Spotify -- which this week filed to offer its shares to the public through a direct listing -- is one of streaming music’s biggest players, but a new regulatory filing suggests that the company still has work to do to reassure advertisers on its platform that they are reaching its full userbase.
The company said it has 157 million active users as of Dec. 31, 2017 -- 71 million of whom pay a monthly fee to remove ads and gain access to premium content. The other 86 million were users of its free service, which includes advertising messages.
However, the filing said that earlier this week, the company discovered that two million of its free users “have been suppressing advertisements without payment.” In other words, they were using software to effectively turn Spotify’s free service into its premium, ad-free service.
The company said it had previously counted those two million users in “calculations for certain of our key performance indicators, including MAUs, Ad-Supported Users, Content Hours, and Content Hours per MAU,” and added that it had since removed those customers from its indicators.
The company’s prospectus addresses concerns about such fraud in its section outlining risk factors. “We are at risk of artificial manipulation of stream counts and failure to effectively manage and remediate such fraudulent streams could have an adverse impact on our business, operating results, and financial condition,” the filing reads.
“Fraudulent streams and potentially associated fraudulent User accounts or artists may cause us to overstate key performance indicators, which once discovered, corrected, and disclosed, could undermine investor confidence in the integrity of our key performance indicators and could cause our stock price to drop significantly.”
While the company’s premium subscription business is its most reliable source of revenue, Spotify has said that advertising is the other key part of its revenue plans, particularly as it expands its programmatic offerings. If a significant number of subscribers are skipping ads, that could impact the company’s bottom line, and hurt the trust the company has gained with advertising clients.
“We will continue to invest in our advertising products in order to create more value for advertisers and our Ad-Supported Users by enhancing our ability to make advertising content more relevant for our Ad-Supported Users,” the company filing says. “Offering advertisers additional ways to purchase advertising on a programmatic basis is one example of how we continue to expand our portfolio of advertising products. We also are focused on developing analytics and measurement tools to evaluate, demonstrate, and improve the effectiveness of advertising campaigns on our platform.”