Here’s another reason to be wary of Spotify’s public offering — the amount of money it brings in for each subscriber keeps shrinking

• The paperwork Spotify filed Wednesday to become a public company offered numerous reasons for investors to be wary.
• One overlooked, but important, data point the company included was that the average revenue it sees per subscriber has been declining and is far less than the $10 a month it charges for a standard subscription.
• Spotify attributes the decline to fluctuations in foreign exchange rates and discounted subscription options, which it says help it keep customers longer.

There are numerous reasons to be wary of investing in Spotify, as the paperwork it filed this week to become a public company made clear.

The music streaming service seems to have never posted a profit. After handing over royalties to the giant music labels, it’s left with only 20 cents of every dollar it takes in. And its chief rivals — Apple, Google and Amazon— are some of the biggest and most powerful companies in the world.

But here’s another, perhaps overlooked red flag about Spotify’s business: Even as the company has been signing up more and more subscribers, each one of those subscribers has become worth less and less revenue to the company.

Spotify collects $10 per month from each of its subscribers who pay the standard subscription rate.

You might think that means Spotify gets about $120 per year per subscriber. But it’s actually taking in significantly less than that — and the revenue it’s seeing per user keeps shrinking.

Spotify spelled out the situation in its regulatory document. Last year, the company got about $6.53 in revenue per subscriber per month. That was down 14% from the previous year, when it took in about $7.61 monthly from each subscriber. The average revenue was down 22% from 2015, when the company saw about $8.39 a month per subscriber.

And Spotify’s average monthly revenue per subscriber was even lower in the fourth quarter last year than it was for the full year. For the holiday period, the company only saw $6.42 per subscriber each month.

Keep in mind, this is the average revenue per subscriber. This is how much Spotify collects from each subscriber before it deducts various expenses such as advertising and music royalty fees.

For a company that’s already struggling to make money, that’s got to be a big concern.

The dip in revenue per subscriber adds up to a big shortfall in overall sales

So what’s going on?

In its regulatory filing, Spotify offered several explanations for the decline in the average revenue it’s seeing per subscriber. Fluctuations in foreign exchange rates helped depress the value of the euros it gets from its overseas subscriptions. Additionally, the company offers discounted plans to certain customers, including students.

The most notable of these discounted plans is the family subscription option Spotify introduced in 2016. Under that plan, up to six people can share a Spotify account for $14.99 a month. The company said in its filing that subscribers to its Family Plan are growing, but it didn’t break out what portion of its user base choose that option.

The problem with all this is that it makes Spotify’s top line look a lot weaker than it should. And as the average revenue per subscriber continues to decline, it adds significant pressure onto Spotify’s revenue growth rate.

Spotify’s total number of subscribers grew from 48 million at the end of 2016 to 71 million at the end of last year. If you use the most conservative math, and take the 48 million figure and multiply it by $120 a year, you’d expect that Spotify would have generated $5.8 billion in subscription revenue last year.

But it wasn’t even close to that. Instead, Spotify’s subscription revenues were only $3.7 billion in 2017. Meanwhile, Spotify’s overall revenue growth rate has decelerated from 79% in 2015 to 39% last year.

OK, so it’s not all bad

Although Spotify’s Family Plan has led to a decline in average revenue per subscriber, the company says the plan has helped reduce churn — the portion of its user base that cancels the service every month. Spotify’s churn has declined from 7.5% in the fourth quarter of 2015 to 5.1% in the fourth quarter of last year. That’s a good thing.

“With the growth in higher retention products, such as our Family Plan and Student Plan, we believe these trends will continue in the future,” the company said in its filing.

Spotify also noted in the document that it pays a lower per-user royalty rate for subscribers on its Family and Student Plans than it does for those who pay its standard rate. Another good thing.

Still, all else being equal, Spotify, and anyone who invests in Spotify, would surely rather take in $10 per subscriber every month than $6.40 — particularly when only a small portion of either number is left after the music industry gets its cut.