Spotify loses $59.1 million on $244.5 million in revenue

http://hypedsound.com/news/details/SPOTIFY-FINANCIALS-DEEMED-UNSUSTAINABLE

by Hates_ • 14 years ago

77 91 14 years ago

king_magic• 14 years ago

That's really a shame. I hope they can turn things around somehow. I've quickly become a rabid fan of Spotify; I'd happily pay more for the service if it meant it would be financially sound.

dsk2012• 14 years ago

Paying more isn't going to do much. It looks like they're losing because of insane licensing costs. Paying more means more goes to the music companies.

mrilhan• 14 years ago

I agree, but I don't think it will be necessary to pay radically more. I was actually happy to see they did $57m losses on $250m revenues; even happier when I saw that a large sum of the loss was the new staff.

Worry not, because, in my opinion; Spotify is here to stay and is solving a problem that is certainly worth solving.

Its the combination of several factors:

A previous commenter stated that Spotify is not only competing for iTunes' money, but with piracy too. I agree; they're converting a client that was worth $0.00 over their lifetime (as well as those who 'pirated and then purchased', etc) into paying the artist per listen. That's absolutely radical.

The $20m increase in staffing is a direct product of this vision. The new staff is hard at work at making Spotify available on as many platforms, as beautifully as possible, with as many artists and in as many countries as possible.

The price, whether it be $9.99 or $12.45, won't be the problem, pricing can be fixed later with more data.

The only danger Spotify faces is the resistance it is facing in 'the rest of the world', where there may be entrenched local media companies with distribution rights, or local music/label representatives may be weary of the payment model. That would limit their scale, and Spotify needs scale to work.

... thank god for the $100m Sean Parker found for Spotify, and for the X billions more he can sway for it as well. I'd bet on Spotify today more than ever, it may be a long bet, but we haven't seen such a successful contender in this category since iTunes.

Spotify is an A+ example of what every other startup with 1/100th of the business plan or cojones is trying to do: Spotify is aiming to become a billion dollar company, and I congratulate them for that.

The music industry is worth spending tens, hundreds, even thousands of millions to fix/disrupt/change/make better.

seats• 14 years ago

Ouch. Net revenue margins at 2%. There's more top line margin in farming.

Makes me wonder if there isn't an antitrust case here somewhere. Feels highly predatory by music license holders.

ajross• 14 years ago

Farming isn't a growth bet. Spotify could break even by increasing their prices/fees by 25% or by reducing their overhead by the same amount. My guess is that either would be an easy option if their goal was short term profits. This represents a high burn rate for sure, but it's not inherently problematic.

That doesn't mean that the content licenses aren't predatory, just that I don't see the relevance of that argument.

aes2562• 14 years ago

> Spotify could break even by increasing their prices/fees by 25% or by reducing their overhead by the same amount.

It's not obvious this is the case. If the record companies see Spotify increasing their revenue, they may just demand higher fees.

That's the crux of the problem here. Spotify need the record companies, but the record companies don't need Spotify. For now the record companies are squeezing Spotify for all their revenue, but it's no trouble to them if Spotify goes out of business. It's a tiny revenue stream for most of these companies.

marvin• 14 years ago

Is high burn rate really a good idea for a company like Spotify? They have been around since 2006. Not exactly in the heart of pizza-consuming startupland any longer. If they aren't able to be profitable now, they have a big problem.

mtgx3• 14 years ago

Do you really think the labels wouldn't increase their price by 25% then? They already think they get way too little money from these services. That's why they're taking all the money they can get. If Spotify increases the monthly price to $20, the labels would probably ask for $19.5 of it.

WiseWeasel• 14 years ago

I'd say farming is the quintessential growth bet. : P

Most of the overhead would seem to be royalties, so reducing them by 25% may not be an option. The revenue is also determined by ad market rates, which can be cyclical, and is out of their control.

joshryandavis• 14 years ago

They have to turn things around. I don't think I could go back to life without Spotify.

kyouens• 14 years ago

As long as Rdio isn't in the same boat, we'll be OK.

k-mcgrady4• 14 years ago

AFAIK all the streaming music services face this problem. The record companies demand so much off them that they barely break even.

dkasper2• 14 years ago

Last I heard Rdio is in acquisition talks with Microsoft so it seems like they're absolutely in a similar boat. http://thenextweb.com/insider/2012/10/03/rumor-microsoft-is-...

gebe• 14 years ago

Same, been using Spotify daily since the invite only days in 2008. Don't know what I'd do if it would disappear, are there good alternatives?

fourstar• 14 years ago

Wanted to try them out, but they restrict their signups to Facebook only... What the heck?

k-mcgrady4• 14 years ago

It used to be just email but when Facebook promoted their open graph integration heavily they made it Facebook signups. Probably some deal they made with Facebook.

_ikke_• 14 years ago

Since recently you can register again without a facebook account. You just have to scroll down. (https://www.spotify.com/nl/signup/open/)

daleharvey2• 14 years ago

I would suggest people not in the netherlands not click that link as it sets your language preference and you need to go searching for the language switcher :P

calinet62• 14 years ago

Every single time Spotify is mentioned in the tech community, this happens....

jmatt• 14 years ago

https://www.spotify.com/us/signup/plain/

staunch• 14 years ago

Pretty sure music license "negotiations" involve asking "How much?" and receiving the reply "How much ya'got?"

calinet62• 14 years ago

Yep, sounds like that's exactly it.

“Virtually every new dollar of revenue went directly to music companies as royalty payments, evidencing the fact that the more members Spotify adds, the more money the company loses. In almost a one-for-one scenario, every dollar Spotify is generating immediately exits the company due to licensing fees.”

This predatory relationship has to stop if the record companies want to exist at all in the future. I don't think they realize that they're pointing the gun at their own foot.

macspoofing• 14 years ago

>This predatory relationship has to stop if the record companies want to exist at all in the future.

There is a lot demand for their product. It's not like people are switching to something else. People still want Lady Gaga and the Beatles.

dasil003• 14 years ago

Their goal is to stripmine music startups as a revenue strategy. They'd rather have the companies there as an alternative to piracy, but they don't want them to have any power at all, so they string them along and siphon as much investment as they can.

jbigelow76• 14 years ago

> This predatory relationship has to stop if the record companies want to exist at all in the future.

If I had to gamble on who would be around in 10 years, Spotify or the labels, sad to say but my money would be on the labels.

swang• 14 years ago

I think the scene is more akin to someone hanging the victim upside down and shaking him until all his money falls out. Then before he leaves he takes the victim's asthma inhaler and then kicks the victim's dog for good measure.

SEE YOU AT SCHOOL TOMORROW SPOTIFY

nlh2• 14 years ago

I'm a huge Spotify fan. In fact, I love it so much that I haven't purchased a song from iTunes in months. That alone should speak volumes about their position in the industry - I can't be alone here, and that means that for some significant portion of people, money has stopped going to Apple for music and now goes to Spotify.

But here's the thing -- Spotify is too cheap. Their service is amazing and far, far too inexpensive relative to what they provide. They provide a bulk of their service for free, and people like me who want a bit more pay $10 a month.

To get access to 5,000 songs via iTunes would cost me (roughly) $5000 -- and people are willing to pay it. That's 500 months of Spotify (42 years!) subscription to generate the same amount of revenue.

So while I agree that music licensing costs, particular for radio-like services like Pandora, need to go down to be more in line with broadcast rates, I don't think that's what's hurting Spotify here. I think they're providing far too much value for what they get paid.

daleharvey2• 14 years ago

As mentioned elsewhere in this thread, I think spotify have positioned themselves exactly to be in this situation. If they earn more money, the music labels still have all the negotiating power and will just take it, and if they raise their prices, less subscribers.

At a guess, I think spotify are trying to squeeze themselves into a position where the labels need spotify because otherwise artists just will not have the same reach otherwise, I know I dont listen to a band until they put their stuff on spotify. I have seen labels + bands be more reactive to making sure their stuff hits spotify quickly which seems to show a shift in power, hopefully the trend continues.

ChuckMcM• 14 years ago

The challenge then is to make money but appear to lose it, this appeases the music labels who think they are taking all the value off the table.

It seems we need a tech company that can do 'hollywood accounting' where they give the labels 40% of the 'net' and sadly there is no net.

ohashi• 14 years ago

Conversely, I hardly listen to music and bought maybe 10 CDs in my entire life. Spotify changed my behavior dramatically. I consume a lot more music now, that I wouldn't have otherwise. Spotify has got more money out of me than the sum of all my other music related spending. It's very possible I am an outlier though.

myspy• 14 years ago

I've experienced the service differently. I'm more old school. Spotify does not give me the feeling to be the master of my library and that this music belongs to me.

I'm more happy with buying albums I love and archiving them. So, I'm looking forward to the new iTunes, I hope it combines the old way with the new way in new ways.

But Spotify has to work more on discoverability of new artists and music. I'm not convinced by there app.

pixie_• 14 years ago

Spotify helps you be 'master of your library' by putting a file icon next to songs you have locally. It's pretty much telling you exactly what you need to download for 'backup.'

mattacular• 14 years ago

It doesn't have to be mutually exclusive... I collect records and digital files, but when I'm away from my collection - whether it be at work, on the go, in the car - I've been making use of Spotify.

The library is really good, and the app itself is quite nice. It has this amazing thing called QUEUING (iTunes - I'm looking at you) and the social aspect of it is actually pretty useful. You can search playlists for anything from "Jazz for dummies" to "Breaking Bad soundtrack" and sure enough, somebody will have gone through the trouble of assembling a really high quality mix from the Spotify library.

So no, Spotify obviously isn't going to give you the same feeling as physically collecting music releases. It doesn't try to.

I will add that I do have a few negatives surrounding Spotify. I think it is a pretty poor music discoverability tool (outside of searching for social playlists to subscribe to). The radio is very poor, and some of the tagging/cataloguing of their vast collection leaves a bit to be desired.

cloverich• 14 years ago

Disagree that the price is too low. I think its sitting right at the top of what most are willing to pay.

I think of it like this: for 10 bucks a month, every month I have Spotify, I could have owned an album on one of my playlists. After 2-3 years, I basically own nothing, when I could have owned most of the music I listen to. Most of the people I've introduced Spotify to are on a similar wavelength.

On top of that, the idea that Spotify may not be around in a year or two add's even more hesitance on my part to keep the $10 subscription.

I really hope it all works out for them (and us).

mchusma• 14 years ago

Interesting usecase. I probably like listening to about 10-20% music a day that I have never heard before. Every 2-3 years, I am basically still only listening to 5% of the music I did like in that time period. So the musical "churn" for me is high where ownership is essentially meaningless. But I can see how someone with a different set discovery needs/wants would have a very different sense for the product.

YokoZar• 14 years ago

Do you really want to own all your music?

Rhetorically, it sounds like an obvious "yes", but if I personally think back to all the stuff I got as a teenager and hardly ever listen to anymore, not owning it might be entirely fine.

Ownership is less of a burden when there's no physical media, of course, and there's still some old music everyone keeps coming back to. But a lot of music is ephemeral, and only having access to it when it's current might not be so bad.

randomchars3• 14 years ago

"I could have owned most of the music I listen to"

If you're only listening to 24-36 albums in 2-3 years than yeah you could have and maybe you should have. If you listen to that much in a month or sometimes a week than Spotify is by far the best thing ever.

crucialfelix4• 14 years ago

From a musician's perspective the entire problem with Spotify is that its replacing sales and yet its paying broadcast performance royalties.

Broadcast has always been promotion for sales. That's how you sell recordings: you get it on radio. Spotify looks and acts like iTunes. Its replacing the user need for purchasing, its not replacing radio. And yet they want to pay like radio.

So they've disrupted digital sales and cannibalized an industry in doing so.

Oh I know .. we can always go sell t-shirts at our gigs. until the kids figure out how to 3d print those.

Adirael• 14 years ago

I know the part about t-shirts is a joke, but you can print your own with stuff bought at Home Depot and in a DIY setup the cost is roughly 3$, being the most expensive stuff the t-shirt and the paint.

tjoff3• 14 years ago

A lot of people seem to compare the earnings from one listening on spotify to the sale of a single...

Thing is, you have no idea how often that single is played. If the customer are crazy about it the musician would most likely earn more if he listened through spotify rather than buying it. If on the other hand the customer gets bored of it quickly the musician would barely get anything through spotify.

Also, one listening doesn't equal to a lost sale. Especially considering how easy (and wonderful) it is to just be able try new stuff out when there is no barrier or cost associated with it.

Musicians get waay more money from me thanks to spotify than they ever would get otherwise. And I bet there is a whole generation where this is/will be quite common.

There are winners and loser though, those artists that make songs that only last two weeks probably loose on spotify. I see that as a bonus.

notatoad2• 14 years ago

statements like this are exactly the reason why people have zero sympathy for the music (and movie) industries. In the real world, products are worth as much as people are willing to pay for them, not whatever the hell you want to charge. Spotify isn't cheating you out of anything. You are getting paid what the market has deemed your content is worth. If you don't like it, take your songs off spotify.

thecoffman2• 14 years ago

I disagree on it being priced too low. I realize that in some sense, they have to play to cards they are dealt by the labels - but 10 bucks a month is far too much for streaming music. If Netflix can stream unlimited HD video for 8 bucks a month, there's no (technical) reason audio should be more expensive than that. The only thing holding them back is the politics of the music industry. IMO, a fair price point for streaming audio has to be < 5 bucks a month at the high end. The marginal cost of a song being streamed is basically zero at technical level.

ryanwaggoner• 14 years ago

You're confusing cost with value.

dkasper2• 14 years ago

If Netflix had almost every new movie release and a larger catalog maybe it would be an apples to apples comparison.

nlh2• 14 years ago

I knew someone would mention Netflix for comparison -- the problem is that I think they're too inexpensive as well :)

Mind you, as a consumer I'm not complaining about low prices. It's awesome. But I'm also mindful of the economics --

I pay $50+ / month for my cable TV subscription. I don't like it. I'm not "happy" about it. But you know what -- I haven't cancelled it yet either, so something's keeping me there -likely the 'flip channels' factor, which is nice and brainless, and the availability of live news - MSNBC, CNN, local news, etc. Sometimes you just want to sit down and turn the TV on, and I'm willing to pay for that.

But the point remains that there's a big gap between $9.99 Spotify / $8 Netflix and $50-$100 cable, both of which many people are willing to pay for.

dchuk• 14 years ago

Spotify has to pay royalties on every song play, which adds up extremely quickly considering you can just leave it running all day without even listening to it (like I do accidentally almost every day). There's not particularly an easy way to just "leave Netflix on".

encoderer3• 14 years ago

Maybe for you. So maybe they should come up with an additional tier to grab some of your consumer surplus.

But for me? I compare it to the $30/year I pay Pandora. I have a Pandora app in my car, on my TV, on every phone and computer, etc. It's ubiquitous and the fact that I can't pick a specific song is meaningless to me. In fact, I like it much better. I can work and live my life and not have to spend a single second worrying about playlists and song selection.

Lately I've really liked the rebooted Songza.com -- it's curated playlists vs Pandora's algorithm-driven model. The playlists are great and the activity-centric UI is pretty awesome too.

randomchars3• 14 years ago

If you like Songza check out http://8tracks.com too.

notatoad2• 14 years ago

Spotify isn't just competing with iTunes, they're competing with piracy. And while $10 a month is nothing compared to maintaining a comprable iTunes collection, it's a lot compared to free.

I think $10 is the sweet spot. I used to be a fairly big music pirate (what.cd elite, if that means anything to anybody), and RDIO at $10/month has completely replaced my whole illegal music collection. If it were more than that, i'd probably start thinking about whether it was worth the money or not, but at $10/mo i don't even think about it.

gcr• 14 years ago

I do not consider the hidden tax of forcing me to use my facebook account worth it. That's not cheap; it's merely a different kind of currency.

Edit: I am mistaken; they allow users wihtout facebook accounts to sign up now (see elsewhere in the thread)

willholloway2• 14 years ago

The easy answer to this is to raise prices. We need to raise the price of digital goods if we want to move forward as a post-industrial society. I pay $36 a year for Pandora, I would pay $72. $3 a month is an insanely good deal. Before Napster I would easily spend $30 a month on music. Society needs more money in artists hands, because the robots are coming to take away more jobs, and we can offset some of that by reducing the labor supply by allowing more people to earn a living creating digital goods.

Many of you will say that most aren't good enough to be pro artists. I say that so many more would become good enough through deliberate practice if financial viability wasn't nigh impossible.

Capitalism as we know it will not survive zero-priced digital goods, robotics and other forms of automation. Deflation is a specter over all our heads.

Wise nations will look for ways to reduce the supply of labor, instead of an insane push for ever higher employment levels.

cdh• 14 years ago

Without going near your comments on Capitalism, I don't think Spotify's situation is as clear-cut as you do. Why would I pay $20, $15, or even $11, when I can get the exact same service from at least a dozen other companies for $10/month or less? (Rhapsody, Zune, Slacker, Rdio, etc.)

If they raise prices at all, they're likely to lose a significant number of subscribers. If they raise prices and somehow keep those subscribers, the record companies may very well just milk them for the difference in increased licensing costs.

willholloway2• 14 years ago

All of the other companies need to pay licensing costs as well, and I believe the current licensing costs are unsustainably low.

In the early years of the internet everyone got very excited about free. Free music, movies, and information. I think that right now society is collectively learning the same lesson so many developers have learned and posted about here. Free customers are the worst customers. Charge more. Inflation is virtuous. Deflation is a downward spiral into the abyss.

evertonfuller3• 14 years ago

The sooner Spotify shuts down, the better.

nicholassmith2• 14 years ago

Not a fan of the service or something else?

randomchars3• 14 years ago

No seeders on your favorite torrent site?

Edit: Just realized that you're the anti-streaming guy from above. Here's the deal: $10 a moth is reasonable for me considering the amount of music that I listen too. If I had to purchase the music to listen to it I would go back to torrents. I can't afford to spend $100-200+ a month on music. And that's what it would cost with digital downloads or CDs ordered online. If I were to buy it in my country I would have to shell out up to $25 for a CD. That would mean that I had spend $500 so I can keep my music habits. That is about the median household income here.

mtgx3• 14 years ago

Spotify should make it so they can make deals directly with artists and then promote them in their store, kind of like how Amazon is doing with its self-publishing platform. They are big enough now for this to work. The problem is they most likely got forced into signing a non-compete clause with the labels, and they took that deal. So now they can't do that anymore, which makes them completely dependent on the labels in the foreseeable future, and the labels can keep asking for 98% of their revenue.

And next time the labels brag about supporting innovations like Spotify (like when they did when they wanted to pass SOPA), remind them that they are what's killing innovations like Spotify, and these services usually achieve success despite them.

AndrewDucker2• 14 years ago

No artist signed to a major label can do deals outside of that deal. The whole point of their signing is that they have an exclusive deal with the label.

So while Spotify could go direct to some artists, none of the big ones can make that kind of deal.

mtgx3• 14 years ago

They don't have to take all the big ones immediately. Just start a trend, and some of the big ones might join later once their contracts with the labels expire. They probably wouldn't be able to put their old songs there, but they could the new ones.

nhangen• 14 years ago

This explains why they've suddenly started spamming me with playlist updates from my FB friends...trying to crank up the virality factor in order to increase revenue.

I paid for Spotify for a few months, and thought it was nice, but I much prefer buying iTunes/Amazon music and syncing it to all of my devices via iTunes Match.

Until Spotify gets a better recommendation engine, I think they'll suffer to get revenue where they want it to be.

cocoflunchy• 14 years ago

It would be interesting to know if they earn more money on subscriptions or on ads. If it is the former, then why not cut all free plans and leave only the subscriptions?

If I understood correctly, they pay a fee to the records company each time someone plays a song. Even if they're making half their revenue on the free plan, cutting royalties by something like 95% (just guessing) and losing 50% of the revenue doesn't seem like a bad idea... Of course they lose on advertising, but is there something else I'm missing?

alexmuller2• 14 years ago

I must be missing something here with regards to revenue. Spotify has 15 million users, 4 million of whom are paid subscribers. So 11 million free users.

They have two paid plans: $60/year and $120/year.

If we assume the following structure:

    11000000 free users @ $0.50 ad revenue per year = $  5,500,000
     4000000 mid users @ $60/year                   = $240,000,000
           0 top users @ $120/year                  = $          0

For a total of $245.5 million in revenue, already more than reported here. And those proportions for their two paid plans are clearly ridiculous. But even if their free users provide $0 in revenue _total_, they still only have 2% of paid users on their top plan.

reitzensteinm• 14 years ago

You're not taking growth into account - they're still more than doubling each year. You'd have to use the average user count to do math properly, not today's user count.

mwg66• 14 years ago

I wasn't expecting to be a fan of Spotify but I have had a subscription on my iPhone this past year and it has been excellent. I no longer keep iPod (iTunes-synced) music on my devices.

bjansn• 14 years ago

I'm a premium user for more than a year and I love it! It is indeed cheap, but making it more expensive won't get them the same number of paying people paying some amount of money. So from that I'd say that they aim to get more people to pay for music again. As nlh mentioned, he is not buying music anymore on iTunes. You could swap iTunes for downloading as well.

Spotify might as easily help artist to release their own music in a seperate section of the application. I would love to see something like this.

encoderer3• 14 years ago

A good friend of mine is a software engineer in their NYC office.

Some observations:

1) They have really cool concerts in their office regularly, and often have B-list musicians in their office .

2) They fly all new NYC employees to Sweden for a couple weeks for training and culture immersion.

3) Being in NYC allows them (it seems) to pay less than comparable jobs here in San Francisco. Probably because there are far fewer cool startups in NYC to compete for talent with.

4) The name "Spotify" was a total fluke and accident, one co-founder mis-heard another, bought the domain, and the rest is history.

tricolon• 14 years ago

> Probably because there are far fewer cool startups in NYC to compete for talent with.

I know this is a silly argument, but unless you have some evidence, I would advise you to take that back. http://nytm.org/made-in-nyc/

encoderer3• 14 years ago

I don't really get your point.

One Twitter or Facebook can hire as many engineers as 1/2 that list. To say nothing of other interesting, top-tier tech companies from which there's nearly a limitless need for more engineers.

I have good friends who are good engineers in NYC, and I live here in SF. They had a ton of choices from digital agencies, finance companies, and myriad other places building line-of-business software. Here? Every experienced engineer I know with a LinkedIn gets several cold-inmails a month for startup & tech company opportunities.

It's about density. The financial district in San Francisco can fit in about 1 block of lower Manhattan. And the startup community in NYC compares similarly to the startup community here -- which stretches 50 miles from San Jose to San Francisco and beyond.

Tycho• 14 years ago

I would pay up to £50 for that service. And if they charged £100 or even £1000 (per month) for that service, I wouldn't consider it unreasonable I'd just curse my luck fir being too poor.

paigalhaes• 14 years ago

Recently I've hear Daniel Ek talk about the Spotify birth and business model, it gives you a better ideia of the path Spotify has taken, and answering questions about the differences about music and video services

http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2964

Spotify loses $59.1 million on $244.5 million in revenue

Related Stories