Should Spotify slash its prices?

Streaming services such as Spotify, Rdio and Deezer are battling it out to persuade customers that music is worth paying for.

Spotify has persuaded more than 20 million users to sign up – but just a fifth of those pay for a subscription. The company last week increased what it offers to free users, killing off caps that restricted listening hours.

Rdio followed suit, indicating that even the most popular services are desperate to keep users on-board.

All three services charge £10 a month as a standard in the UK for unlimited streaming on desktop and mobile. But is that too expensive, and could lower prices win over more users?

Half-price

Yes, according to a new report from management consultants Alvarez and Marsal (A&M), carried out by Harris Interactive.

The analyst firm’s calculations suggest major streaming services such as Spotify, Deezer and Rdio should halve their top-end subscriptions to £5 a month in the UK if they’re to become profitable.

At its core, it’s a straight conversion issue. US consumers get full-fat Spotify and Rdio for $10 (£6) a month. Since that price becomes £10 in the UK, British users are stung almost double.

Unsurprisingly, that has an effect on how willing UK users are to pay. A&M found free US listeners are more likely to eventually subscribe, with 40% forking out, compared with only 17% of music streaming users in the UK.

If a price cut brings the UK closer to the US’ 40% conversion rate, that potentially means an extra £60 million to £95 million a year for the likes of Spotify, even with lower prices.

There are other ways to make streaming cheaper for consumers, according to A&M, which said services should consider bundling content, much like Spotify’s broadband tie-up with Virgin.

Nothing’s better than free

But there’s evidence in A&M’s own report that a large chunk of customers will always believe streaming’s too expensive, no matter what it costs.

The company looked at what stops free users taking out a subscription, and found the uppermost reason both in the US and the UK was price.

Almost half of non-subscribers in the US claimed streaming was too expensive – which is actually higher than the 40% of UK users who said the same. If low streaming prices still can’t win over a mass audience after a decade of piracy, why not charge the earth to the loyal few?

Paying out

Spotify also has to serve a complex ecosystem which has traditionally been slow to adapt to digital change. Though record labels ought to be directly responsible for how much artists are paid, much of the onus has landed on Spotify to explain why it forks out so little to artists.

The company revealed in December that it pays $0.007 per individual stream – which has to be split between the artist, label, songwriter and anyone else with a copyright claim.

A successful but niche indie album can earn $3,300 a month, while a popular album might earn more like $76,000. Bestsellers can earn almost half a million dollars per month, according to Spotify’s stats.

Both Spotify and Rdio have introduced artist outreach programmes to persuade them that the sums add up. Halving the subscription prices could reverse that, and even lead to more major artists pulling their releases from streaming services.

A big ask

Cutting subscription prices means streaming services would have to pick up paying users at a much faster rate if they’re to keep artists and labels on board. In practice, that means speeding up international launches and tying up deals with carriers, ISPs and the media – all of which racks up significant costs. There’s a reason why European streaming services such as Spotify and Deezer took their time to reach the US – and why some American services such as the defunct MOG never made it to the UK.

That’s a big ask, given no streaming service is consistently profitable yet. Accounts filed in the UK by Spotify show continued losses year after year – the company’s British arm lost £10.1 million in 2012.

There are complications too, with simply recouping lost subscription revenue through partnerships with carriers or cable providers. Mobile users aren’t just limited by streaming costs, but data caps too. Even for those with unlimited data plans, 3G coverage is often too patchy to stream reliably.

There’s also a reason why the most popular streaming services offer similar pricing options – they operate within the constraints of their agreements with record labels. Spotify was pressured to cut its free option in 2011 by its label agreements – which may be one reason it can’t drop its prices.

Making streaming music cheaper might be a popular move with consumers – but it might not be Spotify that has the choice.