Spotify wants advertisers to pay for people to hear fewer ads.
Spotify plans to pitch media buyers on a new slate of ads -- including its first so-called "native" units and video placements -- during next week's Cannes Lions festival in France. The streaming music service will also present a new ad package that would swap out an entire playlist's ad load for one mobile video spot.
Users of the free service watch a video ad and get the rest of the playlist ad-free.
"We're giving brands the opportunity to give consumers uninterrupted sessions of Spotify," said sales chief Jeff Levick. Nike, Coca-Cola and McDonald's are among the eight brands testing some of Spotify's new ads.
The new ads are Spotify's latest attempt to build its ad-supported service. While Spotify counts 10 million paid subscribers (at $10 a month), another 40 million-plus users use the free service.
"Ad monetization is incredibly important… From our side, we have rights holders and have to underwrite [the royalties paid to those rights holders] with advertising," Mr. Levick said.
Spotify doesn't disclose revenues, but the company's mobile ad revenue has grown by 900% in the past year, Mr. Levick said. However, a year ago Spotify's mobile ad business was limited to its mobile radio service. The company didn't introduce a mobile ad-supported version of its primary on-demand music service until six months ago.
Spotify's free service competes with a plethora of other advertising-supported options including Rdio and Amazon's new offering, as well as streaming radio services like Pandora, Apple's iTunes Radio and Clear Channel's iHeartRadio. Then there's YouTube and Beats Music of Apple decides to create an ad-supported tier.
"Their challenge is to generate as much monetization from advertising as they can without creating a user experience people get annoyed by," said eMarketer analyst Paul Verna.
Spotify's sales pitch centers on ads targeted to what Mr. Levick referred to as "moments," or the combination of what people are listening to and in what context. "A moment could be that you're waking up in the morning to music. Or a moment could be at 6:30 and you're on your way to the gym or at the gym. These are all sponsorable moments," he said.
Spotify is also selling brands on sponsoring genres in its music discovery section. Until recently, people browsing Spotify's pre-created playlists by mood would have come across a "Happiness" mood playlist sponsored by Coca-Cola that featured songs like Pharrell Williams' infectiously upbeat track "Happy." Mr. Levick described the sponsored genre ads as the company's "first early test" into native advertising.
Video ad dollars
Another way Spotify is looking to boost ad revenues is by going after video ad budgets. On top of the mobile video ads, the company is adding new interstitial video ads to its desktop app that can play at full-screen. Mr. Levick described these ads as "takeover" spots. These ads won't fire up unprompted, like when someone first opens the app, but instead will be triggered by certain user actions in keeping with "non-interrupting advertising" theme.
A key piece to all this is Spotify's acquisition in March of music analytics firm The Echo Nest. That company spent roughly the last decade mashing together music-related data and surface psychographic insights like sentiment that Spotify can now use to identify the "moments" Mr. Levick discussed.
Traditional radio advertisers are still in the early stages of migrating their money to digital services, and many are evaluating the alternatives based on their targeting options.
"This is all very much the first step in a very long series of things to come," Mr. Levick said.