Spotify Desperately Needs Another $400 Million…

firedance

Riddle me this: how can one startup be so bad at making money, yet so great at raising it?

According to details just published by the Wall Street Journal, Spotify’s money-burning bonfire is about to devour another $400 million, its seventh financing round.  Goldman Sachs is bankrolling a large portion of the mega-round, with an Abu Dhabi fund also a source of cash.

Spotify has previously raised $500 million, though that money has largely been burned through.  At roughly $900 million in aggregate financing, Spotify now carries an incomprehensible valuation of $8.2 billion.

That dangerously high valuation makes the company almost impossible to sell, and according to Wall Street Journal, there isn’t even a timetable for an upcoming Wall Street IPO.  “Nine-year-old Spotify, which previously raised more than $500 million in equity funding, hasn’t established any timeline for a possible IPO,” the Journal reports.

“The money-losing company needs the cash to support its costly business model of paying nearly 70% of its revenue to rights holders as royalties.”

 

Spotify_losses_2013

 

Meanwhile, Spotify is facing massive pressure from the ‘big three’ major labels to close their ‘freemium tier’.  The majors, which carry an ownership stake of roughly 15%, and are rumored to have unsuccessfully shopped Spotify at a price tag of $10 billion.

So far, there have been no takers.

 

52 Responses

  1. FarePlay

    The VC guys are in so deep they can’t let Spotify go down. It’s a write off that’s too big to swallow and shows Goldman Sachs doesn’t really understand tech. Got to give GS credit though, they were great at getting our tax dollars to bail them out last time.

    Reply
  2. superduper

    Does anybody think that Spotify could crash financially? I mean it’s not as if it’s making any money. If it does, does anybody think that Spotify would be considered to be a sort of ‘cautionary tale’ in terms of streaming and its fundamental flaws?

    Reply
  3. Anonymous

    Let’s find $4 billion! It will prove the business model and positively smoke labels out of music business!
    Apple- dead/Beats will help in this transition.

    Latest sub pricing trends call for just $20B music industry by 2025. If we are lucky!

    Reply
  4. David

    They are following the example of Amazon. The idea is that the business can run at a loss for many years, until it has wiped out all competition, then it finally starts earning a decent profit. The snag is that Spotify isn’t really like Amazon. To distribute physical products, the main business of Amazon, you need a big delivery infrastructure, which is expensive to copy. But to stream music, the delivery infrastructure is the internet itself, which is available to any rival. So just when Spotify thinks it has crushed all competition, it could pop up again, and the profits go down the drain.

    Reply
    • so

      Good points but it’s becoming apparent that Spotify is so far ahead that they have only one potential rival, Apple / Beats. The Amazon of streaming is likely to be settled once and for all in 2015.

      Reply
  5. Spotify

    Spotify can be profitable today if it wants to. All it has to do is ditch the free version. It has 17 million + paying subscribers that is paying on average $90 a year ($7.5 a month).

    17 million paying subscribers x $90 a year on average = $1.53 billion in revenue.
    70% payout = $1.071 billion in royalties payment
    Left over cash for operations = $459 million a year

    But Spotify is stupid. Instead of focusing on short-term profits, it is focusing on growth. Stupid business strategy. Why focus on long-term growth when you can focus on profits TODAY!!!

    Reply
    • Anonny Mouse

      While I appreciate your sentiment, short sighted capitalism isn’t good for anyone. And if you want to build a company that stands the test of time, the exposure to risk in the short term is huge.

      If they want to pay the lights today, it’s not a good strategy. If they want to be the market leader, it’s a smart one.

      Reply
  6. Spotify

    Spotify paying subscribers

    January, 2010:———— 250,000 paying subscribers
    March 17, 2010:———– 320,000
    July 20, 2010: —————- 500,000
    December 8, 2010: —— 750,000
    March 8, 2011:————— 1,000,000
    July 14, 2011: —————–1,600,000
    Sept 21, 2011: ————— 2,000,000
    Nov 23, 2011: —————-2,500,000
    Jan 26, 2012: —————–3,000,000
    July 31, 2012:—————–4,000,000
    Dec 6, 2012: ——————5,000,000
    March 12, 2013:—————6,000,000
    May 21, 2014:—————-10,000,000
    Jan 12, 2015: —————-15,000,000
    April 12, 2015—————–17,000,000 paying subscribers

    20 million paying subscribers is very doable by the end of the year.

    Reply
    • Sarah

      That’s detailed information, between this post and your previous one (as of yesterday, 17 million paying at average of $7.50).

      In fact, those are numbers I haven’t seen anywhere else yet.

      Can you provide sources for your information?

      Reply
  7. Tcooke

    Should be interesting to watch. More interesting, how music is going to change.

    Reply
  8. RIAA

    2012 RIAA #:

    Downloads at $2.829 billion
    CD (physical): $2.4856 billion
    Streaming Revenue: $1.0328 billion USD (up 59%)

    2013 RIAA#:

    Downloads: $2.803 billion
    CD (physical): $2.1235 (down 14.6%)
    Streaming Revenue: $1.439 billion USD (up 39.3%)

    RIAA 2014 numbers:

    Download: $2.64 billion (down 9.5%)
    Physical CD: $1.85 billion (down 12.3%)
    Streaming: $1.87 billion (up 29%)

    Guess which will be #1 for RIAA 2015?

    Reply
    • David

      On those trends, it will still be downloads. The rate of increase in streaming revenue has fallen very sharply, so just extrapolating the trend, the increase in revenue for 2015 is unlikely to be more than 20%. Conversely, the rate of decline in downloads has also fallen, so extrapolating the trend, the decline in 2015 is unlikely to be more than about 7%. That would leave downloads still slightly ahead. Of course, simply extrapolating trends is a mug’s game, but it is the game you are inviting us to play.

      Reply
      • David

        Sorry, I must correct myself: the rate of decline in downloads has not fallen. I must have had a fat finger on my calculator! Assuming a decline in downloads of, say, 15%, streaming and downloads would be almost neck and neck.

        Reply
      • Spotify

        The growth % is decreasing but the total increase is still increasing.

        2012 to 2013 increase in streaming revenue: + $406 million USD
        2013 to 2014 increase in streaming revenue: + $431 million USD
        2014 to 2015 increase in streaming revenue: + ???

        With Apple launching Itunes Unlimited and advertising it, streaming revenue increase in 2015 will only get bigger.

        Reply
    • arithmetic

      lol, add up all hose figures… How the eff is Spotify… a company who has never made a profit, worth more than all sold or streamed music combined? Fricking SillyCon Valley math….

      Reply
      • Easy

        Spotify $8.2 billion valuation is because Spotify now has 17 million paying subscribers. And poised to have 20 millions by year end.

        And that number will continue to rise.

        17 million paying subscribers x $90 a year (or $7.5 a month) on average = $1.53 billion in revenue.
        70% payout = $1.071 billion in royalties payment
        Left over cash for operations = $459 million a year

        Subscription is all about SCALE and Spotify has plenty of it. It can be profitable right now if it want to. But it is stupidly focusing on growth. Profit is what matter most. Not growth.

        Reply
        • Edward Jennings

          I don’t expect Spotify’s subscriber amount to continue to rise as it has. They did receive a great shot in the arm with 1.2 million subscribers by taking on the SONY Playstation customers. I could be wrong about Spotify topping out but there are forces at work that will redefine how the streaming business model will change.

          There is combined competition from TIDAL HiFi and waiting in the wings Apple iTunes Streaming and YouTube Music. Combine those “competitive” platforms with what we are reading and hearing about record companies wanting to “eliminate” the freemium model, which is Spotify’s Trojan Horse for subscription.

          Add to this federal government legislation forthcoming to help artists receive more royalties and this puts Spotify in an interesting bench vise. Spotify is getting squeezed from multiple sides.

          Spotify secures $900 million in funding. They should be spending that on making their global network high definition quality sound instead of MP3 320 kbps. Don’t want no MP3.

          Spotify also needs to visit its usability and user experience. I would think a company receiving $900 million, who owns The Echo Nest and has 18% investment from record conglomerates would be able to build and supply a better application mousetrap.

          Spotify will survive but we need to see a metamorphosis from them to accomplish that goal more effectively. Ball is in your court Spotify.

          Reply
          • Spotify

            Spotify will continue to have the FREE VERSION.

            They might limit the hours available each month to 20-30 hours.

            But the free version isn’t going away.

          • Casey

            They use 320kbps OGG. Not MP3. Lossless would be nice but that shouldn’t be one of their priorities right now. Their desktop application 1.xx blows and seems to be causing some subscriber loss. They should focus on fixing that immediately. Then focus on adding value to their premium service to lure free customers into paying.

          • Edward Jennings

            You’re right, Spotify Premium multicasts in 320kbps OGG Vorbis. It is inferior to TIDAL HiFi (44.1kHz)1411kbps and PONO Music high resolution audio 24/96 or 24/192.

        • Sarah

          “Profit is what matter most. Not growth.”

          And there’s where you’re at odds with Spotify and its investors.

          Reply
  9. Literati X

    The riddle of being poor at making money and great at raising money is not a very hard riddle to solve: It’s called the ‘ Bernie Madoff ‘ Syndrome : Wall Street will finance a Jew if he were downloading shit inside his own toilet bowl. . .

    Reply
    • Anonymous

      Have racists really not learned to at least keep it to themselves at this point?

      Reply
  10. Willis

    Count me in on this. I desperately also need $400 million. Someone please start a GoFunMe page to help me out.

    Reply
  11. $2 billion a year in revenue

    Spotify is on pace to make $2 billion in revenue in 2015. In a business where you take 30% of the revenue and pay 70%.

    20 million paying subscribers and 80 millions users worldwide by the end of the year.

    That’s why it’s $8.2 billion VALUATION.

    Reply
  12. $2 billion

    $2 billion revenue a year x 30% cut = $600 million a year.

    it’s all about that SCALE.

    Reply
  13. FarePlay

    Cooking the books.

    What a bunch of BS on this page. Businesses don’t track this way.

    The “RIAA” numbers:

    2012: 6.34 billion (total)
    2013: 6.36 billion (total)
    2014: 6.36 billion (total)

    No business flatlines like this.

    Next. US total music sales 6.36 billion. Spotify Valuation $8.2 billion and their reaching $1 billion debt.

    Next. Spotify has given up 20% of equity to vendors.

    Next. The labels are demanding Apple / Beats to have paid only subs and setting the fees AND allowing Spotify to have a free subscribers?

    You can gage Spotify’s financial ‘concern’ by the number of Spotify supporters commenting on this post.

    Reply
  14. Chris H

    Spotify is great at many things. It’s business model is not, as it comes from an arrogant place where devaluing the basic cost of goods is inherent in the model working. 70% of revenue is ok at a certain price point, but that involved leaving numerous value adders out of the chain (i.e. songwriters, publishers).

    Now that Congress is going to act to reset the playing field, the cost of goods SURELY goes up to at least a fair market rate. Add that to the need to infuse 400 million post haste and Yahtzee, it’s game over for this current round of streaming services, Tidal included.

    The VC behind this are going to take it as a huge loss ultimately.

    Reply
  15. Name2

    I’m confused. I thought the WSJ and NYT were old fuddy-duddy journalism, soon to be vanquished by those meddling kids at DMN.

    Reply
    • FarePlay

      This will probably seem like a remote comment, but the NYT is one of the few remaining news outlets that have paid reporters on the ground throughout the world. The NYTimes isn’t perfect, they have bias problems like every news organization, but when push comes to shove they employ the most consistent, reliable reporters in play at major breaking events.

      None of these online news services has anything like it and are dependent on the NYT for many of their top breaking stories. When we lose the NYT we lose our trained eyes and ears. We’re flying blind with untrained, unvetted individuals with cell phones and internet connections.

      Like I said, they’re not perfect, but they play an important part in global news gathering……..

      Reply
      • Paul Resnikoff
        Paul Resnikoff

        when push comes to shove they employ the most consistent, reliable reporters in play at major breaking events.

        …like Judith Miller?

        Reply
        • Edward Jennings

          No like your friend and digital music subject matter authority Ben Sisario who writes for the New York Times. Ben is a competent, reliable source of music industry analysis.

          Take a look at the article he wrote today about proposed royalties legislation which Digital Music News and Hypebot both failed to cover. Tsk, tsk.

          http://www.nytimes.com/2015/04/14/business/media/bill-seeks-to-broaden-royalties-paid-by-radio-stations.html?ref=topics&_r=0

          “All the News That’s Fit to Print”

          Reply
        • FarePlay

          Paul, you can do better than that and you know better than that. Clearly, clearly there were concessions made in my comment addressing the Judith Miller type problems that any large employer runs into.

          NYT. Perfect? No way. Do they provide a valuable service. Absolutely.

          As a journalist, you of all people should know exactly what I’m talking about.

          Reply
          • Paul Resnikoff
            Paul Resnikoff

            So, getting us involved in Iraq on completely faulty, irresponsible reporting is just some problem that “any large employer runs into?”

            Remember, if the New York Times didn’t exist, the world would be a far better place. And 10,000 great articles by Ben Sisario isn’t going to change that.

          • FarePlay

            Correction. Along with half the politicians WE voted for.

          • Paul Resnikoff
            Paul Resnikoff

            Michael Moore once asserted that if 9/11 had happened in 2011 instead of 2001, it’s questionable whether or not we would have plunged this country into the “Wasted War” in Iraq. The media is far more powerful now, if you even want to call it “the media”. It’s not just big papers like the New York Times taking cooked-up talking points from the White House and the administration and printing it as truth. The big, giant, multi-fanged internet might have just called “bullshit” on the whole thing, documents probably would have been leaked by whistleblowers, and truly debunked the “reporting” advanced by journalists like Judith Miller.

            And you’re defending the old system, while shifting the blame to the politicians?

          • FarePlay

            Fascinating that this is bothering you so. I see more passion and vitriol here than I do with the music business. So here’s a question for you. Do you think it is important to have paid reporters on the ground throughout the world or do you think we’ll be well served by unknown reporters sending in news stories from their smartphones? Secondly, are there any news sources that trust and if so who do you access for your world news?

            Lastly, and I apologize if you think I’m sticking it to you, but I don’t believe Judith Miller was a field reporter for the NYT, which is where I started in the beginning.

            In closing, one thing I know we do share is a conviction that the Iraq War need never have happened and worse yet that it made the situation in the middle east far more unstable and deadly today than tolerating a tyrant who hated terrorists, even more than his own people.

        • Paul Resnikoff
          Paul Resnikoff

          Wow, you mean the record labels want a royalty payment on their broadcasted recordings? I can’t believe that! What a groundbreaking development, I’m so surprised that both Digital Music News and Hypebot had the audacity and short-sightedness to skip that fresh, shocking story.

          Reply
          • Edward Jennings

            “Digital Music News is the premier news and information authority for music industry and technology executives worldwide.”

            Not.

        • HolySh|tPaulYou'reDumb...

          Paul Resnikoff

          Wow, you mean the record labels want a royalty payment on their broadcasted recordings? I can’t believe that! What a groundbreaking development, I’m so surprised that both Digital Music News and Hypebot had the audacity and short-sightedness to skip that fresh, shocking story.

          So, this is YOUR first story on Spotify’s apparent financial health?…

          Dude, you recycle more tangential, totally unsupported garbage than anyone. For you to try and assert that you didn’t cover the Nadler bill because it’s just “more of the same” is so laughable, it’s not funny.

          Reply
  16. RickyLopez

    Good thread (mostly) on here. The elephant in the room is Universal Music. They’re bound to pick up Spotify and add so much exclusive content on it that it will be difficult not to subscribe. They already block a bunch of their material being uploaded on there already from compliation labels….. or of course everyone will find it on Youtube like the Tidal stuff…or a torrent

    Reply
  17. Joseph Nicoletti Consulting /Global Village Music co.

    to big to Fail. just like the “Banking” scams…Biggest Crime on the public in history !. everyone of responsibility looked the other way and got paid to do so,…what is the question ?

    Reply
  18. Dr John Pollard

    How many of the 17 million are between the ages of 15 and 25?
    I’ll bet a high proportion. If correct, they’ll outgrow and may not be replaced.

    Reply

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