Since the end of Q2 2018, Spotify has been running a test in Australia for a new feature called “Active Media” that allows non-paying subscribers to skip audio and video ads. Skipping ads isn’t currently available for the ad-funded free tier elsewhere, unless consumers use a third-party ad blocker. Spotify has recently started to make significant moves against ad-blocking users, including suspending access and issuing bans. By giving consumers the choice to hear, watch or skip ads, Spotify hopes to gain insight into what ads consumers are willing to accept. Accordingly, it is changing its ad model from a CPM-based one to a performance-based one. That means it will only charge advertisers for ads that get fully heard or viewed. Spotify feels this new feature will allow greater personalization of the ads served to users, based on their behaviors and preferences. Danielle Lee, Global Head of Partner Solutions, compared this to the streamer’s personalized music playlists.
Exhibit 1 - Spotify's share of advertising revenue 2016-2018
Advertising represents a marginal source of revenues for Spotify, standing at around 10% on average, growing at 19% YoY (as of Q2 2018). In comparison, subscription revenue is growing at 27%. Ad-blockers have hurt Spotify’s ad revenues with two million free subscribers of the service using them as of December 31, 2017, according to its filing with the Securities and Exchange Commission (SEC) on February 28, 2018. Spotify is most certainly looking at ways to grow ad revenue, as revenue growth YoY has slowed in subscription but especially in advertising in Q2 2018 (-56% growth YoY).
By enabling free subscribers to skip ads, won’t have to sit through audio and video ads anymore. Under such circumstances Spotify may appeal to untapped audiences, such as in emerging markets, where willingness to pay is lower and piracy continues to be an ongoing issue, or on new devices such as smart speakers, where audio ads could be perceived as intrusive and pestering.
By providing increased flexibility to free subscribers, Spotify may lose what was a significant incentive to upgrading to a Premium account: an ad-free experience. The outcry of some Premium users in January when audio ads for Spotify’s original podcast series “Showstoppers” were mistakenly pushed into their playlist was a clear reminder. Last March Spotify’s CFO Barry McCarthy emphasized that “the ad-supported service is a subsidy program that offsets the cost of new user acquisition.”
Moving to a performance-based ad model will ensure that advertisers are only paying for ad that Spotify users have been exposed to. The key question is whether the premium ad rates Spotify will be able to charge on a click-thru-rate (CTR) will offset the loss of volume from the previously used reach-based metrics.
Shifting to a performance based ad model will provide advertisers with precious actionable insights on engaged audiences – those who complete a listen, click through, or make a purchase. As Spotify is expands its programmatic advertising and self-serve advertising models (about 20% if its ad revenues in Q2 2018), making performance metrics available will help businesses of all sizes to measure their return-on-investment (ROI). In particular, advertisers will now know more about users’ willingness to listen to their ads, what creatives work best and whether Spotify is the right platform for them to advertise. This will definitely provide a strong foundation for its self-serve ad platform “Ad Studio” just launched in the U.S., Canada, UK and Australia this Q2.
Whether this will enable a sufficient volume of advertisers to compensate the loss from a move away from basic reach metrics remains to be proven. While in theory serving more appropriate ads thanks to better insights into what ads users are willing to accept should lead to higher click-thru rates (CTR), the reality can be much different. All too often for publishers this leads to a decline in ad revenue - a boon for advertisers but a loss for publishers.