The Three C’s of Spotify’s Video Play: CPMs, Creators, and Competition
Spotify&rsquo;s announced last month that it would move in to the video advertising, as audio ads fail to bring in enough revenue to support their business. Mobile video advertising is still relatively new, and as such there are huge opportunities for services like Spotify to achieve massive market share by offering new and innovative solutions at scale. If Spotify manages to effectively present and target its content it could be seen as an entertainment portal.
The largest music-streaming service in the world announced its move into the video space last month – and ironically, the announcement had nothing to do with music videos. Instead, Spotify opened its platform to syndicated content from the likes of Viacom, VICE Media, NBC, BBC, Slate.

Why would a music-centric brand like Spotify do this? Simple, because video is where the money’s at. Now in its ninth year, Spotify has yet to turn a profit, despite attracting 60 million users as of January. According to the company, 15 million of these pay for its premium subscription tier. The rest of Spotify users are served in-stream ads as they listen for free.

Yet according to its latest earnings report, Spotify reported losses of more than $185 million on revenues of $1.1 billion (with over 90 percent of that coming from subscriptions). Say what you want about the cost of licensing music or product development, but it’s clear that audio ads just aren’t bringing in enough cash to support the business.

In the mobile space, which is where most of Spotify’s traffic comes from, more and more users are willing to watch video on platforms other than YouTube. Snapchat’s Discover feature is one example, the emergence of Vessel is another. Yet mobile video advertising is still a nascent space. There’s a tremendous opportunity for services like Spotify and others to achieve massive market share by offering new and innovative solutions at scale, something YouTube has been slow to respond to.

So Spotify’s expansion to video is a testament to the value of video ads and the increasing demand for video content. Video ads simply carry higher CPMs than audio ads – video content brings more viewers that Spotify might convert to paying subscribers. Combined, that means Spotify can pay out to labels and artists, who are increasingly grousing about the paltry payments they receive from ad-based music streaming.

But there’s more. Spotify could easily have simply embedded a video player from other video services to achieve these goals. However, the company went right to the creators – both syndicating from brands and paying for original content. Premium and exclusive content is a key necessity to attract more valuable video ads, and Spotify is smart to pursue it.

In this respect, Spotify could almost be seen as a sort of entertainment portal, like Yahoo or AOL, but one built on music. The question is whether Spotify can properly present this content to users. Spotify has made great strides in better surfacing relevant music to listeners based on their tastes, and it will need to do the same with video for it to stand out from other competitors.

One additional point here is the growing power and influence video creators have in this day and age. In a world where video ad inventory is at a premium, premium content to place against it is just as valuable. So if you’re the one creating the content that viewers want to see, then you’re definitely in the catbird seat, as companies like Spotify and others expand their scope into the video space. That means that Spotify will need a strong video advertising offer, particularly in the mobile space, as creators will only stay on board for as long as they’ are seeing the ROI.

The demand for mobile ads is skyrocketing. Mobile video ad requests on our Beachfront.io ad mediation platform increased from just over 100 million a month in August of 2014 to over 10 billion by the end of last year. That kind of demand is opening the door to all kinds of new video services competing with YouTube, which is under fire from all directions from challengers to its video network throne. Giants like Facebook and Snapchat, as well as newcomers like Vessel, are challenging YouTube’s video dominance with alternative options.

On one level, Spotify doing the same is a bit of a head-scratcher. Spotify is betting that its music listeners will suddenly want to use the service like they do on YouTube.

But again, with 60 million worldwide users boasting 150-minute-a-day engagement, that’s not a bad base to offer new content. And then there’s the mobile component. Spotify claims 52 percent of its traffic comes through mobile phones and tablets. Interestingly, that’s about the same breakdown of YouTube’s mobile users.

It’s also worth noting that earlier this year, YouTube stole a page from Spotify’s book by offering a subscription music service called YouTube Music Key. Spotify launching a competing video service is one way to return that favor.