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Massive growth but increased losses at Spotify – when will it go into profit?

By | Published on Tuesday 24 May 2016


So, with more and more record labels now declaring streaming as their single biggest revenue stream; and with that really meaning subscription streaming; and with that, in many markets, really meaning Spotify; how the hell is everything going over there at Spotify HQ?

Good question, and a timely question, because the uber-streaming-firm has just filed its latest financial report in Luxembourg. Of course, we already knew that the company had seen rapid growth in userbase in 2015 – with both premium and freemium user numbers growing fast, despite Apple’s arrival into the streaming market – but what about the moolah?

Well, the streaming business saw its revenues surge by 80% in 2015 to a neat €1.95 billion. The vast majority of this income came from paying subscribers, with premium revenues up 78% to €1.74 billion, though ad income actually grew faster, by 98% to €196 million. Nevertheless, the smaller premium subscriber base is still very much subsidising all of those users on the free ride.

Still, what growth! That’s good right? And you know what else were up? Net losses. That’s what. From €162 million in 2014 to €173 million in 2015. So that’s fun, isn’t it? Of course it’s no surprise that Spotify is still loss-making, given that pretty much everyone in the streaming music game is losing money, plus we knew just how much extra cash Spotify had been raising as it ramps up for the IPO that is now expected next year.

The minimum guarantees based on users and usage that Spotify must pay to the labels, music publishers and collecting societies under its licensing agreements are in no small part behind those losses, the firm’s liabilities to the music industry still significantly higher than they would be under the basic revenue share arrangement that sits at the heart of its licensing deals with the music rights owners.

Carrying all those freemium users in the hope that they’ll upgrade at some point is another big cost, and Spotify became more proactive in its marketing efforts last year, partly in a bid to take its service to more mainstream consumers, and partly to counter new competition from Apple (and, to an extent, Google and Amazon).

The company also continues with its expensive policy of aggressive growth worldwide, moving into new territories while concurrently trying to go mainstream in existing markets.

Spotify, and its competitors, have to pursue these aggressive growth strategies because they have business models that all about scale. “We believe our model supports profitability at scale”, said Spotify once again in its latest financial filing, in a bid to put a positive spin on the mounting losses.

Of course, the big unknown remains just how much scale Spotify needs to become a viable business long term. Despite nearly doubling its ad income last year, Spotify is really in the premium subscriptions game. How many premium subscribers does it need – bearing in mind the value of a subscriber varies from market to market – and are there that many subscribers out there, at all, and in face of competition from the cash pile that is Apple?

Says Spotify: “We believe we will generate substantial revenues as our reach expands and that, at scale, our margins will improve. We will therefore continue to invest relentlessly in our product and marketing initiatives to accelerate reach”.

With streaming now the single biggest revenue generator for many labels, and that revenue stream basically reliant on a handful of currently loss-making services, whether or not Spotify can go into profit is a serious concern. Because if not, the record industry could become wholly reliant on data and device businesses for which music is a means to an end and which could, at any time, decide there are easier ways to gather data and flog devices.

With download sales now in steep decline, it could be argued that artists and labels should themselves be more proactively encouraging their fans to sign up to paid for streaming platforms, and not just whichever service paid them for an exclusive. And perhaps the industry at large should be employing consumer PR to talk up the paid for options, rather than relying on corporate PR to bad mouth the freebie platforms.

Because while it’s true that there are plenty of tedious investor types who are set to profit handsomely from a successful Spotify, the music industry itself has the most to gain from at least a few of the premium subscription services going into profit and, more importantly, the most to lose if they fail. Because if they do all fail the traditional record industry is, to use an economics term, fucked.

Talking of loss-leading marketing efforts, Spotify has announced it is upgrading its family plan to match those of its rivals, so more family members can have accounts on the streaming platform without increasing the monthly family rate fee. More users, more streams, no more money – it’s a winning formula!