Tim Bradshaw Spotify hits 3m subscribers to improve conversion rate

No wonder the record labels are sounding much more positive about music subscription services. Spotify is starting to reap the benefits of its oft-doubted “freemium” business model.

After hitting 2.5m subscribers in November, the Anglo-Swedish digital music service has now reached 3m, with more than 20 per cent of its active user base paying every month to banish advertisements or listen on smartphones.

That ratio is up from 15 per cent in March last year, when Spotify crossed 1m subscribers. The latest figures mean it’s added another million since September’s 2m milestone, suggesting its growth rate is accelereating.

“We have achieved some pretty great results in terms of the ratio of paid users,” Ken Parks, Spotify’s chief content officer and US managing director, told the FT. “We have an enormous internal effort to drive conversion and engagement with the service. We are very focused on growing in our existing 12 markets as well as expanding in other markets.”

Ensuring that enough free users start subscribing is crucial to making the economics of Spotify’s business work, due to the costs of paying out royalties to labels and publishers every time a song is played, regardless of whether the user is paying.

Some observers had feared that Spotify’s losses – £26.5m, according to UK accounts, in 2010 – may have widened last year as it launched in the US, the world’s largest music market, and plugged into Facebook’s new entertainment platform. Both of these are likely to have sharply increased the number of people trialling Spotify, which costs £4.99 ($4.99/$4.99) for ad-free PC listening or £9.99 (€9.99/$9.99) to use on mobile devices.

The 20 per cent figure does not include people who have tried out Spotify but not continued to use the free service. That falloff rate may have increased as Spotify introduced new caps on the amount of free listening available after six months, a limit which kicked in for early American adopters this month.

But Spotify says that month-long free trials of its premium service have also helped conversions in both European and US markets – and that as the services grows, labels’ and artists’ remuneration (a controversial subject) will also improve.

“This is a healthy model. As it scales it gets better for everybody,” said Mr Parks, adding that half of Spotify’s paying customers are under 30. “That is a remarkable number of people who are generally hard to monetise.”

Earlier this week, record label executives said that subscription services such as Spotify, Deezer and Rhapsody were finally helping to offset declining CD sales and put the music industry back onto a growth footing by next year.

The latest Spotify figures show the scale of the challenge for Rhapsody, which has just announced its launch in the UK and Germany through the acquisition of Napster.