Judging by Spotify’s recent financials, you’d be forgiven for assuming that income from advertising was a negligible part of its business.
As of Q2 2018, revenues from advertising on its free tier made up just 9.7% of Spotify’s total revenue pie, generating $123m from April to the end of June.
Despite this relatively low financial contribution, Spotify has been investing in – and experimenting with – its offering to advertisers.
The streaming service recently tested an unlimited ad skip function called Active Media for its free users in Australia in an effort to collect data and offer a more “personalized experience”. And last year, it rolled out self-serve programmatic advertising channel Ad Studio for small to medium-sized businesses.
Alongside a growing premium subscriber base, increased revenue from Spotify’s ad-supported tier could play a key role in the financial status of the company — which has yet to turn a profit — in future.
But how interested, in reality, are big brands when it comes to advertising on Spotify? Will freemium ever provide a revenue stream that’s more on par with premium? And how ambitious is Spotify’s ad team?
We posed these questions and more to Brian Benedik, Global Head of Advertising at Spotify…
Which area of Spotify’s advertising proposition are you most focusing on for growth?
On a format front, Spotify has a lot of interest in the podcast space right now as it starts to get organized. Think about a world where podcasts are being surfaced in a very intelligent way to users, and there is a whole monetisation strategy that’s going to follow around that.
Streaming music will still be a big part of what we do, but this evolution of content and how we monetize that is super exciting.
“Streaming music will still be a big part of what we do, but this evolution of content and how we monetise that is super exciting.”
The test of Active Media in Australia right now is something that we are gathering learnings around and we are hoping to scale to different markets.
The self-serve tool Ad Studio that allows smaller businesses to activate the Spotify free audience is a big growth area for us, and is going to be a very big part of what we do in years to come.
So the monetization of other content, the self-serve ad market and this idea of users controlling their ad experience — those are three things we are pretty excited about.
Can you tell us more about Active Media — why is a function that allows users to skip ads appealing to advertisers?
It’s a signal for us to have an idea as to what ads users skip and what ads they don’t. Serving them relevant ads that they want to hear or see is the holy grail of advertising. We don’t want to create an interruptive experience, we want to make these ads are something that users perhaps find relevant.
Rather than being able to skip all the ads, perhaps we allow users to skip a certain amount. But we don’t know yet, it’s a new user experience that we’ve never tested.
When you’re a leader in a space you carry the burden of innovation so we are constantly trying to stay out front and see how can we make this the best experience possible for our users. The better the user experience, the better the ad experience.
Across your six years at Spotify, how has the attitude and perceptions from advertisers about the value of advertising on streaming services changed?
It’s been quite an evolution. Six years ago, it was really early days for the Hulus of this world and even for Spotify. There has been a real education and I guess a comfort level for users to jump into these platforms and the frequency of the use case has grown tremendously.
Advertisers are looking to follow eyeballs, or ears, so as consumers migrate from terrestrial TV and radio over to the streaming platforms, advertisers will go with them.
“Advertisers are looking to follow eyeballs or ears so as consumers migrate from terrestrial TV and radio over to the streaming platforms, advertisers will go with them.”
When I joined, trying to explain this idea of access over ownership of content and the streaming economy took some time. Today we don’t have to explain that much, the big brands like the Nestles, Samsungs, McDonalds and many others are sold.
Now it’s a matter of providing them with interesting audience insights that can inform their investments, and create the return on investment that they are expecting.
What are you able to offer that traditional broadcasters can’t?
From a user standpoint, [it’s] the idea of consuming Spotify in all of these environments — mobile is a big one, desktop, but also gaming through integrations like Playstation and Xbox, and also the smart speaker craze now with Google Home, Amazon Alexa and Bixby.
The user is spending over two hours a day with Spotify so it’s a lot of engagement time, but they are doing it across all these environments, which is a way different use case than radio.
So advertisers can activate that free audience across all these environments, and we have insights that we can share about what the audience is doing and who these people really are.
I spent 15 years of my career in terrestrial radio so I have a fondness for it, but the measurement and the metrics that we have on the digital side… we are not using panels or surveys, we are actually monitoring people.
Spotify’s Q2 numbers revealed that from Q1 to Q2 this year, your global ad-funded user count went down by 1m, while premium numbers rose. Does that concern you?
I’m not going to comment on quarterly earnings but what I can tell you is that we are very adamant about this freemium model. Having a vibrant free tier and a vibrant premium tier is really important to us for a couple of reasons.
Having a healthy free tier allows us to build a vibrant advertising business and talk to advertisers in all the ways that I just described, and then the free tier really works as a funnel for conversion in the premium side.
We’ve invested heavily to make sure that our free users are getting the experience that they love and that’s very important to what we do at Spotify.
That goes back to our belief and support of this freemium model, and that it’s all very much working hand in hand.
Despite ad supported making up over 50% of Spotify’s monthly active users, the cash they generate makes up just 10% of revenues. Will that always be the case?
There are always going to be users that jump onto the free tier and there are going to be users that want to pay for music. As we continue on the free tier with the innovation that I mentioned, we are expecting this ads business to continue to grow at the velocity that you’re seeing.
What that translates into in terms of percentages, I don’t know, but eight years into our commercial journey as an advertising business, to keep growing at the year over year rate that we are is pretty rare. It makes me think that we still have some runway here and that is what excites me six years into my journey.
Would you ever consider serving advertising to paid users?
That’s not a line we will ever cross because I think one of the main propositions of being a premium user on Spotify is no ads.
At the moment, because of the way the podcast content is ingested there are what are called host reads, which is the main podcast ad driver right now.
That means that premium users do hear the host reads, so there is a touch of that until a scalable digital ad insertion is built over the coming years.
Music Business Worldwide