spotify

Today Spotify announced it had hit 10 million paid subscribers and 40 million monthly active users. That’s impressive growth for the music streaming service, which in March 2013 (the last time Spotify published its user stats) had only 6 million paying customers and 24 million active users.

While those 40 million actives is a nice number demonstrating that the company is finally getting some mainstream attention, in truth it’s the paying folk, not the freeloaders, that really matter to Spotify and to the music industry at large.

Here’s why:

According to figures released last March by the Recording Industry Association of America (RIAA), streaming music sites including Spotify, Pandora, Rdio, and others generated $1.4 billion in revenue last year in the US. That’s a 39 percent increase over 2012, and it amounted to one-fifth of all US music industry revenue on the year.

Now here’s where things get interesting: Of that $1.4 billion, almost half came from customers who pay to use Spotify, Rdio, or Pandora, amounting to $628 million. A slightly smaller chunk, $590 million, came in the form of performance royalties which are collected and distributed by the performance rights organization SoundExchange. (The vast majority of these come from Pandora; services like Spotify and Rdio are “on-demand,” not radio, meaning they negotiate directly with labels). The remaining $220 million came from advertising-supported streaming and was generated in large part by YouTube and Spotify’s non-paying customers.

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This matters because there are far more people listening for free on Pandora than there are people who pay for streaming music, and even more people listening for free on Spotify and YouTube (which is, after all, still the largest music streaming service in the world). And yet, it’s the comparatively small number of paying customers that comprised the lion’s share of music streaming revenues in 2013.

The numbers here tell the real story. Spotify has 10 million paid users; Only 3.3 million people pay for Pandora; Deezer has 5 million who pay; Rhapsody has 1.7 million; Rdio doesn’t publish its subscriber counts, but if layoffs and recent statements from its CEO are any indication, there may be a reason for that.

That amounts to, generously, around 25 million paying subscribers. Compare that to Pandora’s 72 million non-paying monthly active users, who helped generate that SoundExchange revenue. Even more strikingly, compare that to Spotify’s 30 million freeloaders, plus whatever portion of YouTube’s 1 billion monthly active users are using it to stream music: Accustream estimates that 38.4% of all YouTube views are music videos, meaning there could be almost 400 million monthly active users contributing to that paltry ad-supported slice of revenue.

Granted, these are global figures, but the US ratios between paying and non-paying listeners may be even worse, considering that Deezer, with 5 million paying customers, has thus far focused its efforts internationally. Nevertheless, the revenue-potential of a paying customer appears to far outweigh that of a non-paying customer supported by ads.

This is all a long way of saying that to boost streaming revenue in a way that’s meaningful to artists’ bottom lines, more people have to start paying for music. $1.4 billion is a nice chunk of change, but it would have only amounted to 9 percent of the entire pie at the industry’s peak in 2000.

From this perspective, Spotify’s impressive paid-subscriber growth is a good sign for the industry, but it’s not enough (and may never be enough) to lift music revenues to their former glory. Apple’s purported acquisition of Beats, which only offers a paid option, holds promise. Perhaps Apple can use its impressive marketing machine to convince untapped portions of the streaming market (read: olds) to pay $9.99 for unlimited ad-less access to virtually any song on the planet on mobile and the Web.

As someone who grew up dropping $17.99 apiece on CDs at Virgin Records, that’s a bargain. But the new generations are also going to have to pony up if the industry is ever to make a meaningful comeback. And who can predict what those post-millennials will do next?

[illustration by Brad Jonas]