Business Matters: Can Spotify Catch iTunes in Two Years? The Numbers Behind Sean Parker’s Prediction

Glenn Peoples
·5 min read

Can Spotify Catch iTunes in Two Years? The Numbers Behind Sean Parker’s Prediction
— Sean Parker, entrepreneur and investor (in Spotify and other companies) predicted at SXSW that Spotify, at its current growth rate, will overtake iTunes within two years. Even at first blush the statement comes across as optimism from a Spotify equity owner rather than an informed statement on consumer spending on digital music.

Since iTunes sells tracks and Spotify sells subscriptions and advertisements, the only way to measure the two services is revenue. Spotify can surpass iTunes in some countries, but it’s unlikely to happen in a U.S. market where iTunes sales are strong the download market continues to grow.

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For Parker to be right — at least in the U.S. — Billboard.biz estimates Spotify would need to average 12.34 million U.S. subscribers in 2013. It would need to generate 28.8% of revenue from advertising sales and the remainder from subscription fees (which was its 2010 revenue mix, according to the company’s earnings statements).

Here’s the math behind Parker’s statement: Billboard estimates there was roughly $2.4 billion of consumer spending on music downloads in the U.S. in 2011, based on Nielsen SoundScan sales figures and rough estimates of per-unit prices. iTunes was assigned a 70% share of the download market, giving it estimated sales of $1.7 billion.

U.S. download sales would be $2.96 billion in 2013 if the market grows by 12% in 2012 and 9% in 2013. Tracks would need to grow by 7% in 2012 and 5% in 2013. Digital albums would need to grow by 20% in 2012 and 15% in 2013. Those are aggressive forecasts but entirely possible given recent trends and year-to-date improvements in 2012.

Spotify would need U.S. revenues of $2.08 billion in 2013 to catch iTunes. Roughly $2.08 billion of the $2.96 billion download revenue would be captured by iTunes, again assuming a 70% share of the market.

Spotify would need somewhere around 12.34 million U.S. subscribers to reach $2.08 billion in revenue in 2013. That 12.34 million figure takes into account revenue generated from subscription fees and advertisements. According to the company’s earnings release for 2010, Spotify generated 71.4% of revenue from subscriptions and 28.7% from advertising. Those numbers could very well be outdated but they are the most recent public figures available. For the sake of simplicity, I assumed all paid subscriptions are the $10 premium tier and none are the $5 PC-only tier.

I should note that Parker said Spotify will take over iTunes in terms of revenue paid to rights holders. Since the two pay out roughly the same percent of revenue to rights holders, I did not perform an extra calculation to go from consumer spending to royalties paid. iTunes pays out 70% of revenue to rights holders. Spotify pays out 65% to 70% of revenue in content costs, chief content officer Ken Parks said during a SXSW conversation with Billboard editorial director Bill Werde.

To average 12.34 million U.S. subscribers in 2013 would be an incredible feat for Spotify considering it had just 250,000 U.S. subscribers last October and U.S.-leader Rhapsody has a bit over 1 million — after 10 years. And it’s not unreasonable to think the company could get there someday. But doing it on Parker’s accelerated timeline will be incredibly difficult.

Spotify could overtake iTunes in other countries, however. Sweden, for example, never had much of a download market. Streaming accounted for 66% of the country’s 2010 digital revenue compared to just 21% for track and album downloads combined, according to the IFPI. Streaming also accounts for much of digital revenue in Spain, Norway and France — all markets in which Spotify operates.

Again, these calculations are just for the U.S. even though Parker could have been speaking in terms of iTunes’ global revenues ( which were $6 billion in 2011). It will be easier to test Parker’s prediction for all Spotify markets after the IFPI’s Recording Industry in Numbers 2012 report is issued.
( Billboard.biz)

UMG Continues to Shed Non-core Assets
— Universal Music Group’s sale of non-core assets continues with Thursday’s announcement the company will sell its Vivendi Entertainment distributor to lifestyle media company Gaiam, Inc. for $13.4 million plus net working capital. The transaction is expected to close later this month.

Universal is shedding non-core assets to help finance its acquisition of EMI’s recorded music division. Earlier this month, Universal sold Fontana Distribution to INgrooves, although sources told Billboard.biz the deal had been in the works before the EMI deal was completed.

Vivendi Distribution has exclusive rights to large independent studios and content providers such as WWE, National Geographic, Shout Factory, NFL Productions and RHI Entertainment. Gaiam, which puts itself in the lifestyle and eco-conscious living categories, has a distribution network of 62,000 retailer stores, 14,600 stores within stores, a digital distribution platform and 10 million direct customers.
( Gaiam press release)

Twitter Re-Teams With Gracenote
— Twitter has teamed with Gracenote for an exclusive deal that will streamline the process of acquiring a Twitter-verified account. Gracenote will create tools to make it easier and faster for artists to request a Verified Badge, which establishes authenticity of well known people, for their Twitter Accounts. The blue-and-white badges are commonly seen on the Twitter pages of celebrities. Gracenote, owned by Sony Corp., has a database with descriptions for over 130 songs and album art, plus filmmaker and cast biographies for movies and TV listings. The company works with more than 3,000 record labels, publishers, artists and artist managers to maintain the music-related metadata.
( Gracenote press release)

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