Spotify Sinkhole Seeks $200 Million in New Funding…

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Maybe there’s always  whale willing to gamble.

Spotify is now in talks with Technology Crossover Ventures (TCV) to secure an additional £100 million ($160 million) in funding, according to the latest report.

Sky News first reported these “advanced negotiations”, saying this round of funding is likely to be closer to $200 million. This would make TCV a significant shareholder.

Nothing has been finalized.  TCV’s investment portfolio includes Facebook, Go Daddy, and Netflix.

The backdrop here is one of furious cash burn, and serious questions about the long-term sustainability of Spotify and the broader streaming music space.  A few months ago, it was reported that Spotify planned on borrowing money to expand, with the founders hoping to avoid further dilution in ownership.

At present, Spotify’s cumulative investments total $288 million, according to Crunchbase, with burned cash well into the $200 millions at this point.

 

Image by ota_photos, licensed under Creative Commons Attribution 2.0 Generic (CC BY 2.0)

28 Responses

  1. Jeri Mandering

    This has been a wonderful scheme to fleece investors and pump money DIRECTLY into the major labels and owner’s pockets. They are doing a great job on that front. It sucks for the artists though.

    Reply
  2. Billy Bragg

    I’ve long felt that artists railing against Spotify is about as helpful to their cause as campaigning against the Sony Walkman would have been in the early 80s. Music fans are increasingly streaming their music and, as artists, we have to adapt ourselves to their behaviour, rather than try to hold the line on a particular mode of listening to music.

    The problem with the business model for streaming is that most artists still have contracts from the analog age, when record companies did all the heavy lifting of physical production and distribution, so only paid artists 8%-15% royalties on average.

    Those rates, carried over to the digital age, explain why artists are getting such paltry sums from Spotify. If the rates were really so bad, the rights holders – the major record companies – would be complaining. The fact that they’re continuing to sign up means they must be making good money.

    Reply
    • Chico SOTA

      Billy I think you have a fair point, however Sony in the 80’s wasn’t losing 250 million dollars in four years. Spotify has an unstable business model and is only profitable if millions more people sign up for paid subscriptions. They are opening penthouse office spaces in expensive cities such as New York and San Francisco. Their overhead is too high, and their pay rate is too low.

      Major labels have collected HUGE catalogs over decades, so for majors streaming is a dream come true. People weren’t buying the albums, but now they can at least make some money off of it. If you are against major labels and their deal, and support indie artists, you too should be against Spotify. The deals done with Spotify with the majors are beneficial to the majors, but when indies try to enter the game, they get the same or even less favorable terms.

      If/When the major labels begin complaining then we will know that there is no money to be made by anyone at all. And when artists are complaining now, it’s worth giving their points a listen.

      Reply
    • TuneHUnter

      Billy, It will not work in current set-up. No matter who takes bigger share of the cash, the cash from streaming is just not big enough. 500 million streaming subscriptions can generate only 40 billion dollars – which equals 1999. Guess what? – 500 million will never happen! …and it means that we are on the wrong track.

      Counting the amount of new music generated since 1999 and old marketable music and adjusting for inflation we should be today at 80 billion dollars. WE ARE AT 16 BILLION …time to wake up!

      Adding to the pot mature and misused discovery engines (like Shazam) and all tools delivered by internet we should be well above 100 billion dollars! At that level nobody would argue who got to much or to little cash.

      Our biggest problem is fact that music industry went from “Roman Empire” of CDs straight to hybrid of communism and fascism. We never implemented simple capitalism.

      Reply
      • Sam

        I don’t know where you’re getting your numbers from, but the most albums ever sold in a year was 785 million at an average price of $13.50ish/sale. I think $40B might be the total size of the music industry in 1999 which would include touring and merch.

        And I’m not sure how Spotify isn’t capitalism. The subscription prices are set by the market, and huge corporations decide how to distribute the earnings. The only government involvement is setting the statutory rates, which are largely influenced by corporate lobbying. Sounds like good ‘ol fashioned American capitalism to me.

        Reply
    • Faza (TCM)

      I’m sorry Billy, but you’re so far off the mark, you need a better playbook.

      Spotify simply has a borked business model that hasn’t got a snowball’s chance in hell of working for anything else than assuring its insiders a fat cash-out come liquidity day and some fine advances for major labels. It is really very simple: they charge a bargain basement rate for all-you-can-eat music, whilst said music is actually made by millions of artists who each have their own overheads, to say nothing of origination costs. Just think about it: if a song cost you $1000 to record, you’ll need to have it played 200,000 times just to break even at the current mean rate of $0.005 per play (FYI, I own all the rights to my music, so I’m unimpressed by all the talk of “legacy contracts”). That’s one song and we haven’t even started talking about making even a minimum living for the four or five people that might be in the band that recorded the song. By the time you’ve done three singles, you’ll need over half a million plays and if you want to see a meaningful contribution to money actually earned from recordings, double that. Of course, if you actually wish to spend anything on promoting the stuff, your minimum number of plays just swells.

      A “public utility” model, like Spotify’s, works (unsurprisingly) for public utilities – a situation where you have one company shouldering the cost of actually producing the service. A kWh may cost pennies, but those pennies are working towards one player’s bottom line. With Spotify we’re talking about a whole lot of bottom lines (one for each artist on the service) that need to be healthy or they’re going to have nothing to distribute.

      So, no.

      Reply
    • Buck

      Billy,

      While you are correct that Artist royalty rates of yesteryear’s physical sales are often unfairly applied to digital download sales, you are way off base when it comes to streaming. The artist royalty rates that are applied by the majors to Spotify earnings is 50% – even on older contracts. Thus, it is incorrect to declare that the artist royalty rates are the cause of “paltry sums” received from Spotify.

      Rather, it should be understood that the major record labels only pay out royalties allocatable to uses of the track. So, for example, when UMG receives a lump sum payment in the amount of $XXX to participate in the service in addition to per stream allocations (i.e. licensing fees), the artist does not receive a percentage of the lump sum amount – only their 50% “share” of the per stream allocation.

      The major labels have equity in Spotify – and this equity is not disbursed among artists since it is not technically allocatable on a per stream basis. Thus, it makes little sense for the major labels to push for higher licensing fees, as doing so would decrease their equity to only the benefit of artists.

      So, yes- labels are to blame here. But not exactly for the reasons you claim. There are much more nefarious dealings going on here.

      B

      Reply
  3. With Respect To Billy Bragg

    No one is against Spotify Billy… they are FOR FAIR COMPENSATION to artists without whom Spotify could not exist. To marginalize artists need to be fairly compensated seems silly, sorry. Love you Billy, but you’re wrong or misinformed on this one.

    Reply
  4. Tom Andrus

    TuneHunter, I think Billy is correct. I think Spotify, Deezer, Rhapsody and the others could get to 100 million subscriptions worldwide. At $10 per month this would be $12 billion for this one line item. If current economics are followed, over 60% of that will go to rights holders with the remainder going to run the streaming service. For the musicians, this should be one of many revenue lines? There should also be pay as you go streaming (300 million people and could be bigger than subscription), downloading to own, music videos, premium content, live performances, live video streaming, recorded video streaming, and a plethora of licensing options. Spotify is running up huge losses today because of the economics, but they will need to turn this into a profitable business. But while they and the other streaming services work towards that goal, the rights holders need to work out their deals between themselves. I have heard it joked that the music business is a stream of nickels. It is true, and those nickels are becoming half pennies. But there should be billions and billions of those pennies; in part, because of the streaming services. And what is most important to keep in mind is the music consumer has never had it so good. This should be another time for music and artists to rule entertainment. What is even better, it doesn’t have to be a handful of winners like the old payola radio days. The streaming services are a platform where any artist or even genre can get exposure, performers can build a fanbase and can grow all the other revenue lines which compliment streaming. The discussion should be about building the business, getting better at soundtracking peoples lives and not squabling over half pennies.

    Reply
    • TuneHUnter

      Tom, Billy just did some wining and dinning with Spotify dreamers in Sweden and got blurred vision – there is no hope for streaming in current set-up.

      I the meantime I have no problem with free streaming without subscription as long as we get the cash at the Discovery Moment! Streamer has to pay for addition of fresh tunes to his play list!
      Music ID and similar tune suggest engines cannot be the integral part of Spotify – with them Spotify is like new Audi Q7 and original Nupster like Ford T.
      It took 5 years to kill Ford T. Several Audi Q7 will kill the industry in less then 5 … or will freeze it at 30 billions.

      Just remember that inflation adjusted 1999 sales of music would be today at 56 billions – we are at 16!

      Reply
      • TuneHunter

        One billion subscribers at $7 dollars a month makes 84 billion dollar industry.
        IT WILL NEVER HAPPEN!

        500 million subscribers is possible by 2025 but at $4 / month and that is just 25 billions a year.

        ($4 is most likely # – today in US: Pandora $3, Sony desperation 3.99, most of Spotify is semi premium at $4+
        in India or Kazakhstan it will be just $2 – and you got to be there to make 500 MM subs)

        Reply
  5. david k

    Spotify i just another corporate scam to fill the pockets of only the major labels and the owners of the service.
    Dont compare a walkman to spotify you can compare a walkman to an iphone and spotify to a cassette …
    Artist need to wake up and begin shifting away from these services and realise that their music is really being exploited .. The data shows it spotify isnt profiting from this system they are only well funded that keeps them going.. take away their stash of cash and the service wont last more then a quater.. and all majors will begin pulling their catalogs. No earnings what so ever just a money loundering scheme.

    Reply
  6. david k

    Is it fair that musicians invest a large amount of money towards their craft yet majority of them can not even afford to pay for their electricity bill let alone their housing,food and basic living needs.. its the indies that drive the traffic and the indies are suffering the most I suggest everyone begins pulling their content from these streaming services and focus on those that actually pay such as Itunes/beatport.

    Reply
    • buck shine

      beatport ? they knowingly sell bootlegs which also rips off the original artists and when called out on this ..their response is entitled and dismissive to artists.

      Reply
    • asdf

      I would say paying out 78% of your revenue, according to the graphs in this post – qualify as paying. Compared to itunes/beatport, spotify pays out a higher percent of their revenue

      How are indies driving traffic? Just went through the Spotify artist top 50 worldwide – i see one indie artist. Arctic Monkeys on Domino

      Reply
  7. R.P.

    Stop your bitching and create your own spotify as an artist so that whoever wants to listen to your music can stream it and pay you directly… oh wait, CD’s were made for that before, no?

    Ok, ok. So sell your singles and albums online… Oh wait, you already do… Get the idea? No single artist is that interesting by themselves, no matter how much or big of a fanatic you are.

    and, Spotify is going to die when again? Because I put money on it that it will still be here 11/11/14. Anyone wanna bet?

    Reply
    • agraham999

      “and, Spotify is going to die when again? Because I put money on it that it will still be here 11/11/14. Anyone wanna bet?”

      Well let’s put some stipulations on that wager and I’ll take that bet. How about we stipulate certain financial markers…like near term profitability…or some break even point…because I can’t see after burning through all this cash that rapid expansion is going to make that happen. They should be putting more focus into converting freemium into paid subscriptions. Right now Spotify is functioning as a charity for the music business…but yeah…I’ll take your bet.

      Not my first time at the rodeo…I’ve seen companies like this flame out more than once in 20 years.

      Reply
      • R.P.

        eventually all corporations die, so again, 11/11/14? It isn’t going anywhere, profitable or not it’s all about speculation and as long as they have the numbers to prove their reach they will be just find and will continue to find sucker investors to keep them afloat. It is after all art, no?

        Let’s remember that they haven’t even opened up Brazil as a market and some of the other big economies globally, not to mention video, which is an idea they have been throwing around the air lately.

        Reply
        • agraham999

          In the next 12 months you’ll see a launch of an Apple competitor and some other deep pockets…it’s gonna be a tight market to make money in…so we’ll see.

          Reply
  8. andre

    this might qualify as an aside . . . but still

    I live in SF, was riding on MUNI the other day and noticed that the college-girl next to me was listening to music via her SoundCloud app on her iPhone. It occurred to me that if you’re in your late twenties or younger, you’ve probably had access to “free” music for as long as you can remember, whether YouTube, blogs, SoundCloud etc.

    I think we all agree that the viability of Spotify (or Rdio, Daisy — I personally believe only one can survive) hinges on persuading young people to accept a monthly utility-like bill for streaming music. But this is a tricky proposition when most young people are gravitating towards dance music with its inbuilt culture of posting tracks on SoundCloud — even if/when those tracks are released for download and other paid-for services. The availability of a new dance track from an EDM producer on SoundCloud or YouTube is now considered a *given* for young people. Also, in the world of blockbuster pop music (Gaga; Cyrus; Perry), we see the culture increasingly becoming singles-driven — which makes sense for this market, but it also diminishes the perception among those fans that they simply must have (access to) the entire album. Isn’t the Spotify value proposition is a bit different for a teen that mostly just wants access to hit singles, the ones that are always available on Spotify?

    I think the biggest obstacle to the viability of a Spotify is music’s diminished role as a cultural force.

    Reply
  9. Josh Jenkins

    Wow, that is A LOT of money. I’m all for streaming music services, but I think they really have to prove that they’re profitable, and this isn’t helpful in that argument. Funny thing is, it’s not going to go back to CDs, so if streaming services don’t work out, then it’s back to pirating, so detractors don’t get much out of this either. I do believe that a large enough audience base could lead to profitability though, so hopefully this funding will go somewhere. I very much like Spotify. I listen to it everyday (along with torch music), and I love the accessibility of the streaming model. Hopefully they’ll make it work out, and I won’t have to go back to downloading what I want!

    Reply
  10. Murray

    All arguments aside, the headline says they are looking for $200mm? What happens if they don’t get it? Tick-tock Spotify.

    Reply
    • TuneHunter

      Then they should merge with Shazam and Echo Nest.
      This will make them all the Jesus Christ of the Music Industry.
      50 billion IPO in 12 months! …and it would be honest IPO.

      Reply
      • TuneHunter

        Just one note Crowd Pleasing business model has to switch to Discovery Moment cash!

        Investors of Pandora and Soundhound should follow at once. Sony’s Gracenonte and monstrous Google lyric ID would be stupid not to jump to new cash pot.

        70% of current piracy fuel will start to propel Discovery Moment engine.

        Just check this NYT link – music at some moments is like a narcotic or sex – merchandising digital music should be the easiest task – lets create this productive and fair to all environment.

        http://www.nytimes.com/2013/06/09/opinion/sunday/why-music-makes-our-brain-sing.html

        Reply
  11. agraham999

    For companies like Spotify…streaming is their entire business. We all know Apple will release a Spotify type service within the next year, and that’s simply an extension of an ecosystem to sell hardware…their real profit base. So Apple can lose money on music (if they chose to) and pay a higher rate than Spotify…and if it’s included in an all you can eat plan that’s the same price or cheaper…it will be interesting to see how all this plays out.

    Right now Spotify is simply a charity and a house of cards in many respects. Investors help keep it afloat as it pays a ton of cash to the labels who also own a piece of the company. If Spotify fails…the real losers once again are the artists.

    I think it’s a bit weird that we’re seeing people hold up this model as the future of the music industry before it’s proven it can actually sustain itself. Again…if I were Spotify I’d be focusing less capital on expansion and more on conversion.

    Reply

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