Why the Spotify Price Increase Is Overdue
Spotify faces its moment of truth Tuesday, as the music streaming giant releases its Q2 results before market open. Though the top- and bottom-line numbers will matter, the real focus will be on whether the company finally follows through on its promise of a long-awaited price increase. The Wall Street Journal reported over the weekend that Spotify was planning to announce a $1 price increase to its ad-free premium plan this week.
Rival YouTube Music announced a price hike last week for the first time since its launch in 2018. Others, such as Tidal, Apple Music and Amazon Music, have all recently raised prices to offset other challenges in the business.
Price increases aren’t exactly thrilling news from a consumer perspective, but they are imperative from an investor's vantage point. As the biggest music streaming player, Spotify has managed to grow while maintaining its $9.99 a month price tag in the U.S. since its launch in 2011.
But times are different, and the concerns weighing on the video streaming business are also putting pressure on the music side. With no end in sight for economic uncertainty, an advertising slowdown and growing competition, many are worried recent declines in music streaming revenues could be more than just temporary.
Music streaming has been chronically undermonetized, especially compared with its video counterparts. That’s not to say music streaming consumption isn’t way up. In fact, the number of streaming hours on Spotify increased nearly five times between 2015 and 2021, according to Goldman Sachs.
However, revenue per audio stream has fallen 14% during the same time period. And revenue per hour streaming of music for Spotify is four times lower than for Netflix, Goldman Sachs estimated.
The most obvious way to effectively monetize would be by increasing prices on plans. Just look at video streamer Netflix, which raised prices three times in the past four years. And even though consumers grumble about it, there’s no denying the impact it has on average revenue per user (ARPU) growth.
Spotify CEO Daniel Ek is very aware of the benefits of such a move. He has said on multiple occasions that we could see a price increase in the U.S. sometime this year. After all, Spotify has experimented with price increases in other regions, and what better time to announce than during the Q2 earnings results?
In addition to price increases, it was previously reported that Spotify was also considering a new, more expensive subscription option that features high-fidelity audio. Spotify first announced the idea in 2021 and refers internally to the option as “Supremium.” The hi-fi option would be another way to drive up revenue at the company during a challenging time for music streaming profitability.
The clock is ticking, and the major record labels are losing their patience. Last week, Warner Music Group announced an expanded licensing partnership with TikTok, a deal that will leverage TikTok’s massive user base and create new revenue opportunities for WMG artists.
This comes as TikTok also announced that it has begun testing TikTok Music, a subscription-based music streaming service, in Australia, Mexico and Singapore. Even though Spotify currently dominates the music streaming market, TikTok is a very real threat.
As TikTok grew, its music discovery capabilities actually boosted music consumption on platforms such as Spotify. But if TikTok can keep users on the platform for both discovery and consumption, it does not bode well for Spotify or its competitors.
Spotify shares have been on fire this year, rising more than 110% so far in 2023, much of that owing to investor optimism that we’ll likely see a price increase this year. With that kind of optimism already priced into the stock, Spotify has to deliver this time around.
The hope is the company announces the first price hike in the U.S. and that is just the beginning of further recurring price hikes ahead. But whether it’s a price increase or a more expensive plan option, the music business is fundamentally changing, and Ek will have to deliver some kind of new strategy to instill investor confidence.
