In the digital age, tech companies have monopolised our memories which gives them the power to increase prices when they need to boost cash flows.
A few weeks ago, Spotify announced its second price rise in the last year. Together these rises mean that Spotify is around 20 to 30 per cent more expensive, depending on what sort of subscription the user has. That is way above the 2.3 per cent and 3.4 per cent respective annual inflation rates in the UK and US.
The reason Spotify is pushing prices up so quickly is because it can and has to. Spotify was not a profitable company until recently. In 2018, when it went public it made an operating loss of $51mn, then $60mn in 2019 and $314mn in 2020. Its losses peaked at $683mn in 2022, according to Factset.
In this period, the audio distributor signed over $200mn worth of podcast deals with Joe Rogan, Kim Kardashian and Meghan Markle. When interest rates were near zero, and the cost of debt financing was minimal, spending massively on big celebrity names to attract users made sense. Premium subscribers rose from 96mn in December 2018 to 180mn by December 2021. However, by this point inflation was rising and central banks had decided it was time to start increasing interest rates. The market soon became concerned about whether Spotify could ever become profitable. In 2022, its share price dropped 65 per cent.
Spotify was slower than competitors to increase prices but by 2023, chief executive Daniel Ek decided it was time. This was a fundamental change in strategy. In 2018, when Ek presented at an investors' day, he said “between growth and profit, you should expect us to manage for growth”. Well, it seemed this promise only lasted if interest rates remained near zero. At the start of 2023, he said “we're ready to raise prices, and I think we have the ability to do that”.
It turned out he was right. Spotify’s price rises coupled with hundreds of layoffs boosted profitability. In the three months to March, it made an operating profit of $182mn, a swing from a loss of $167mn the year before. Yet, even with the price rises its premium subscribers grew 14 per cent year-on-year to 239mn.
People are very attached to their music streaming platforms. This is obvious anecdotally. If you have been building a playlist for decades there will be a huge reluctance to let it go. Most people will remember exactly when they discovered a song, why they decided to add it to the playlist and the emotional state they were in when they initially listened to it non-stop. It might be a sad memory or a joyous one, but the feeling of nostalgia is powerful.
So even when Spotify increases prices by 20 per cent users aren’t changing over to Apple Music because they want to keep building the playlists they have been listening to for years. In fact, out of all subscription platforms, including video and audio, Spotify listeners are the least likely to cancel, according to research firm Antenna and reported by Bloomberg. The churn rate for Spotify was below 2 per cent while Disney+, Apple TV and Hulu are reportedly between 4 per cent and 10 per cent.
Correspondingly, Spotify’s share price has more than doubled in the last 12 months as the market realised the pricing power the company holds.
For users, this isn't good news. They can either pay the higher prices, change to the free ad-supported services, or cancel altogether. For now, it seems most are happy to pay the higher premium prices but inevitably these prices are going to push some people over the edge. Even with a two per cent churn rate, millions of people every year cancel the premium service.
Despite these price rises, when put into historical context music is still way cheaper than it was. Spotify gives access to almost all music for less than £150 a year. In 1980, a brand-new record cost around £6 which is almost £25 in today’s prices. The difference is that record was yours and once it was purchased, nobody could take it away from you.
Now, all our photos, music and messages reside on the servers of a few large tech companies. The digital age offers cheap abundance but leaves us vulnerable to increased monetisation. We don’t own our playlists on Spotify, we just pay for the right to access them.
So first, print your favourite photos and buy your favourite vinyl records. Then, if you still feel inescapably emotionally attached to a service, buy shares in that company. At least when Spotify raises the price of subscriptions, shareholders will get a small cut of the increased profits. It might not be romantic but it will guarantee you can afford access to your memories for years to come.
