Spotify has 100 million users but Apple Music remains a threat

According to a new report in The Telegraph, Spotify has reached 100 million active users every month and 30 percent of those users are paid subscribers. Those figures certainly sound impressive, but it’s interesting to note that Spotify reported a similar figure of paid subscribers back in March. This means that Spotify’s paid subscribers have remained pretty stagnant at 30 million in the last three months.

We have 30 million @Spotify subscribers, but none of them are in Cuba … yet. So cool to see Cuba opening up! https://t.co/nZa67f0l8U

— Daniel Ek (@eldsjal) March 21, 2016

Meanwhile, Apple reported at WWDC last week that its 1-year-old music streaming service, Apple Music, has reached 15 million paid subscribers. Apple Music counted 11 million paid subscribers in February, and that figure went up to 13 million in April, according to MacRumors. This means that Apple Music is acquiring paid subscribers at a faster rate than Spotify.

At WWDC, Apple unveiled a new, cleaner look for Apple Music in iOS 10. In addition, Apple Music will start integrating song lyrics and a new playlist feature called Discovery Mix, which sounds very similar to Spotify’s Discover Weekly.

Spotify has a free, ad-supported tier where users can listen to the entire catalog but have limited capabilities when it comes to mobile and offline listening. Paid subscribers don’t hear any commercials and can listen to any song on-demand using the Spotify apps. Apple Music gives all users a three-month free trial, but then users have to become paid subscribers to continue to listen to the catalog. Both services cost $10 a month.

Why this matters: The freemium model may attract millions of users, but Spotify needs to focus on converting free users into paid subscribers to sustain its business over the long haul. Having 100 million free users may not be enough to turn a profit.

“The economics of the freemium tier remain challenging, and every single freemium user is loss-making on a gross margin basis,” analyst Alice Enders of Enders Analysis told The Telegraph.

Furthermore, Spotify’s free tier does not offer lucrative royalties, which has led to many big-name artists withholding or delaying new albums from Spotify. In just the last year, music from Adele, Beyoncé, Coldplay, Rihanna, Drake, and Kanye West have been notably absent from Spotify, or at least slower to appear.

Since Apple Music agreed to pay royalties even during users’ three-month free trial, the music service nabbed exclusives from Taylor Swift and Drake.

“Apple treated me like I was a voice of a creative community that they actually cared about,” Swift said in an interview.