Spotify keeps adding millions of ad-supported users, but its advertising revenue has stayed stubbornly flat. That disconnect, visible again in its latest earnings, puts the streaming giant's chances of becoming a major player in digital advertising in doubt.

"Over the last five quarters, Spotify has grown its ad-supported user base from 420 million to 490 million users. Yet over that same period, ad-supported revenue has declined year-over-year in four of the five quarters and grew just 1% in the most recent one," said our analyst Marcus Johnson on a recent episode of "Behind the Numbers." The company's Q2 2024 results showed total revenue growth of 14%, but that performance was driven almost entirely by premium subscriptions, which account for 90% of Spotify's business.

The advertising struggle

Spotify's ad-supported tier keeps growing its audience without growing its revenue. The platform added 16 million monthly active users in Q2, bringing its total to 777 million. Yet ad-supported revenue grew just 1% YoY, compared with 15% growth for premium subscriptions.

"Spotify's been under pressure from investors to increase its ad revenues for years at this point, and it's never really been able to do it meaningfully," said Daniel Konstantinovic, senior editor at EMARKETER. "If you are a subscriber and you have got used to listening to audio without ad breaks, I think you're less likely to go back to ad-supported listening."

The disconnect extends beyond Spotify. Across the digital audio industry, ad spending lags time spent by a factor of four to five.

Spotify leads streaming audio, so its advertising struggles signal broader challenges for the medium. If the category leader can't monetize a massive ad-supported audience, the problem likely lies in how advertisers value audio inventory compared with other digital channels.

Can Spotify become a major ad player?

The persistent weakness in advertising raises a more fundamental question: Should Spotify even try to compete as a major advertising platform?

"There may be pressure from investors to really crank up the advertising because they've seen it go to the moon at other companies," Konstantinovic said. "But it seems like Spotify can kind of comfortably sit at its current rate of growth with subscriptions and not really worry too much about ad revenues."

With advertising representing only 10% of Spotify's business for years, the company may not need to solve this problem. Premium revenue growth of 15% suggests the subscription model remains healthy, though continued price increases could eventually face consumer resistance.

Podcast advertising: A second chance?

Spotify has poured more than $1 billion into its podcast business, and executives believe podcast ads could eventually drive 40% margins. That bet rests on what makes podcast audiences different.

Most podcasts have tiny but intensely engaged audiences. The average podcast gets just 27 listens in the first week, according to Buzzsprout. Weekly podcast listeners find podcast hosts twice as important as social media influencers, per Cumulus Media, and 67% of global listeners have made a purchase directly because of a podcaster, according to Acast.

"Podcasts are emerging as an essential investment in a crowded digital marketing ecosystem for their ability to engage consumers and drive trust," said Marissa Jones, analyst at EMARKETER. Just 25% of US adults consider podcast advertising annoying, compared with 50% for online display ads and 46% for YouTube, according to YouGov.

The challenge: Spotify doesn't capture revenue from host-read advertisements that podcasters negotiate directly with sponsors, the very ads that command the highest trust and engagement. Instead, Spotify sells dynamically inserted ads that function more like traditional audio spots, which likely generate lower engagement rates.

Nano influencers (social media creators with 1,000 to 5,000 followers) have grown their share from 3% to 20% since 2021. That shift suggests a similar opportunity exists for small-audience podcasts. If Spotify can figure out how to monetize these engaged niche audiences, podcast advertising could deliver the revenue growth its ad business has lacked.

Alternative revenue streams

Spotify is exploring new ways to monetize premium subscribers beyond monthly fees. A partnership with Live Nation gives premium subscribers early access to concert tickets based on how much they stream and share an artist's music.

The perk is hard to justify. At $144 per year for Spotify Premium, subscribers would need to attend multiple concerts annually to justify the expense, and tickets for popular artists remain prohibitively expensive regardless of early access.

"I go to a lot of live music, and I feel like it's cheaper to just go direct to the band or artist or local venue that is selling the ticket than to do it through this," Konstantinovic said.

The company has discussed creating tiered subscription products beyond the current premium and free options, though plans for a long-rumored lossless audio tier were scrapped when Spotify added high-definition audio to existing premium subscriptions rather than charging extra.

Listen to the full episode.

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