I just read that Spotify has never been profitable – yet they are the #1 music streaming service internationally for music. How can they continue to operate like this?
In: Economics
Tldr: investors thinks that spotify will eventually make money, so have granted them large amounts of cash that they can burn until they finally start making a profit, which can hopefully pay back the original investment.
Long answer:
There are no special rules. If you’re losing money then eventually you will run out of money, and if you run out of money you can’t stay in business.
So what’s happening to Spotify? Well they simply have access to enough funds to support these losses.
Looking at their most recent financial report, which shows their activity as of September 30 2019, in the 9 months leading up to the report, spotify made 23 million dollars.
Wait a minute, that means spotify is making money haha.
Well lets pretend that spotify was still losing money like it was last year.
From their 2018 annual report, for the entire year of 2018 spotify lost 78 million dollars. The cash they had at the time was 891 million. So basically spotify has so much money that it can sustain losses for a long period of time before it goes bankrupt.
This money comes from investors who believe spotify will eventually start making money (which it looks like it finally did), and they believe that over time they can gain back their initial investment and more
Great minds think alike. Yer not alone in askin’, and kind strangers have explained:
1. [ELI5: how can companies post losses of millions, billions of dollars, and stay in business nevertheless? ](http://reddit.com/r/explainlikeimfive/comments/35hume/eli5_how_can_companies_post_losses_of_millions/) ^(_7 comments_)
1. [ELI5:how can Amazon lose millions year after year and stay in business? ](http://reddit.com/r/explainlikeimfive/comments/1p79xc/eli5how_can_amazon_lose_millions_year_after_year/) ^(_>100 comments_)
1. [ELI5: I hear of huge companies operating at a massive loss hoping to become huge in the future. How does that work? ](http://reddit.com/r/explainlikeimfive/comments/bh4qor/eli5_i_hear_of_huge_companies_operating_at_a/) ^(_7 comments_)
1. [ELI5:How can a company have a negative net income for an extended period of time but still stay in business? ](http://reddit.com/r/explainlikeimfive/comments/26nf1c/eli5how_can_a_company_have_a_negative_net_income/) ^(_12 comments_)
1. [ELI5: How do companies such as Twitter, which has yet to turn a profit since it’s creation and has lost $165 million this year so far, continue to run and how can they pay employees? ](http://reddit.com/r/explainlikeimfive/comments/1qdoml/eli5_how_do_companies_such_as_twitter_which_has/) ^(_>100 comments_)
1. [ELI5: Billion-dollar valuations for tech companies that have never turned a profit () ](http://reddit.com/r/explainlikeimfive/comments/5je8vm/eli5_billiondollar_valuations_for_tech_companies/) ^(_54 comments_)
1. [ELI5: Why does a company like Tesla or Uber have such high valuation (over 50 Bn) despite have low sales or losing money yearly? ](http://reddit.com/r/explainlikeimfive/comments/6fmkie/eli5_why_does_a_company_like_tesla_or_uber_have/) ^(_98 comments_)
As others have said, they have tons of investor money to play with. That’s money they only have to repay if they become profitable, so there’s no reason for the company not to spend every cent in an attempt to become profitable.
Investors might invest for a bunch of reasons, but those investors who are hoping to make money are looking to leverage one of these facts:
1. The biggest player in a market can often configure the market to suit themselves. So losing money to become the biggest player is ok because you’ll eventually get to reconfigure the market in a way that lets you become profitable.
2. In many markets (especially digital products), the marginal cost of each sale is practically zero. This means that it costs you about the same to sell your product 1000 times as it costs to sell your product 1000000 times. So losing money to get big fast is ok because every little bit of growth is a step towards profitability.
3. If you are an established player with a sophisticated infrastructure, you’ll be better able to capitalize on new markets when they emerge. So it’s ok to lose money assembling and maintaining an agile infrastructure and workforce because you will be able to jump onto the next big idea much faster than a startup.
In short, investors are looking for a company that is big and a big player in its current market.
It’t a long time investment with hopes of eventually making money.
When Norwegian construction company Veidecke wanted to branch out to Sweden they did so with a plan to lose about 300 million kr (roughly $30 million) on purpose for 3 years to establish them self in the Swedish market. They knowingly offered to do contracts (jobs) for far less than the competition so that they’d get the opportunity to show that the can do good work. After a few years they were established in the market and started making profit.
Latest Answers