Spotify (NYSE:SPOT) revealed a new version of its mobile app on Tuesday, offering a lot more features for free listeners. The music streaming leader had about 90 million free listeners as of the end of the year, and the majority of its listening hours occur on mobile.
Previously, free users were unable to select songs on demand on mobile, with Spotify requiring them to shuffle through playlists and artists' catalogs or use its radio feature. The new app will allow free users to play select songs and playlists on demand based on their listening habits. It will also enable mobile users to more easily create new playlists, and encourage users to tell Spotify more about their listening preferences.
Playlists and personalization data are, by far, Spotify's biggest advantages over competing services like Pandora (NYSE:P). Extending additional functionality to mobile users -- where free users spend the majority of their time on Spotify -- will help extend that advantage.
But it could come at a cost.
A curious move
Despite the majority of listening taking place on mobile, Spotify still generates about 50% of its ad revenue from desktop listeners. And that's after making changes in 2016 to reduce the number of ads on desktop and focus on mobile advertising products. "To date we primarily rely on our Premium Services to generate revenue on mobile and other connected devices," management wrote in the company's F-1 filing.
Management says it still sees opportunities to improve its ad revenue per user, but it's still generating huge losses from its ad-supported streamers. Cost of revenue for its ad-supported listeners amounted to 90% of ad revenue in 2017. By comparison, Spotify's cost of revenue for premium listeners was just 78%.
So, extending more premium features to free mobile listeners is a bit curious.
Getting more data
But in offering the option to select songs on demand, select songs and artists you love or want to hide, and easily create new playlists, Spotify is gathering additional data. Spotify uses its data to help personalize the user experience, improve its search capabilities, and create new playlists.
Pandora relies on data as well, particularly for its free listening experience. However, its listener data is more limited than Spotify's, as Spotify listeners telegraph their interests more explicitly through on-demand song and artist choices. Pandora uses passive listening and a simple thumbs-up, thumbs-down switch for determining listener taste. Pandora is also experiencing declining listener hours, while Spotify hopes that offering more premium features to free listeners will help continue growing listener hours, resulting in more data.
Spotify will also rely on its personalization data to help make creating playlists on mobile easy. Playlists are another competitive advantage for Spotify, and the more playlists a user makes on its platform, the more they're locked into the service. As of the end of last year, Spotify's 157 million monthly users had created 3.2 billion playlists.
In March, Spotify revealed that it found 2 million user accounts that used a hacked version of its app to remove advertising and add some premium features to the app. Those features included on-demand listening instead of the requisite shuffle play.
Spotify and others in the space also need to take steps to curtail unauthorized account sharing. The Swedish company has seen its average revenue per premium subscriber fall from 6.84 euros ($8.37) in 2015 to 5.32 euros ($6.51) in 2017. While there are many factors that go into that decline (including a strengthening euro), it's something investors should keep an eye on as subscriptions are still the primary revenue generator for Spotify.
Offering on-demand listening for listeners' favorite artists and playlists could reduce the amount of piracy Spotify experiences in the future, while good actors (the vast majority of listeners) provide additional data to improve the service.