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Tuesday, October 9, 2012

Analysts Spot Big Problem in Spotify Profit Model

Posted by on Tue, Oct 9, 2012 at 8:42 AM

Spotify was already huge in Europe before it jumped to the United States. where it's user base is currently ballooning, but Friday brought the news that the numbers aren't all that impressive for one very fundamental reason: The more users the service gains, the more money it loses. Privco, which conducts business and financial research on major privately held companies, released a report on Spotify's year-end financial report for 2011.

"[In 2011] virtually every new dollar of revenue went directly to music companies as royalty payments," the abstract said. "Evidencing the fact that the more members Spotify adds, the more money the company loses."

This is a clear indication that the online licensing fee/royalty model is increasingly restricting Spotify's ability to generate sustainable margins using its freemium model. In almost a one-for-one scenario, every dollar Spotify is generating immediately exits the company due to licensing fees as members listen to music and ring up Spotify's music royalty tab.

The report also noted some other elemental issues. For example, "Spotify's 311 employees grew salary costs 173% year over year, outpacing revenue growth." Spotify has verified that the numbers are accurate. And unsurprisingly, Privco's conclusion is that Spotify's current business model is unsustainable, and the firm suggested a tiered pricing system. Below are Privco's key financial data points on Spotify:

Revenue (2011): $244.54M (€187.8M)

Revenue (2010): $96.15M (€73.9M)

Revenue Breakdown (2011): 84% Subscriptions, 15% Advertisements, 2% Other

1 Year Revenue Growth Rate (2010 to 2011): 151%

Key Backers: Kleiner Perkins Caufield & Byers, Digital Sky Technologies, Creandum, Northzone Ventures, Li Ka-Shing, Wellington Partners, Sean Parker, The Founders Fund, Accel Partners

Employees (2011): 311

In light, of this, or just in general, would you pay for Spotify if it became necessary?

Via Digital Music News


Comments (5) RSS

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Josh Bis 1
Kind of strange that this financial analysis firm is suggesting something -- a tiered pricing system -- that Spotify already has (free/$5/$10)?
Posted by Josh Bis on October 9, 2012 at 8:57 AM · Report this
Grant Brissey, Emeritus 2
Basically they're saying do away with the freemium initiation, which is how Spotify attracts users. The more users they attract but who continue to use the freemium mode, the more music those users play, and the more royalties must be paid out. Unless Spotify can find a way to more quickly convert freemium users to paid users, the model is unsustainable.
Posted by Grant Brissey, Emeritus on October 9, 2012 at 9:22 AM · Report this
Josh Bis 3
Originally, the free tier had some imaginary limits to total playing time, didn't it? I think that the "free" tier is really important for the social angle -- without its big userbase and the ability to widely share songs -- I think it might use loses a major advantage over (and customers to) competitors like rdio.
Posted by Josh Bis on October 9, 2012 at 9:28 AM · Report this
I love spotify. $10 a month an I can listen to pretty much anything at home work or on my cell phone. Even easier than mp3s. Doesn't look good though if Spotify is losing money and there are all those articles out there about how little the artists are getting paid.
Posted by Conrad McMasters on October 9, 2012 at 9:37 AM · Report this
Keekee 5
I prefer Rhapsody myself.
Posted by Keekee on October 9, 2012 at 10:29 AM · Report this

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