Spotify’s record profits come with a price.
Spotify is finally on track for its first profitable year since going public with a $499 million operating profit for Q3 of 2024.
But these numbers come at a cost, not for Spotify, but for its artists.
The company’s new bundling strategy has cut millions in royalty payments, and the music industry isn’t happy.
The Numbers Behind Spotify’s Profit
Spotify’s Q3 2024 financial report shows how the company changed from a streaming service that burns cash into a profit-making machine.
Let’s look at the numbers:
- The company made €454 million in operating income (about $499 million or nearly half a billion dollars).
- Their total revenue jumped 19% from last year and reached €4 billion ($4.4 billion).
- They’ve earned €888 million ($975 million) in operating income in 2024 so far.
These numbers come from two sources.
First, Premium subscriptions grew by 12% compared to last year, while advertising revenue rose by 7%. Second, the company cut costs by laying off some employees and reducing its marketing and operating costs.
They did have one cost they didn’t expect, though.
The money they set aside for worker benefits and stock options went up by €54 million, more than the €39 million they planned for. This happened because Spotify’s stock price kept going up during the quarter, so it’s not really much of a problem.
Bundling Strategy and Lower Royalties
Spotify’s bundling strategy has contributed a lot to its increase in revenue.
This strategy is basically all about bundling different types of content together to pay less for each piece.
When you subscribe to Spotify Premium, whether Individual, Duo, or Family plan, you now get music, podcasts, and 15 hours of audiobooks all in one package.
But, this isn’t just convenient for users. It’s also a money-saving strategy for Spotify.
This comes from a 2022 agreement called Phonorecords IV (CRB IV). According to this, if a service only offers music or podcasts, it must pay higher royalties every year. But, if it bundles music with other things, it can pay less. So, Spotify now uses this ‘loophole’ to save money.
Thanks to this, Spotify was able to pay reduced royalties, cutting over $100 million in costs so far.
To make its bundling plan work, Spotify also introduced a standalone Audiobook plan and a cheaper ‘basic plan’ with just music and podcasts. This setup lets them treat audiobook access as an add-on to regular streaming while also justifying its recent price hikes.
But there’s a catch. When Spotify brought out these new plans, they moved all current users to the more expensive bundled options without asking.
Switching from the bundled plan to the basic plan isn’t straightforward either. In fact, users cannot directly register for the basic plan. They need to subscribe using the bundled plan first, then downgrade. And, since it’s just one dollar cheaper, a lot of users don’t bother.
Criticism and Industry Backlash
The music industry isn’t staying quiet about Spotify’s money-saving tricks.
The National Music Publishers’ Association (NMPA), for one, sees the bundling strategy as more than just creative accounting.
The NMPA’s main concern? This bundling could undo progress from the 2022 settlement, which was supposed to raise standalone music royalties to 15.35% by 2027. Instead, Spotify’s bundled plans let them pay much less.
Spotify’s strategy can also start a trend, leading other services to use similar tactics to cut creator payments. And, since platforms only pay around $0.003 to $0.01 per stream, many are worried about how low this can go in the future.
Spotify, however, stands firm on its position.
They point out that bundling isn’t new to their business model. They’ve done it before with services like Hulu, and those bundles also qualified for lower royalty rates and no one bat an eye.
Yet, critics point out something different this time around.
With previous bundles, users had a clear choice. But now, Spotify automatically moved everyone to the more expensive bundled plans.
This forced transition, combined with the complex process of downgrading to basic plans, suggests the bundling strategy might be more about boosting profits than offering user choice.
Future Profitability Initiatives
While Spotify faces industry backlash over royalties, it is not putting all its eggs in the bundling basket. The company is also adding new features to make more profit while growing beyond music streaming.
For instance, they’ve started a Partner Program to help content creators make more money.
Content creators can now earn money from ads in their work and get paid based on how long Premium subscribers listen.
This changes how streaming usually works. Instead of just counting how many times something plays, they now count minutes (like YouTube does). (sort of like how YouTube works).
Speaking of video, Spotify’s making an interesting play in that space too.
Creators can now put their TikTok and YouTube Shorts videos right on Spotify to keep users engaged.
And, when people watch these short videos, they’re more likely to play full episodes or songs, which have ads. Both creators and Spotify can make money from these ads, which works out well for everyone involved. Except, maybe for users who’ll be the receiving end of these added ads.