$698.1 Million Reasons Why Spotify Isn’t Sustainable…

Can this possibly be sustainable?

Spotify tossed another scary financial figure into the ring this morning, with 2015-year losses topping an astounding $188.7 million on revenues of  roughly $2.12 billion. That widens a year-2014 loss of $176.9 million, and brings cumulative losses to $698.1 million since the company started in 2008.  All of which raises the question over whether streaming music is a viable business model.

The plunging losses explain a recent, $1 billion tranche in loans, which brings cumulative loans and debt to roughly $1.56 billion.  But whether that debt can be properly services is now a very real and pressing concern.

The question analysts and the music industry is pondering is whether this math can somehow make sense.  Heavy losses aside, other metrics are booming, including top-line revenues and paying subscribers.  For 2015, Spotify counted total revenues at $2.12 billion, up 80 percent over 2014.  Paying subscribers were counted at 25 million, a figure Spotify has since upwardly revised to 30 million (while hinting at 100 million total users).

Meanwhile, Spotify says payments to rights owners are exploding: the company claims €1.63 billion ($1.82 billion) in royalty payouts last year, up 85 percent.  But a gigantic chunk of that appears to be going to major label partners, all of whom carry equity positions but are simultaneously upping licensing fees.  Meanwhile, artists continually complaining of decreasing per-stream payouts, with data to back it up.

The next step is a massive Wall Street IPO, one that could generate billions in fresh capital.  But here’s another problem: analysts don’t think Spotify will ever reach profitability, at least without drastic changes to its core business model.  “Their operating and net losses were both bigger in 2015 than 2014, and that’s a bad sign for future profitability,” Jan Dawson of Jackdaw Research told Mashable.

Mark Mulligan of Midia Research offered a similarly dour outlook.  “The fundamentals remain that it’s not a profitable business and it’s difficult to see how it will get to be a profitable business,” Mulligan told the Financial Times this morning.

15 Responses

  1. Spotify is on a race to domination

    gaining profitability will be easy for spotify. They control playlists, and could easily start signing artists and keep a larger percent of revenue than they do currently. Greater margin = profitability in 1-3 years. Easy.

  2. Adam

    Spotify could make a profit tomorrow if they stopped focusing on expansion. But the press (yes you Paul), don’t understand businesses or the markets.

    Looking at these numbers it’s easy to see how they could easily turn into the black in a year or two by reducing some costs while still expanding revenues.

    And to anyone who thinks artists aren’t paid enough – isn’t 16% fair for a distributor?

  3. Anonymous

    can someone explain why we care about Spotify’s profitability? Crazy as it sounds, it’s not a measure of sustainability. Plenty of companies are not profitable. Tesla, Pandora, Twitter and many others have never made a profit. All are beloved and vital in their own way. Amazon has only recently become profitable and has been public for nearly 20 years!

    Stop playing amateur economist!

    • Jonas

      Good point!. I used to like this page.. but, the last articles are cheap press just to get more followers.

    • Me2

      Good point, though I wouldn’t exactly label those companies as ‘beloved’. Depends who you are and how they affected you.

  4. Anonymous

    If I had money to invest any streaming music companies would be pretty much near the bottom of my list.

  5. Kevin Brown

    Just because Spotify allows you to play millions of tracks for a small monthly fee and just because losses as a share of revenues is falling doesn’t mean it’s a sustainable business plan. Artists won’t use streaming services to launch their new material forever and like Adele, when new music is not available on Spotify and it becomes the equivalent of ‘Dave TV’ (I.e. For old material only) then the model and profits will fall further.

    This model is not sustainable.

    There is also another problem with this model in that the label or artist doesn’t own the relationship with the fan directly. This also happens on social networks. Artists and labels are increasingly aware of the pitfalls of this and as services like; GigRev.com and Disciple Media (who provide artists social platforms) know, things are changing fast.

  6. FarePlay

    Spotify has done nothing to contribute to the music business and have demonstrated they know nothing about it. All they’ve done is divert money away from the artist for what?

    So they could also eliminate disc jockeys and get free playlists from their customers?

    Freemium was as bad as piracy, if not worse. Freemium depleted the listeners who were willing to pay away from purchasing. They even went so far as to cut a deal with Starbucks that eliminated CDs from their stores.

    Out of sight, out of mind, right? And I don’t know where all these trolls came from, but then again I wonder why it took them so long.

  7. DavidB

    According to Spotify’s own publicity sheet ‘Spotify Explained’, which has not as far as I can see been revised, about 70% of revenue is paid to rights holders. If this has increased to 85% an explanation is needed. The article claims that major labels are ‘upping licensing fees’, but gives no evidence for this, and I have not seen it reported elsewhere. Isn’t it more likely that Spotify’s own discount policy has something to do with it? Spotify has been giving massive discounts to trial subscribers, but label contracts likely set minimum revenue requirements which mean that Spotify would have to carry much of the cost of the discounts itself.

  8. Jesse klapholz

    I agree with Kevin Brown above. Unlike Amazon, et al, with major record label ownership in Spotify whose hands are in the till, royalties are choking the company off. Yes, if Spotify could go public and buy out thecrecord labels, that might be one avenue of survival and growth.

    Just beacause you have a great launch plan, e.g., Amazon, you need a growth and scaling plan. Does Spotify have that plan? Or, will it take the music industry to make another turn?

    • LOL

      Universal is owned by French media conglomerate Vivendi, Sony Music is owned by Sony Corporation. There’s no way in hell that Spotify will afford to buy any one of these out, LOL

  9. Anonymous

    Spotify was a huge success — it made Ek a very, very rich man.

    So it did everything it was supposed to do.

  10. Nicky Knight

    It’s a case of Profitless Prosperity – a term coined by Neil Bogart of Casablanca Records fame when talking about a Cher record that shipped gold and returned platinum…

  11. steven corn

    The two big questions are:

    1) Can Spotify service its debt? I estimate that this might be ~$100m+. That’s more than half of their losses.
    2) Is Spotify too big to fail? For many companies (majors, indies, and others), Spotify is a top-3 digital earner. If Spotify’s revenue went away, I don’t think it’s reasonable to expect it to be picked up by Apple or Youtube or Deezer.