In an age of austerity, free is where it is at. Certainly for consumers. Yet Spotify as the best known free streaming music service is, despite enormous expansion in the last few years, experiencing widening losses. Why?
The symptom of Spotify’s problems is noted in its financial record (as obtained by PrivCo). In short, the bigger the company gets, the bigger its losses are.
Spotify’s revenue growth has been impressive. For example, Spotify’s revenues grew 151% in 2011 to $244 Million. Yet costs of sale ate up virtually every new dollar of revenue, which instead went to music companies in royalties.
So, the more members Spotify adds, the more money the company loses. The online licensing fee paid to the music companies and is limiting Spotify’s ability to generate sustainable margins. As members listen to free music, they add a music royalty to Spotify’s bill from the music companies.
But the costs of sales aren’t just a result of a huge growth in listeners. Spotify salaries also play their part. In 2011, Spotify’s 300+ employees salary costs grew by 173% year over year. Salary growth seems to be outpacing revenue growth.
For Spotify, 98 cents of every dollar of revenue is going to pay music royalties, leaving 2 cents to cover operating costs, from payroll, overheads, office rent, sales, marketing, data servers . . . the lot. As a business model this is not sustainable. It will be interesting to see how Spotify address this, if at all.