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Context

As the music industry focuses on generating greater revenue, Warner Music's CEO, Robert Kyncl and others have recently called for streaming services such as Spotify to increase their subscription fees. This article will examine the reasons why Spotify is likely to keep its current subscription pricing in place until its users become more dependent on the platform's personalized streaming recommendations. Until then, Spotify seems to have a different vision for how to improve artist’s revenues - supporting fan transactions.

Temporary focus on fan transactions

In March, Spotify announced its “biggest update since mobile”, which allows artists to add 30-second videos to their pages and target their biggest fans with exclusive releases. The most significant change is the revamped homepage, which now features a continuous vertical feed of short-form videos in the style of TikTok.

So is this a big payday for artists? Well, not really. In fact, Spotify has even reduced the amount it pays for music. The Discovery Mode function, which will be rolled out to more artists and labels alongside the new changes, offers promotion in exchange for a lower royalty rate.

Another announced change has slid under the radar: the higher profile placement given to merchandising and concert tickets. It appears this is the next in a series of updates focused on improving alternate ways for creators to monetise their work and grow their revenue outside of streaming, but within the Spotify ecosystem. These alternative revenue sources include merch, ticketing, live interaction, or direct support - all hosted and enabled by Spotify. 

The unifying theme? Spotify doesn’t foot the bill, the fans do. For the time being, Spotify wants to help artists build a better long term business through enabling direct fan transactions and increasing total streams rather than improving the value of those streams through higher subscription prices.

The need for an improved recommendation engine

I believe this approach is designed to appease the music industry while Spotify gets their house in order before increasing subscription fees. After all, what separates Spotify from Apple Music and other competitors? It’s Spotify’s “recommendation engine” and it’s at the core of Spotify’s business model. No other music streaming platform, Spotify argues, can match it.

Yet right now, 80% of plays on Spotify are chosen by the human user (as indicated by the CMA) rather than the algorithm. Spotify needs to counteract the decreasing impact of its own playlisting algorithms before it can raise prices. If users are not using Spotify's unique feature, the recommendation engine, what would be the incentive for them to continue using the service after a price increase?

In a recent interview Spotify Co-President Gustav Söderström calls Spotify’s playlists “old news” and describes how new changes, particularly the vertical scrolling feed, supports improved algorithmic recommendations. He begins:

“Imagine that you have our old homepage, where we would show cover art for a song, you would scroll past that, and the algorithm can’t even know if you saw it. Maybe you saw it; maybe you didn’t. Maybe you saw it, thought about it, evaluated it, and didn’t like it. It can’t know that, so it’s going to repeatedly show it again and again.” 

Next he describes what happens when users are served a “card” in the new interface:

“Not only does the algorithm know you saw it, it even knows you heard it. It can know that if you listened to it for a while but then continued, that you should never see it again.” 

The new user interface provides more signals for Spotify, which should result in improved recommendations. With improved recommendations, Spotify can expect increased reliance on their proprietary recommendation process. With more users getting their music recommended from Spotify, they buttress their unique value prop and make it harder for users to leave, even after a price increase. 

Avoiding concurrent changes

Spotify calls their new updates the biggest change to user experience in 14 years. It’s a big risk - it means Spotify is now a markedly different experience from the one that has drawn in over 200 million paying subscribers so far. And it remains to be seen whether users will embrace a new, more frenetic interface. With Instagram Reels, YouTube Shorts, and TikTok already vying for attention on users' phones, the changes are expected to be polarizing.

I believe Spotify simply won’t consider raising prices at the same time. This UI change is a gamble, and that risk would compound with a concurrent price raise. In addition, a simultaneous price raise would muddy feedback on the design updates and Spotify wouldn’t be able to receive as clear insights into the success of their big launch. For a data informed business with a track record of A/B testing features, it’s counterintuitive to raise prices alongside a dramatic user experience update.

Key Takeaways

While the music industry is pushing for higher revenues, rather than increase subscription fees Spotify is focused on improving user experience and supporting alternative revenue streams for artists. The recent updates, including the revamped homepage and increased focus on merchandising and concert tickets, demonstrate this strategy in action. By strengthening their recommendation engine and increasing the value of their algorithmic recommendations, Spotify sets the stage for a future price increase. For the music industry - that means practicing more patience.

 Written by Patrick Gilley, Marketing Manager at Wavo

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