This isn’t just Digital Music News raising a red flag, because any sane financial analyst can see the problem. Which is why on Friday, financial data firm PrivCo raised some serious questions about the sustainability of Spotify’s financial model, based on year-2011 losses of nearly $60 million. “Spotify’s financials show that the bigger the company gets, the bigger its losses,” the company assessed.
“…while Spotify’s revenue growth is impressive, its overall financial results are alarming.”
PrivCo treated this as a disaster area, with urgent issues surrounding content licensing, ballooning personnel costs, unworkable subscription tiers, and revenue gains that disguise a drastic financial sinkhole. “While Spotify’s revenues grew 151 percent in 2011 to $244 million, Spotify was unable to generate any material improvements to its cost of sales margin,” the company continued.
“In fact, 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…“
PrivCO CEO Sam Hamade urged drastic and immediate changes to this model: “Spotify’s 2011 results indicate that drastic changes must be be made quickly to its business model in order to generate growth while actually improving operating margins so that break-even, let alone profitability, is somewhere, anywhere, on the horizon,” Hamade warned. “Either the online music royalty payment model to artists and music companies needs to change, which is highly unlikely in the near term given that digital royalties are record companies only growing revenue stream, or Spotify needs to ASAP introduce a tiered subscription system, as opposed to its current flat monthly fee model, which is clearly a broken business model.”
“No matter how we slice the math, it is patently clear that something’s gotta change soon on Spotify’s business model if the company is to survive.”