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Spotify Is About to Make Its Free Version a Lot Better

By Evan Niu, CFA – Apr 10, 2018 at 6:37PM

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The free tier is strategically important to the Swedish company.

Music-streaming leader Spotify (SPOT -6.50%) has grown to become the largest music-streaming platform, thanks in part to offering a free version of its on-demand service, which helps the company expand in emerging markets while funneling free users toward its paid subscription plan. While Spotify has historically lost money on free users, only turning a profit on its free user base last year due to new licensing deals, these users also contribute plenty of listening data for Spotify to fine-tune its discovery algorithms.

For these reasons, the free version is quite important strategically, and a key distinction between Spotify's model and its closest rival, Apple Music. The good news is that Spotify's free version might be about to get a lot better.

Spotify desktop app interface

Image source: Spotify.

Improving the free tier

For starters, here are the main differences between the free and premium versions of Spotify.

Feature

Free

Premium

Shuffle play

Yes

Yes

Ad free

No

Yes

Unlimited skips

No

Yes

Listen offline

No

Yes

Play any track

No

Yes

High quality audio

No

Yes

Data source: Spotify.

Bloomberg reports that the company is looking to overhaul the free version, making it easier to use and focusing on the mobile experience. The ability to play any track on demand is arguably one of the most important features, and Spotify may give free users somewhat more control over hearing specific songs, according to the report. Currently, free users can create playlists that shuffle songs that can be accessed on mobile devices.

At the end of the first quarter, Spotify estimated that it had 168 million to 171 million total monthly active users (MAUs), including 73 million to 76 million premium subscribers. By year's end, the company is forecasting 198 million to 208 million total MAUs, including 92 million to 96 million premium subscribers.

Spotify's free service has been contentious within the music industry, as record labels have long argued that offering a free service erodes the value perception among consumers. Apple Music's effective per-stream royalty rates for 2017 were much higher -- nearly double on average -- than Spotify's, according to estimates from The Trichordist. As part of Spotify's renegotiated deals (which have boosted gross margin), the company agreed to let artists delay the release of new music on the free version of Spotify.

The company is planning a major news announcement on April 24. While it could be related to hardware, Bloomberg says the improved free version could be unveiled within "a couple weeks," which would line up with the scheduled event.

Evan Niu, CFA owns shares of AAPL. The Motley Fool owns shares of and recommends AAPL. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.

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