Private financial data firm Privco dove into Spotify’s business and stated that their financial model is unsustainable. The prediction of future troubles was based off the fact that Spotify lost over $59.1 million in 2011 on $244.5 million in revenue and that, according to Privco, “Spotify’s financials show that the bigger the company gets, the bigger its losses.” If you know the online streaming music business, you know that record labels often have a stranglehold on the profitability of a company that pays huge chunks of their revenue back to the record labels:
“Virtually every new dollar of revenue went directly to music companies as royalty payments, evidencing the fact that the more members Spotify adds, the more money the company loses. In almost a one-for-one scenario, every dollar Spotify is generating immediately exits the company due to licensing fees.”
Popular radio streaming service Pandora, which went public in mid-2011, also faces similar problems with licensing costs, though the laws governing terrestrial radio streaming are different and more favorable than the royalties Spotify agreed to pay labels. Even still, Pandora is lobbying to help get those licensing costs reduced as they try to finally make their way to profitability.
Will Spotify recoup their losses with big gains in the future as their marketing costs decrease? It’s tough to tell given Privco’s sobering financial analysis. Spotify paid $229 million in sales, which includes royalties, distribution, and other costs unrelated to salaries and general overhead. Seems like a hefty number, though the company is growing rapidly.
If you’re interested in online music streaming, entrepreneur and current App.net founder discusses the woes of starting a music startup geared towards negotiating with record labels. Watch the presentation below: