Spotify Launches New Premium Tier w/ AI Features

Spotify is gearing up to launch a "Music Pro" subscription tier, targeting its most dedicated listeners with perks like higher-quality audio, AI remixing tools, and early access to concert tickets. The move comes as Spotify seeks new avenues for revenue growth amid ongoing pressure from major record labels.

The Revenue Tug-of-War

Spotify's business model has long been defined by its complex relationship with the music industry's giants: Universal Music Group, Sony Music Entertainment, and Warner Music Group. These labels control the lion's share of music rights, giving them significant leverage in royalty negotiations. Spotify reportedly pays 55-70% of its revenue to labels, a figure the labels are pushing to increase.

In an effort to diversify its content and reduce its reliance on music licensing, Spotify has aggressively expanded into podcasts and audiobooks. Some have even speculated about the existence of "ghost artists," AI-generated music profiles created by Spotify to populate playlists and drive listens towards its own catalog

Superfan Perks: A Step in the Right Direction?

The "Music Pro" tier, expected to cost up to $5.99 more per month on top of a premium subscription, aims to capture revenue from the most engaged users. Features like higher-fidelity audio and AI-powered remixing tools are designed to appeal to audiophiles and creative listeners.

However, it's unclear whether these features will significantly impact Spotify's revenue share with record labels. While some rivals offer hi-fi audio, and the remixing capability is novel, the market for these features remains niche. Tidal, a streaming service known for its high-quality audio, has only around 5 million subscribers, compared to Spotify's 250+ million.

The AI Music Wildcard

One potential long-term strategy for Spotify to reduce its reliance on major labels is to popularize AI-generated music. If users could easily create customized songs in the style of their favorite artists or genres, it could shift listening habits away from traditionally licensed music, and thus reduce their dependence on the 55% rev share they have with major labels.

However, the appeal of AI music as more than a novelty remains uncertain. While companies like Suno are attracting significant investment in the AI music creation space, it is unclear if mainstream listeners will adopt this technology as a primary source of music consumption.

Betting on the Biggest Fans

Ultimately, Spotify's move towards a superfan tier reflects a broader trend in the music industry. With growth in major markets slowing, streaming services and record labels are looking to extract more value from their most dedicated fans. While Spotify has experimented with concert ticket discovery, it’s unclear if they were able to meaningfully extract value in the live events world, especially with the dominance of Live Nation.

Spotify is betting that its most ardent fans will be willing to pay more for enhanced features and exclusive access1. Whether this strategy will be enough to move the needle in its ongoing negotiations with major record labels remains to be seen.