Brief:

• Spotify revised usage metrics for last year after discovering that about two million users accessed a free version of the streaming music service with an unauthorized app that blocked ads, according to a regulatory filing with the Securities and Exchange Commission. The fraudulent users made up 1.3% of its total user base, per Variety.
• After the discovery, Spotify cut its monthly active user count from 159 million to 157 million, including 71 million subscribers for who pay $9.99 a month for the ad-free premium service. Spotify also reduced its number of streaming content hours by 1.2% to 39.8 billion from 40.3 billion to account for the fraudulent activity.
• Spotify disclosed the revised user data just one week before its an April 3 public offering on the New York Stock Exchange in a nontraditional direct-listing IPO. About 31% of its outstanding shares will be available for sale as part of the offering, Variety said.

Insight:

Spotify's disclosure of fraudulent activity and voluntary adjustments to its total user base numbers are likely intended to avoid the lawsuits that typically follow any kind of revelation surrounding whether a company knew about renegade ad-free apps but didn't promptly tell investors. Social media company Snap was sued last year in a securities class action suit that alleged it made false and misleading statements about its user growth, per a separate Variety report. That lawsuit followed a 21% drop in the company's share price after its first public report to shareholders showed disappointing user growth. It appears that Spotify looks to prevent this drop in share price and negative sentiment as it heads into its IPO next week.

The public disclosures did indicate that its service faces a risk of artificial manipulation of stream counts that can be difficult to police. The failure to crack down on fraudulent streams could have a negative effect on its business, operating results and financial condition, the company said, so it seems like a smart move to offer up this information before news breaks from some other source.

Spotify's disclosure follows an effort earlier this month to crack down on pirated apps that allowed free access to paid features like ad-free Premium, per TorrentFreak. The company sent emails to users saying it had detected abnormal activity on apps and had disabled them. The email assured users that their Spotify accounts were safe and provided instructions for how to download and install the official app from the Google Play Store or App Store.