A Blog by Jonathan Low

 

Jun 16, 2017

Spotify's Users Are Loving It To Death

Looking for that network effect in all the wrong places? JL

Noah Kulwin reports in Vice:

The more music users stream, the more millions Spotify loses.
Spotify may be the world’s most popular subscription music streaming service, but that doesn’t mean it’s anywhere near profitable. In fact, the more music users stream, the more millions Spotify loses.
The Swedish company posted a net loss in 2016 of just over $600 million — widening 134 percent from its 2015 loss of $257 million — according to financial filings in Luxembourg made public today. At the same time, Spotify grew its revenue by more than 50 percent to $3.3 billion in 2016, a healthy increase but not near enough to keep up with expenses.
Coincident with these disclosures, Spotify today announced it has reached 140 million users worldwide — a 40 percent increase from this time last year. But only 50 million of those users are paying subscribers, according to figures from March.
The reason Spotify — recently valued by investors at $13 billion — loses so much money is because it pays billions of dollars in royalties to the record labels. So each user stream helps fill a giant river of red on its balance sheet. Recode reports that Spotify is set to pay more than $2 billion to Universal Music Group and Merlin (which represents indie labels) over the next two years, in addition to whatever deals it strikes over royalty rates with the other two big labels, Warner Music and Sony.
Spotify needs to sign these mega deals in order pay better royalty rates, which in turn will help Spotify lose less money — the thinking being that Spotify is taking huge short-term losses with the goal of longer-term gains and better margins. These rights negotiations with the labels, in addition to growing Spotify’s paid subscriber base, is the company’s priority.
In part, that’s because Spotify got over $1 billion in debt financing with the promise to investors and lenders that the company would soon go public. The longer Spotify waits to go public, a process that’s particularly tough on money-losing companies, the more it will have to pay its lenders.
Spotify is reportedly planning to pursue a “direct listing” on the New York Stock Exchange later this year or next, a process that would allow it to be publicly listed without having to offer new shares of stock to the public. This means the only way an Average Joe could get Spotify shares would be to buy them from employees and existing shareholders.
But before Spotify can get there, it needs to figure out just how much it will have to fork over to the remaining labels.
In that calculation, the company has one bit of leverage: Earlier this year, music streaming became the biggest labels’ biggest moneymaker for the first time, as physical sales and digital downloads continue to dwindle.

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