Spotify gathers users, cash as battle with Apple Music looms

Spotify now has more than 20 million paid subscribers and over 75 million active users, and has raised a reported $526 million.

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Spotify, run by CEO and founder Daniel Ek, now has more cash to prepare it for a battle with Apple. Sarah Tew/CNET

Streaming music provider Spotify has responded to the threat posed by Apple Music the best way it can: raising more money, growing its user base and preparing for battle.

Spotify now has more than 20 million paid subscribers and more than 75 million active users, the company announced in a blog post Wednesday. Spotify noted that it took five-and-a-half years to get to 10 million paid subscribers, and just one year to get to 20 million. In May 2014, Spotify had 10 million paid subscribers and 40 million active users -- those numbers swelled to 15 million paid and 60 million active by the end of last year.

The news came just after the Wall Street Journal reported that Spotify has closed a funding round for $526 million on an $8.53 billion valuation. Spotify didn't confirm that amount, but Sweden-based telecommunications company TeliaSonera said Wednesday that it invested $115 million in Spotify in return for a 1.4 percent stake in the company. That amount and stake extrapolates to an approximate $8 billion valuation.

The dual news underscores a conundrum for streaming music, the fastest growing way most people worldwide listen to music. Spotify's popular free tier has fueled rapid adoption, but it also has driven up eye-popping losses. The free, ad-supported arm has been an unparalleled marketing tool to convince people to try, and sometime subscribe, to all-you-can-eat music. With the majority of Spotify's revenue going out the door in royalties, the company has become less profitable amid its growth.

For you, it means as long as investors are willing to write checks to the Swedish company, the free tier is safe.

In the US, Spotify has been running a promotion offering its subscriptions -- typically $10 a month -- for just 99 cents for three months. A Spotify spokesman called the latest listener numbers "legit," saying that the vast majority of the company's growth has been organic. He added that the company revived the 99-cent promotion from earlier this year because it was successful at retaining subscribers.

On Monday, Apple unveiled its new Apple Music streaming service, born out of its acquisition last year of Beats Music. The consumer electronics giant still dominates the music industry's main source of revenue -- digital downloads -- but Apple's dismissal of subscription models kept it on the sidelines as upstarts like Spotify gained steam. Streaming has now overtaken sales of physical music items like CDs in the US, the world's biggest music market, and it is on track to overtake downloads as well, which have begun to decline.

As far as subscriber numbers, though, Apple may as well be starting from scratch. When Apple announced its plans to take over the service's parent, headphone maker Beats, for $3 billion in May 2014, Beats Music had only 250,000 paying customers.

Spotify's 75 million active users puts it within spitting distance of Pandora's 79.2 million as of the end of March, which for now leaves Pandora with the crown for the biggest pure-play music streaming service on the Internet. Pandora operates in the US, Australia and New Zealand, while Spotify is available in dozens of countries worldwide.

Only a fraction of Pandora's listeners pay for $5-per-month subscriptions, which eliminate ads and allow more skips of songs. But Pandora's game plan, unlike Spotify's, is to be financially viable based overwhelmingly on ad revenue, with paid subscriptions more like icing on the cake rather than the cake itself.

Spotify, by contrast, banks on subscriptions. Even as its listener base has surged, so too have Spotify's losses: though revenue increased 45 percent to more than a billion euros last year, the company posted a 162 million euro loss, or more than $180 million. That compares with a just a 56 million euro loss a year earlier. Why? More people are on its free, ad-supported tier, which generates less revenue per user -- and the company still has to pay out about 70 percent of its revenue in music royalties.

On Wednesday, Spotify noted it has paid more than $3 billion in royalties total, including more than $300 million in the first three months of 2015.

By comparison, Pandora's loss narrowed last year to $30.4 million from $40.7 million, while revenue rose 44 percent. In the first three months of 2015, its content costs were $108 million, a third of Spotify's.

Spotify's latest numbers solidify its position as the world's leader in online subscription music. Deezer, a company popular in Europe that hasn't launched widely yet in the US, comes next, with 6 million paying members out of its 16 million total listeners.

Yet the latest stats also indicate Spotify hasn't amped up the proportion of its user base that pays. Across the last three updates on listeners over the last year, the percentage of paid users has remained at about one-quarter of the total audience. While the increase in total royalty payments from Spotify will be welcomed by the recording industry, that static percentage of paid members may less encouraging.

Labels have begun to show impatience with the Spotify pitch that a free tier is essential as an on-ramp to paid memberships, with the heads of major labels like Universal and Sony commenting that ad-supported streaming may be harming their industry.

Apple Music, which is set to launch June 30, will have some free elements like radio. But unlike Spotify, you won't be able to search and listen to the specific song you want to hear unless you pay at least $10 a month.

Based on Spotify's listener growth, Apple has a long way to go. Judging by Spotify's losses, Apple may be satisfied to take an alternate route to get there.

Updated at 6:05 a.m. PT and at 7:40 a.m. PT with Spotify spokesman response and more details.