Spotify Is Now Profitable In the UK…

spotify

The following is a developing story.  Please check back for ongoing updates, including the release of more financial data.

Spotify is now profitable in the United Kingdom, according to financial reports filed with the Company House this morning.  Broader financial details outside the United Kingdom, including the rest of Europe and the United States, remain undisclosed.

In total, Spotify is present across 58 countries worldwide, and a top-level, global financial report has not been released.

In the UK, Spotify UK counted a profit of GBP 2.58 million ($4.1 million) for 2013, a reversal from losses of GBP 11 million ($17.68 million) in 2012.  Accounting changes appear responsible for some of the shift, though Spotify’s subscriber and advertising revenues both increased last year.  Bundled deals with Vodafone, coupled with discounted student subscriptions, help to boost subscription-based revenues, despite both netting lower per-subscriber revenues.


The filing comes just days after a presentation by Digital Music News at the Vienna Music Business Research Days symposium on the financial problems that streaming services face, and will undoubtedly pour fuel onto the debate over whether streaming music services can become sustainable businesses.  But the dataset is limited and preliminary: the finances come from a country where Spotify enjoys heavy saturation, and little else is know about the worldwide picture.

Licensing costs, particularly from the major labels, remain extremely large.  According to the filing, licensing costs accounted for more than £96.2 million, or 73.2 percent of revenues.

That is a number that remains large and variable, meaning that the more money Spotify makes, the greater the licensing fees (and equity demands) become.

Administrative expenses added another 16% in costs.  Investors have sunk more than $500 million into Spotify so far.

 

 

70 Responses

    • Erik P

      “But the dataset is limited and preliminary: the finances come from a country where Spotify enjoys heavy saturation, and little else is know about the worldwide picture.”

      Reply
    • FarePlay

      Whether or not Spotify is profitable is of far less concern than the downward re-set of artists’ income. If there is a significant trade out of streaming revenue as a replacement for recorded music sales, the impact on mid-level artists who once sold 20-50k CDs will be devastating.

      The focus of my concern, as it has always been, is on the side of artists being equitably compensated for their work.

      Reply
      • GGG

        How much money do you think a mid-level artists, signed to a label, who sold 20-50k records brought home?

        Reply
        • FarePlay

          That would primarily depend on the bands advance, what the band spent in the studio, whatever the label can claim as support and marketing expenditures and the points the artist negotiated. And of course, if the artist held onto their publishing. The artist was probably signed to a 360 deal, so other factors enter into it as well.

          But at the core of your question, was the label able to build awareness for the band to continue growing their fan base through exposure and providing advances that support a band or an artist so they can focus on songwriting, rehearsing, etc..

          But I digress. When I refer to mid-level bands, I am primarily talking about indie bands who receive a much higher percentage of sales. Band’s who are making $6 to $8 on CDs, getting 70% from iTunes or higher from other sources for paid downloads.

          Reply
          • There is something...

            Please point me to a label that will pay 8$ per CD or 70% of download income in 2014. To get that kind of deal, you would need to be a full self produced, self released artist.

          • FarePlay

            Gee really? Why don’t you take the time to read before you shoot from the hip. As it says in my comment: indie bands. INDIE BANDS. It says nothing about Indie bands signed to labels does it?

          • GGG

            You overestimate how many of these bands exist. Even Glassnote, who I’m pretty sure splits 50/50, won’t give bands $6-8, it’ll be $5 tops….after recouping.

            And we can probably count the amount of unsigned bands selling 20-50K on two hands. Labels will be throwing money at them when sales hit about $10k.

          • Me

            Also consider that iTunes doesn’t deal directly w/ unsigned bands. 70% is pretty much impossible for an indie band w/o a label. If the band did have a label/distributor/aggregator, they would take an additional 15% off of download revenue, so the band would only end up w/ 55% of the download revenue.

          • There is something...

            Sorry grandpa, you obviously didn’t know that indie bands are usually signed to indie labels. For self released artists, we (the young people under 60) are using the word DYI artist. 🙂

          • There is+something...

            DIY of course, My bad for confusing you even more…

          • FarePlay

            You do realize that referring to me as “grandpa” is a form of racism.

          • There is something...

            Oh man, please ! You’re the one who was so proud to say how long your experience was and how music was so good “back in the days”. No don’t complain when someone point that your age also means that you’re out of touch with today’s music scene.

    • Anonymous

      Here’s another angle on Spotify:

      A TALE OF TWO PIRATES? Daniel Ek (uTorrent) and Kim Dotcom (Megaupload)

      See TheTrichordist.com, October 6, 2014

      Reply
      • Anonymous

        From the TriChordist article:

        Spotify CEO Daniel Ek is celebrated as the former Co-Founder and CEO of uTorrent. uTorrent is described as “the world’s most popular BitTorrent client with more than 100 million downloads” on Mr. Ek’s Wikipedia page.

        […]

        In many ways both Ek and Dotcom represent the same devaluation and destruction of the arts by building personal fortunes as the result of monetizing the work of creators, without paying those creators for their work.

        […]

        Megaupload and uTorrent have monetized the mass scale distribution of infringing works for profit. In other words, infringement as a business model where the cost of goods goes unpaid and creators are uncompensated.

        […]

        Mr. Ek like his previous cohorts Bram Cohen and Matt Mason would like to say that BitTorrent is not a piracy platform, however multiple independent studies have repeatedly concluded that 99% or more of the files being distributed via BitTorrent are in fact, infringing.

        […]

        All of this of course points to the fact that Megaupload and BitTorrent have hidden behind the DMCA, which has failed at it’s intent to protect artists. It could be argued that uTorrent and Megaupload have participated in business models enabling one of the largest transfers of wealth in history from individual creators to Silicon Valley companies and operatives.

        Daniel Ek is reported to have a net personal wealth valued at $400 Million Dollars. Kim Dotcom’s fortune has been recently estimated to be $200 Million Dollars.

        SOURCE: TheTrichordist, October 6 (I’ll post the link in a separate comment below, it may take some time to show up)

        Reply
        • Anonymous

          “Daniel Ek is reported to have a net personal wealth valued at $400 Million Dollars”

          …and that’s why the music industry needs to build it’s own kick-ass audio&video service!

          Indies account for 1/3 of the industry. That’s real money, real power.

          Why don’t we organize that power?

          We need to launch a free, non-censored, high-quality, ad-financed, artist-friendly, better-paying YouTube alternative — owned and operated by the industry — and use that service exclusively. All revenues straight back to the artists!

          Exclusive releases have proved to be a huge success for Netflix.

          Now it’s our turn.

          Reply
          • Anonymous

            “We need to launch a free, non-censored, high-quality, ad-financed, artist-friendly, better-paying YouTube alternative — owned and operated by the industry — and use that service exclusively. All revenues straight back to the artists!”

            And there’s a lot of money to make here:

            According to Business Insider, Google makes $3-4 billion/year from YouTube. Music channels account for 34-50% of the total traffic — but during the past 8 years, YouTube only paid $1 billion to right holders…

          • Pawel Soproniuk

            Well – we’ve been builiding such platform (NuPlays.com) for 2nd year now and it seems very promising!

          • Anonymous

            That’s a confusing site. It also seems to be a store, not a streaming service.

          • Anonymous

            Except the majors would never be on board. And without the majors it will sink. That’s assuming you have the funding without the majors to get it off the ground in the first place.

          • Anonymous

            “Except the majors would never be on board”

            Don’t you think they want to make money? 🙂 This is the only way to do it.

            However, their hands are tied until their YouTube Music Key contract expires (they are not allowed to exclude the new YouTube from releases), so we’ll have to do without them until then.

            But again: Indies account for 1/3 of the industry and that’s a lot of money and power.

            All it takes is organization.

  1. jw

    >> Licensing costs, particularly from the major labels, remain extremely large.

    You’re a hard one to please, Paul. Spotify can’t pay rights holders enough, nor can they keep enough profits for themselves. You do realize that “licensing costs” & “recorded music industry revenue” are one in the same? It’s kind of silly how you use one or the other, depending on how you want to skew the article, which is always in an effort to put Spotify in a bad light.

    I’m alllll for tough journalism, but you need to pick a side on this one.

    Reply
    • Paul Resnikoff
      Paul Resnikoff

      The issue is extremely slim profit margins, if profits exist, and costs of services and goods that are extremely variable. One shift that has happened is that labels have moved away from gigantic lump-sum or licensing payments, but traded that instead for very sizable percentages instead. I’m not sure if that is playing into the current financial balance sheet.

      But when it comes to financial stability, and overall stability, ask yourself if Spotify will be around in 5 years? I’m not sure anyone can definitely answer that question. With 25 million subscribers, the situation would be different.

      Reply
      • David

        70% of revenue is actually quite reasonable considering that it pays for the product Spotify are selling! Spotify’s additional costs (offices, servers, promotional costs, etc) should not increase in proportion to revenue, so they should become more profitable with increasing revenue.

        Reply
      • jw

        If profit exists? You have it in black & white right here. Profit. How are you acting like that’s in question?

        What you’re supposing is that the labels will act against their own best wishes, killing of Spotify. Labels who have a vested interest the service in both the short term & the longterm. Would you strangle a company that you had equity in? It’s the labels, & the labels alone, who are putting the burden on Spotify. They hold the gun. You’re supposing a scenario where would willing, or for some reason they would be forced to run Spotify into the ground. And that defies all logic to me. You’re taking that for granted, but to me it seems like you’re taking a realistic view of what the motivations are. You’re just perpetuating this doomsday scenario where everyone is asleep at the wheel & we’re approaching a cliff, but that’s not reality. There’s psychology involved here, there are vested interests, &, when it comes down to it, I can’t imagine everyone not playing ball in order to reach that 25m subscriber mark.

        If you’re right that the labels are asking for a percentage of revenue in exchange for continued licensing, they control that, & their vested interests would motivate them to lower that percentage if need be. Those things aren’t written in stone.

        Reply
      • Rfilo

        I think it’s fair to consider that profitability may not actually be in Spotify’s interests. If they become profitable the contrast between that and the tiny amounts they pay for individual streams becomes greatly amplified as well the pressure to pay out even more. Perhaps, like Amazon who has done this successfully for years, the goal is the never ending pursuit of growth, which is something investors seem to value almost as much as profits.

        Reply
  2. Anonymous

    “But the dataset is limited and preliminary: the finances come from a country where Spotify enjoys heavy saturation”

    Yup.

    Reply
      • smg77

        That’s not Spotify’s fault. Streaming services are paying millions of dollars to labels and very little of that money is being paid to artists. The labels are the bad guys here…not the streaming services.

        Reply
        • Anonymous

          What if the artists had their own music service?

          Then they wouldn’t have to pay hundreds of million dollars to people like Mr. Ek. All revenues would go straight back to the artists.

          (See the comment above, that might be the solution…)

          Reply
          • Anonymous

            Ek isn’t getting paid hundreds of millions. His ownership stake in Spotify is worth hundreds of millions.

            Until you learn the difference, anything you post is invalid.

          • Anonymous

            Here’s how it works:

            Streaming fat cats like Daniel Ek take hundreds of millions from their artists.

            Simple…

          • Anonymous

            If that were revenue, then perhaps. But it isn’t.

            Are you saying Ek should give his stake in Spotify to artists that he earned by investing his time (well over 40 hours a week from what I have heard) and his own money? Fascinating. It wouldn’t have killed artists to… well… you know…. Actually WORKED at Spotify to gain equity. Or invested money into Spotify to gain equity. They had plenty of chances.

            Spotify is a company. If you wanted equity like Ek has, you actually needed to earn it. They don’t owe you stake in Spotify.

          • Anonymous

            There’s really no need to make it complicated.

            Why allow Mr. Ek to take hundreds of millions from the artists?

            He never created anything. Remove your music from Spotify, and see what happens: 🙂 His service will be dead within seconds.

            Again, here’s my proposal:

            Launch a free, non-censored, high-quality, ad-financed, artist-friendly, better-paying YouTube alternative — owned and operated by the industry — and use that service exclusively. All revenues straight back to the artists.

            Exclusive releases have proved to be a huge success for Netflix.

            Now it’s our turn.

      • Anonymous

        And then we need consumers to give up videogames etc. and spend money on music like it was 1999. Easy peasy.

        Reply
        • Anonymous

          “We need streaming to fail”

          Sounds weird, I hoped it would succeed. But it didn’t.

          Reply
  3. Yep

    ‘One shift that has happened is that labels have moved away from gigantic lump-sum or licensing payments, but traded that instead for very sizable percentages instead. I’m not sure if that is playing into the current financial balance sheet’

    In terms of the balance sheet ‘lump sum’ payments i.e advances are open to a certain amount ‘creative’ accounting. They can be split across many years depending on how the company predicts future sales. However, as you say they are moving away from this to a more normal pay per stream model. I think this roughly works at about 70% of net revenue (much like most other digital retailers)

    Therefore, this set of accounts seems on the face of it a pretty accurate set of financials for the year 2013.

    Congratulations Spotify (UK)

    Reply
    • Paul Resnikoff
      Paul Resnikoff

      It’s a good comment. After all, that’s how much the music costs, and I’ve always advocated paying the proper percentages for content. I’m curious as to whether that, and the loss/slim profit margins those percentages have created, are sustainable.

      Reply
      • it's not about margins, it's about cost of goods

        the problem with framing the conversation around paying out 70% of gross is that the margin is moot if the cost of goods can’t be met.

        if you sell a ferrari for the price of a volkswagon it doesn’t matter if the seller is paying you 70% of gross – the maker of the ferrari is screwed, simply because the cost of goods on a ferreri is much greater than the cost of goods of a volkswagon.

        Spotify is selling ferrari’s at volkswagon prices, that’s the fundamental problem. It’s not that streaming can’t work any more than selling ferrari’s can’t work. It’s just that the cost of goods has to be sustainable for all stakeholders in the value chain, and right now, with Spotify it is not.

        If Spotify wants to exist at bargain basement prices than offer only the music from hobbyists and weekend warriors. If this is the future, than show us how well it works when we take the ferrari out of the volkswagon showroom.

        Reply
        • Anonymous

          Apple seems to think Spotify is already charging/paying Ferrari prices. Rumor has it they are trying to convince labels to take a pay cut from Beats music to drive growth. Unfortunately DMN hasn’t covered that yet.

          Reply
        • dude

          Thats an awful metaphor dude, all streaming music is 0s and 1s and the cost of goods is the same. You’re thinking of overheads not cost of goods – it costs a TON to record and market a high-profile album but that doesnt vary depending on how many times its streamed or how many CDs/LPs you press

          If you wanna argue that streaming royalties are not gonna be enough to cover those insane overheads even at scale, theres definitely a case to be made there, but cost of goods has got nothing to do with it. The music biz has always covered its overheads by selling a lot of product at a relatively low margin a la Volkswagen, not by selling a few high-end items at a huge margin a la Ferrari.

          tldr stop reading David Lowery that dude is a fucking moron who doesnt know shit about shit

          Reply
          • sorry dude...

            you don’t understand the cost of goods includes the human labor required to produce the product. if you think all music is the same, remove all major label music from all music services and see what happens when the only thing you are left with is hobbyists and part-timers. goodbye pandora and spotify…

            let’s see how well music services perform without music from professional musicians. I’m pretty sure you end up with this – the ghetto known as http://www.soundclick.com/

          • dude

            I actually agree with you that recording a good album takes more than a part time commitment. HOWEVER recording & promoting an album only takes a certain amount of time, and living expenses for that period are finite. The musician’s time and energy is a fixed cost just like the rest of the recording costs, not cost of goods.

            If you’re arguing musicians should be able to make one album and coast on residuals for the rest of their lives, I dont think you’ll find much sympathy for that here or anywhere really. I think the argument you *want* to be making is that even at scale, and even if the release is relatively successful (which most probably won’t be), streaming royalties are not gonna be enough to cover the overhead costs of recording and releasing a quality album. I would still disagree with that, but its a reasonable basis for discussion

          • yes and more dude

            it’s all of the above. recording and releasing are not exactly fixed costs, and neither is the “10,000 hours” required to become a professional musician.

            the bottom line is, no matter how you slice the current economics of music streaming services are both unsustainable and out of touch with the cost of the product at any scale – unless of course, the music is made by hobbyists and part-timers who do not need the music from recorded revenue to survive.

          • dude

            What would you call a sustainable level of income? How many times do you think a moderately successful release should be seeing if everyone gets on board with the format, and how much do you think the rights holder should make off that to cover their costs? Im interested to know what your expectations are here

      • Yep

        How can you suggest 70% to rights holders is not sustainable? How much higher do you want it? 90%? Of course, it depends how large the revenue pot is. The pot is growing that’s for sure. The question is, is the return to labels and artists large enough for them to forge a ‘career’

        But the business is shifting, recorded music revenues are now structured differently. Now we get paid per listen..so you better keep people listening.

        In the food retail business if the price of potatoes falls so much that the farmers cannot afford to run their farm. You know what happens? The farm goes bankrupt and the supermarkets import them! Change your business to suit the market or die!!

        Reply
        • yep, you're not listening...

          paying 70% of gross is not the problem, not charging enough for the subcriptions is… go back and re-read the previous post. if something cost you $100 to make, and you are only paid on a gross of $50, the 70% you get (which is $35) means you’ve now got a net loss of $65…

          Learn the difference between the “marginal distribution cost” and the “cost of goods.”

          The cost of music is NOT in the distribution of music, but rather the cost of music is in the CREATION of music… by real human beings who need enough money to sustain food, shelter and clothing… not rocket science, just math.

          Reply
          • Adam

            So you’re saying they should charge more?

            Seems implausible considering how hard it is to convince people that $10 is fair value.

            And by the sounds of Apple’s plan looks likely that prices will be going the other way.

          • Yep

            Reality check! – Do you honestly think people will pay MORE than $10 a month for a digital jukebox? Nope!

            Your expensive car analogy is floored! Who knows what the ‘price’ of music is? It’s subjective “One Man’s Trash Is Another Man’s Treasure”

            If it’s costs a label half a million dollars to produce the album + they cannot make that back via streams they have 2 options:

            1. Don’t spend half a million dollars on the next project (and don’t tell me ‘great music costs money’ ….BS!)
            2. Find other ways to monetize the artists output (360 deals etc..)

            It’s the responsibility of the label to make it work in a streaming world! And if they don’t the artists will gravitate to a label that can or do it alone.

          • sorry yep - you are wrong again

            but you’re half right, we don’t know the true cost of music because we’ve been operating in a black market for over a decade. eventually the stockholm syndrome needs to end. and yes, they will pay more, they do pay more for Sirius XM and Premium Cable. Netlfix charges less, but has limited inventory. The streaming business models require more flexibility in both pricing structures and inventory management via windowing.

          • agraham999

            In any other industry of tangible goods this is exactly what you do. If you make artisan cheese and your milk costs are high, you don’t eat into your profits by absorbing those costs. You pass the costs on to the consumer. So yes charging more for something of value is how business works.

            That said, you can take the same analogy and apply it in another way.

            If Kraft is willing to pay advances to milk producers to keep their costs low, and turn around and sell an “artisan” cheese at a lower cost, it pinches out the actual artisans. I use this analogy because my family went through this in the 80s.

            In music, Google/Etc. are Kraft and Spotify and other smaller streaming companies are the artisans making a very good value-add product. However, in order to compete and survive, the artisans are dropping their prices but still have the same costs…and added to that is the cost of expansion as a further drain that the giants can absorb indefinitely. Even with an IPO Spotify has a long way to go to survive. And while labels may have some “investment” in Spotify succeeding, that investment was very minor…their end game is not backing any single horse, but using the competitive nature of the space to generate more and more money. This revenue will likely not translate to royalties.

            My biggest concern with streaming is this race to the bottom. For example, Spotify has cut their monthly subscription rates in half for students, who are clearly the most important demographic. Now a student is likely to remain a student anywhere up to say 10 years. That’s 10 years you need to keep that monthly cost low and grow that base which means you are inheriting an audience that essentially pay nothing for music and is accustomed to paying nothing.

            If Apple, for example, want to, they could operate beats/iTunes as a loss leader for hardware indefinitely. Where is Spotify then? What if Apple rolls beats/iTunes streaming into a bundle for each iPhone sale? Or part of some other monthly fee that includes other valuable offers? What if they do one of their back to school specials with a laptop/tablet/music bundle?

            So Spotify being profitable in one market…is not much of a ray of hope. Don’t get me wrong…their survival is good for the industry on the whole…I just wonder if they can make it that far.

  4. steveh

    Please note total income is “revenue” plus “other operating income” = £145mill

    So percentage distributed in “cost of sales” is 66% not 73%.

    Reply
  5. SteveC

    I disagree with Steveh. you can’t really add in the other operating income because then you would have to add in the other operating costs. These are not typically part of the COS calculation. What makes me curious is comparing the COS percentage from year to year. It was 82.7% in 2012 and 73.1%. That’s a large difference.

    So what caused their COS to fluctuate so much? I’d really like to know. I think it would be very telling about the level of profitability.

    Reply
    • steveh

      But what then is the other “operating income” if not derived from music content?

      And do the not subtract “other operating costs” in the next line?

      Reply
      • SteveC

        Other income could be interest, rental, tax refunds, or a myriad of other things. It could very well be non-music related income and be some sort of non-royalty bearing income. It was something that had a royalty to it, then it would have been on the revenue line with a Cost of Sales attributed to it.

        Reply
        • steveh

          Your reply is rather odd. No way would a tax refund, for example, be entered into a profit and loss account.

          re-rental:- what does Spotify rent out? Do they run a brothel on the side or something?

          re-interest:- who are Spotify lending money to? – I thought they were borrowing investment money – shed loads of it…

          Reply
    • agraham999

      That’s called business. Can you tell me a business that doesn’t profit off the work of others? How about a grocery store, car manufacturer, etc? Just because it is art doesn’t make it any different than any other exchange of goods or services. Someone creates something and provides it to someone else to “sell” that item.

      The problem isn’t Spotify profiting off artists, the problem is can they build a sustainable and vibrant creative industry that also profits from Spotify’s work? No matter what issue you have with streaming or Spotify in general, it all comes down to that. Sure, there are amazing numbers to point to as far as getting to 200 million subscribers…but there are many other issues that make getting there questionable and whether or not that can actually sustain a music industry.

      People tend to forget discounting things in a race to the bottom eventually hurts everyone. Apple never employs that tactic to win, yet Dell, HP, Samsung, etc all have discounted to the point where they destroyed their own margins and devalued the technology they built. Samsung’s race to win at all costs is coming back to haunt them. I see the same thing occurring with music and Spotify might win the race to X amount of subscribers, but along the way destroy the industry they serve because people no longer want to pay for anything.

      Reply

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