Brief:

• Spotify is testing a feature in Australia that lets non-paying users skip audio and video ads as it seeks to differentiate its service from rivals like Pandora, according to Ad Age. The feature, called "Active Media," won't charge advertisers for ads that users skip.​
• The streaming company is running the test to determine if skippable ads help to glean more insights into listener preferences while improving the overall experience through stronger personalization. Executives told Ad Age that the intention is to expand the ad-skipping feature to its 65 markets around the globe.
• Meanwhile, Spotify reported in its Q2 earnings call on July 26 that its quarterly ad revenue totaled $158 million, up 20% year-over-year. Automated sales made up more than 20% of total ad revenue in Q2. It currently has 83 million paid subscribers and 180 million monthly active users, up 30% from Q2 2017.

Insight:

As part of its effort to compete with Pandora, Spotify appears to be getting bolder in its efforts to lure listeners to its platform and bolster its audience base above Pandora's. Spotify's test of skippable ads appears to go against its core "freemium" business model of charging users for an ad-free experience through paid subscriptions. Instead of frustrating listeners with more intrusive ads in order to compel them to subscribe to remove ads, Spotify is taking the opposite route by giving both listeners and advertisers what they want. The risk is that having to repeatedly skip ads could denigrate the user experience and annoy users, which wouldn't be good for Spotify or brands. The potential plus for brands is that if a user does listen to an an, it could be a clearer indication of interest in that brand. 

Spotify has various strategies for building its user base, including last week's announcement of a partnership with Samsung. The agreement means that Spotify's service will be integrated with a range of devices, including phones, TVs and the new Galaxy Home smart speaker. Spotify forecast that its paid subscribership will reach 85 million to 88 million by the end of next month, according to CNBC. The streaming service is also working to tackle unauthorized ad-blocking. In March, the company said it discovered 2 million users of its free service who had blocked advertising without paying, per Reuters.

Media companies typically work to lure paying subscribers who provide steady, predictable revenue. YouTube in March said it would insert more ads between music videos as part of a strategy to convince them to pay for a music subscription, according to Bloomberg. Spotify's free, ad-supported version typically offers half an hour of ad-free music after viewers watch a 30-second ad, then will play ads every five or six songs, according to user anecdotes on the Spotify Community website.

Spotify's share of the audio advertising market is still small. Almost half (46%) of all music streaming happens on YouTube, according to the International Federation of the Phonographic Industry (IFPI). Considering the broader market of audio consumption, the share of audio time spent among adults is still dominated by AM/FM radio (47%). Music videos on YouTube hold a 9% share, ad-supported Pandora has 4% and ad-supported Spotify has 2%. The percentages are even less for paid, ad-free versions of Pandora and Spotify, according to Edison Research.