Can Spotify Catch iTunes in Two Years? The Numbers Behind Sean Parker’s Prediction

From Billboard Magazine:

Sean Parker, entrepreneur and investor (in Spotify and other companies) predicted at SXSW that Spotify, at its current growth rate, will overtake iTunes within two years. Even at first blush the statement comes across as optimism from a Spotify equity owner rather than an informed statement on consumer spending on digital music.

Spotify can surpass iTunes in some countries, but it’s unlikely to happen in a U.S. market where iTunes sales are strong the download market continues to grow.

For Parker to be right — at least in the U.S. — estimates Spotify would need to average 12.34 million U.S. subscribers in 2013. It would need to generate 28.8% of revenue from advertising sales and the remainder from subscription fees (which was its 2010 revenue mix, according to the company’s earnings statements).

Here’s the math behind Parker’s statement: Billboard estimates there was roughly $2.4 billion of consumer spending on music downloads in the U.S. in 2011, based on Nielsen SoundScan sales figures and rough estimates of per-unit prices. iTunes was assigned a 70% share of the download market, giving it estimated sales of $1.7 billion.

U.S. download sales would be $2.96 billion in 2013 if the market grows by 12% in 2012 and 9% in 2013. Tracks would need to grow by 7% in 2012 and 5% in 2013. Digital albums would need to grow by 20% in 2012 and 15% in 2013. Those are aggressive forecasts but entirely possible given recent trends and year-to-date improvements in 2012.

Spotify would need U.S. revenues of $2.08 billion in 2013 to catch iTunes. Roughly $2.08 billion of the $2.96 billion download revenue would be captured by iTunes, again assuming a 70% share of the market.

Spotify would need somewhere around 12.34 million U.S. subscribers to reach $2.08 billion in revenue in 2013. That 12.34 million figure takes into account revenue generated from subscription fees and advertisements. According to the company’s earnings release for 2010, Spotify generated 71.4% of revenue from subscriptions and 28.7% from advertising. Those numbers could very well be outdated but they are the most recent public figures available. For the sake of simplicity, I assumed all paid subscriptions are the $10 premium tier and none are the $5 PC-only tier.

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