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
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.
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