Spotify Launch Sponsors Pay $1 Million Each

We spoke with an executive very close to Spotify and several advertising executives to understand the company’s strategy behind its hybrid ad-driven/subscription model now that it has launched in the US and become a global company. We learned that Spotify was able to charge charter sponsors $1 million each for their launch campaigns. However, after these initial sponsorships the company’s strategy is similar to most other digital music companies so we think it will end up relying mostly on paid subscriptions for the majority of its revenue.

Charter (NSDQ: CHTR) sponsors paid $1 million each in return for typical display branding on the platform. In addition sponsors received approximately 10,000 memberships each to give to fans via Facebook. Launch sponsors included Chrysler, Coke, and News Corp’s The Daily. The use of subscription giveaways has been used by the company in past overseas sponsorships such as one with Ford Fiesta in 2008 in Sweden.

According to one executive with knowledge of the company’s strategy, future monetization plans include sponsored playlists by acts and brands (with significant sharing features), free song giveaways, and offline events like sponsored concerts. We believe the company is likely to be successful with initiatives like these from time to time, but don’t believe it will achieve the kind of consistent volume it needs to build the ad-driven product into a big business.

More likely, in our opinion, is that Spotify is able to sell more traditional ads like banners within playlists and library archives which we’ve confirmed is a large part of its strategy. However, we think it will likely be difficult for the company to earn high ad rates on this kind of inventory. In addition, Spotify reportedly serves only three minutes of ads per hour (versus nearly 20 minutes per hour for traditional radio). As a result, it is difficult to see how Spotify becomes a big business primarily on the heels of ad revenue.

Some past campaigns suggest Spotify can achieve above-average ROI for its ad clients. For example, in 2010 British Telecom (BT) ran a campaign overseas that the company says achieved higher ROI than competing online companies due to the combination of banner and audio messaging. The company hasn’t released any specific details about the campaign.

Agencies we speak with are somewhat skeptical. Most we spoke with have not heard much about Spotify’s plans. Those that have used the service since its launch said they didn’t see much inventory beyond basic display ads and think the company will have a hard time selling that kind of inventory at volume.

Still, we’ve noted in the past that Spotify could be a decent small business mostly on subscription revenue.

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