Published 10:00 a.m. ET August 17, 2019
Spotify CEO Daniel Ek. (Photo: Spotify)
Spotify is planning to test a price increase for family plan subscribers in Scandinavia to see if it can raise prices in the region and around the world, according to a Thursday report from Bloomberg. Currently, the Swedish family plan costs around 149 Swedish krona ($ 15.45) per month, such as pricing in the US and the rest of Europe. New pricing will increase by 13%.
The company is seeking to maximize its income in markets where it is already a dominant music force and expanding at lower prices in emerging markets in Asia and the rest of the world. It is wise for the Swedish company to see if it can successfully raise prices in Scandinavia before testing other markets.
(Photo: Spotify quarterly reports. Chart by author)
Income falling per subscriber
The average income per user has decreased significantly with Spotify in the last few years. Corrosion coincides with its 2016 revamped family plan, which made it much cheaper for larger families to access premium access. For example, a five-person family could spotify their bill to cut in half with the new pricing.
While Spotify expanded into new markets with lower average prices than in the most popular markets – Europe and North America – family plan pricing is the main factor that affects average income per user. "About 75% of the impact on ARPU is attributable to changes in product mix," management wrote in the company's second quarter letter to shareholders.
Some music publishers complained about ARPU who are reducing Spotify, since many of their contracts include income sharing agreements with the music streamer. The company is currently engaged in a contract renewal round with the major labels, having dealt with two of the four companies as part of their second quarter earnings release at the end of July. When ARPU is maintained, or even increasing, it will give Spotify an additional impetus in the next round of negotiations, which is likely to be in two years time, if history is going on.
Can Spotify pull it out?
A more demanding task for Spotify is price increase than it is your company as Netflix. Netflix has achieved a number of successful rounds of price in recent years, and has continued to grow its subscriber base.
While Netflix has a large number of competitors and is streaming videos, it has been able to distinguish itself from its original set and films. Users may be able to easily cancel Netflix and switch to another streaming service, but there is a large transfer cost: no more Stranger objects (or other original set).
On the other hand, Spotify has the same 50 million songs as Apple or any of its competitors in music streaming. While Spotify worked to differentiate its products through playlists and podcasts, the switching costs are not as high as in the world of video streaming.
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More importantly, however, Apple and most of the Spotify contestants can not make a profit on music streaming. So, probably a family plan would not get $ 14.99 per month more expensive Apple as long as Apple sees continued loyalty and engagement with the rest of the Apple ecosystem from those customers. So, if Spotify raises prices, more consumers could engage with less expensive competitors who offer the same service.
Ultimately, it will not hurt Spotify to test higher prices in markets such as Scandinavia, where it is a dominant force. It can then display the data on at least music labels. And if the price increases actually work, then it is a win for Spotify and for both the labels. However, it is important that better labels from other competitors do not receive any interest in raising prices. Meanwhile, Spotify can focus on other sources of income such as podcasts.
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