in the second half of 2020. Also that year, the company raised the price of its standard U.S. plan by $1 to $13.99. In 2022, it went up $1.50 to $15.49.

Spotify may have been fortunate not to raise its standard plan prices. In the wake of global supply chain problems and persistent inflation, consumers are increasingly price-sensitive. In the short term, Spotify could have bought itself some goodwill. “It can make a case that it’s helping consumers through a downturn,” says MIDiA Research’s Mark Mulligan. Over the long term, however, music subscription services’ unwillingness to raise their rates could put them at a disadvantage to their video peers. “Basically, streaming music waited so long to change prices,” says Mulligan, that “a whole generation expects these prices.”



[ad_2]

Source link