Has the time finally come for music streaming platforms to be profitable?

On September 21st, Deezer announced a price hike in five European markets, namely France, the UK, Spain, Italy and the Netherlands. In a macroeconomic context of globalized inflation impacting most countries and goods, such a hike might be overlooked. Nonetheless, music streaming subscriptions have long been remarkably stable. In early 2022, Deezer - already - led a wave of price hike by crossing the symbolic $10/£10/€10 landmark for its flagship plan. With its second price adjustment in less than 2 years, is Deezer about to launch a second wave of price raises? How does the near future look for music streaming service subscribers in Western countries?

Pricing has always been a sensitive issue in the music streaming industry

Before Deezer crossed the $10/£10/€10 bar in early 2022, streaming platforms were concerned such a decision would result in a high churn rate. That concern explains why the prices had remained stable for so many years. Indeed, streaming platforms have had a hard time differentiating their offers, thus making the pricing a particularly sensible topic. The digitization of music entailed the promise of unlimited content, thus considerably lowering the value of a given record company’s catalog. On the contrary, the video streaming market has differentiated the catalogs offered by the different platforms very early on in its development. Innovations in terms of features (karaoke, humming recognition, personalized recommendation algorithms) have not proved as attractive to users as content exclusivity in the video streaming market so far.

With subscriptions fees being virtually uniform in the market, streaming platforms have steadily focused on subscriber acquisition to generate revenue. As a matter of fact, even the most mature markets are not completely saturated, most notably because of the relatively low take-up rate of music streaming services by the elderly. Hence, short term profit is only secondary to customer acquisition, which will entail long term profit. This strategy is best exemplified by the global market leader Spotify, which has never generated annual profit since its launch in 2006.

Nonetheless, Deezer raised its prices above the symbolic bar, first in the UK in October 2021, then in a handful of other European markets in February 2022. It did it again last September in a tough context. One year after its IPO, Deezer’s latest financial results are not good. The service lost 100,000 subscribers compared to June 2022 and published a €13.1 million adjusted EBITDA loss. Therefore, its move partially stems from an internal and external pressure to generate more revenue. Contrary to most estimates from industry insiders, the churn rate was almost not impacted at all, which flagged Deezer’s move. Soon after, other tier-1 platforms followed suit, as detailed below.

Amazon Music, which was cheaper than its competitors ($7.99), implemented its price hike in two steps. It first affected only Prime members (May 2022) before being extended to non-Prime members (January 2023). As Prime members are more committed to the brand than their non-Prime counterparts, they can be considered a test sample with a lower expected churn rate than the average. In addition, the core part of Amazon’s consumer business being delivery, Amazon Prime Music is a tool to attract listeners to an Amazon Prime membership. In other words, Prime members are not the most critical part of Amazon Prime Music’s subscriber base.

Similarly, Apple Music raised its prices in October 2022. Like Amazon Prime Music, the service is part of a broader ecosystem. It is mainly used by Apple to either raise the overall ARPU of an Apple device user, or to attract listeners to the core part of its business, namely hardware. Therefore, there is little to lose in markets where Apple devices are highly popular. That is why the price update was at first implemented only in the US and in the UK.
Over 6 months later, YouTube Music adjusted its subscription fees too.

During all that time, Spotify’s lack of action garnered attention. The global market leader finally aligned its offer on its competitors’ in over 50 markets in July 2023, a long-awaited move in the music industry, as it would substantially increase the revenue streams of record companies and artists. Compared to GAFAs-backed platforms, Spotify was more cautious on the potential impact the move could have on its subscriber base. This decision was a turning point, as it established a reference point for tier-2 pure players platforms such as Tidal, which mimicked the Swedish company in August.

Round 2 for Amazon and Deezer

With Spotify jumping in the trend, it clearly felt like a first loop had been closed, as most price hikes were still recent in August 2023. However, Amazon Music and Deezer could cash in on their differentiated timeframe. Moreover, they could use the impact of Spotify’s announcement to outbid their own subscription fee, as if their move was a response to it. Both services did so. In August, Amazon increased its subscription fee for Prime members, probably before extending the new pricing to non-Prime members in the upcoming months. A few weeks later, Deezer raised its flagship plan’s subscription fees to £11.99/€11.99 in 5 European markets. What can we reasonably expect in the next few months following these decisions?

Will music finally be recognized at its actual value?

After getting the jump on their competitors, Deezer and Amazon have put them in a delicate position. Considering the timing of their move, it is pretty unlikely to see the next round take place this year. However, it will inevitably happen, most likely next year.

With more hindsight, it is unclear whether one can reasonably expect more loops in the long term. On the one hand, many industry insiders shed light on the undervaluation of music as a commodity, asserting that the former pricing was too low with respect to the sizes of the catalogs offered and the amount of service consumption time. In particular, they consider that it was incoherent with the pricing observed in the video streaming market. Now that the 10-barrier has been breached, they argue that there are little obstacles to further price hikes. The stability of the churn rate after the first loop of price hike is also a major source of hope for them.

On the other hand, some facts advocate for a less optimistic approach. Despite the higher valuation of video content, the overall SVOD ARPUs have not spectacularly increased over the last few years in key-markets such as the US and the UK. It has even slightly decreased in the US since 2018, due to highly intense competition. This contrasts with the intuition given by the pricing evolution of players such as Netflix, which do not represent the trend in their market. As shown below, music streaming platforms do not have less pricing power than their video streaming counterparts. It is thus quite unlikely to see video and music streaming services’ ARPUs converge even in the mid term.

In addition, players such as Netflix can justify their price hike with their content investment. Conversely, music streaming platforms tend to remain purely distributors. That is why Spotify has invested heavily in podcast production. Once podcast becomes a highly valued media, it will give the company a strong pricing power. Although podcasts are increasingly popular, it is still too soon to consider that Spotify’s strategy has borne fruit yet.

From a business model perspective, the widespread price adjustment also widens the gap between free and paid users. For freemium platforms, the goal has long been to expand the subscriber base through free plans, and then to try and convert free listeners into paid subscribers. If platforms push for more numerous price adjustments, it might hamper this strategy. Although freemium platforms already generate the bulk of their revenue through their paid subscribers (which are a minority of their total user base), their revenue structure might have to rely even more on them in the future.

The role of the large and free user base will then depend on the nature of the platform. For the GAFAs-backed ones, it will always remain a valuable tool to reinforce brand awareness and the core business of their holding. In contrast, the value of a huge free user base is less easily leveraged for pure players such as Spotify and Deezer, as it would require heavy investments in advertising monetization solutions.

Further competition might disappoint optimists

To conclude, the recent move from Deezer has sparked a lot of attention in the industry, but may not be that much of a harbinger for what is coming next. Certainly, Amazon Music and Deezer have got the jump on their competitors as they have been able to secure two price hikes when their counterparts have done only one. In the long term, it is too soon yet to forecast several more loops. Music streaming services are certainly undervalued, which does not mean that users are ready to pay more.

The glass ceiling of music streaming prices will also depend on the competition intensity. As some emerging countries still lag behind, new players are bound to enter. In particular, TikTok Music was launched in July in Brazil and Indonesia, and is being tested in Australia, Mexico and Singapore too. As TikTok is highly popular in those markets, which are not mature yet (except Australia), the future looks bright for TikTok Music. If it manages to thrive in those markets, it might consider entering Western markets as well.

This research highlight is based on our data coverage of Music worldwide. Please contact us to get a demo and see the depth of our service. Discover Nextv Series Europe, the event that focuses on the trends, innovation and strategies driving Pay TV, Telecom and OTT in an increasingly connected ecosystem.

Lucas Ackerer


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Published on: Thursday, 26 October, 2023

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