ADVERTISERS ARE BULLISH ON SPOTIFY, BUT THERE’S A CATCH

Spotify is in a win-win situation, but successfully growing its two-tiered business will require some fancy footwork.

Advertisers love the free tier, which results in a sizable revenue stream and thus boosts the potential valuation of the company leading up to the inevitable IPO.

“We’ve become very bullish on Spotify, especially in the last 6 to 12 months,” Digitas SVP of Media John Tuchtenhagen told Digiday reporter Eric Blattberg. “They’ve made huge strides in the competitive space, mostly on scale, but also on better backend technology, products and targeting. If your audience is 18 to 34, every buyer puts Pandora [with its 80m+ listeners] and now Spotify on recommendations.”

Because Spotify is a more active experience than Pandora, “we’re seeing Spotify as a main opportunity to get into the music arena for a variety of digital assets, not just audio ads,” AKQA MD of Media Scott Symonds offered in Blattberg’s piece.

Advertisers are reportedly delighted with last week’s upgrade of Spotify’s desktop app, which added song lyrics, a revamped friend feed and daily viral charts, making it that much stickier.

The ad-free premium tier is also pivotal for Spotify in that each subscriber—and there are 15m of them compared to 45m using the free service—ponies up $10 a month, for a hefty annual gross of $1.8 billion.

As we’ve been saying ad infinitum (no pun intended), the major labels aren’t seeing a decent return from Spotify’s free business and are pressing the service to redouble its efforts to convert free users to premium subscribers—and lest we forget, these same majors provide Spotify with the bulk of its content. No music, no Spotify—and the current deals with UMG and Sony are up for renegotiation just as the music business is going whole-hog into streaming, with the forthcoming iTunes/Beats Music service the looming X-factor.

The force field created by the vastly different interests of advertisers and record companies has Spotify CEO Daniel Ek doing a carefully choreographed tap dance. Back in November, Ek pulled off a masterful hedge in a blog post.

Spotify’s free tier, Ek pointed out, targeting advertisers with his initial spin, “is not as flexible or uninterrupted as premium. If you’ve ever used Spotify’s free service on mobile, you know what I mean—just like radio, you can pick the kind of music you want to hear but can’t control the specific song that’s being played, or what gets played next, and you have to listen to ads.” Then, stopping on a dime, he spun his spiel toward the record companies. “We believed that as fans invested in Spotify with time,” Ek explained, “they would eventually want the full freedom offered by our premium tier, and they’d be willing to pay for it.”

Can Spotify continue to have it both ways, becoming profitable on a worldwide basis while satisfying the critical demands of the music business? That’s the $64 billion question.