Spotify Is Changing How It Charges Customers, With New Plans And Prices

(Bloomberg) -- Spotify Technology SA plans to raise the price of its popular audio service in several key markets for the second time in a year, a crucial step toward reaching long-term profitability.

The streaming giant will increase prices by about $1 to $2 a month in five markets by the end of April, including the UK, Australia and Pakistan, according to people familiar with the matter. It will raise prices in the US, its largest territory, later this year, said the people, who asked not to be identified discussing confidential plans.

Spotify shares jumped 4.6% to $281.92 at 9:35 a.m. in New York. 

The higher prices will help cover the cost of audiobooks, a popular service introduced late last year. Spotify offers customers up to 15 hours of audiobook listening a month as part of their paid plan. While the company pays publishers for books, it has so far only collected additional revenue from listeners who exceed the limit.

The Swedish audio company is also going to introduce a new basic tier that will offer music and podcasts — but not audiobooks — for the current $11 monthly price of an individual premium plan, said the people. Users of that plan will need to pay for audiobooks. 

The new basic tier is the first of what will be several new pricing options from Spotify. The company has also been working on a “supremium” plan, which would charge customers a higher price for access to high-fidelity audio, among other features, as Bloomberg reported last year.

For years, Spotify offered most customers two options — a free, advertising-supported music service with limited functionality and a paid listening product with unlimited access.

But the company has lost money every year since it went public in 2018, largely because it pays out about 70% of its sales in royalties to the music industry. Spotify paid record labels, artists and others more than $9 billion last year – from $13.2 billion in revenue.

Management has attempted to reduce Spotify’s reliance on the music industry by offering other types of entertainment.

The company dabbled in video before deciding to focus on offering many different kinds of audio. It began by pouring billions of dollars into podcasts, an emerging field of on-demand audio. While management has said podcasts will turn a profit this year, Spotify also fired thousands of employees and curtailed its investment in original audio programming.

Last year, the company announced big plans in audiobooks, a field dominated by Amazon.com Inc.’s Audible. While Audible customers must pay to listen to almost any book, Spotify offered its customers free, limited access. The results so far have been strong, at least in terms of consumption. 

Spotify’s move into other kinds of programming has alarmed its partners in the music industry, who fret the company will try to reduce their royalties. As a result, major music companies have been pushing Spotify and its competitors to raise prices.

While Netflix Inc. has doubled the price of its most popular plan in recent years, Spotify only raised prices in major markets last year for the first time since introducing its premium audio service to the US in 2011. Despite concerns that some subscribers would cancel, the company posted its best year of user growth ever, with 113 million new sign-ups to its free and paid services.

Spotify had 602 million users at the end of 2023, including 236 million paying customers.

The success of the price increase has given management confidence to seek even more. Under the new pricing, individual plans will go up by about $1 a month, while family plans and so-called duo plans for couples will rise by $2.

Spotify’s biggest competitors, Apple Inc. and Amazon.com Inc., have also raised prices for their music services.

Music companies and audio services are also discussing ways to generate additional money from the most ardent fans. Currently, all listeners pay the same rate for access to a musician’s catalog. But there are fans willing to pay far more to support an artist they love, as evidenced by the rising price of concert tickets, merchandise and even vinyl for Korean artists.

Among the various options, streaming services have discussed charging people more for early access to new music. Yet the companies are reluctant to significantly alter the main paid product – such as Spotify’s $11-a-month, all-you-can-listen plan. Whether or not management figures out how to capitalize on the more-loyal fans, the cost of that main service is only going up.

(Updates with share move in third paragraph)

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