why is Spotify a loss making enterprise? Where did they mess up?
In: Economics
Spotify is still labeled as a startup as they are still increasing their revenue quite significantly. Startups are supposed to lose money in order to grow as it takes money to acquire assets and loyal users. So for the moment it looks like this is all according to plan.
But Spotify have had some issues with their initial business model. They make money by buying music for cheap from the record labels and musicians and charging a big monthly subscription fee from their consumers. But this have not happened exactly as planned because the record labels have been quite unified and strong in their negotiations. So Spotify have not been able to get exclusive deals like you see in the TV-streaming business. This means that the record labels have been able to negotiate prices on their terms. If Spotify declines a deal with for example Sony then users will switch to Tidal or YouTube Music or any other music streaming service.
Spotify is trying a few different things to get out of this situation. First their tried becoming the de-facto standard music streaming service. If users did not know about other services or if the other services were not able to deliver what the users wanted then the record companies would have no choice but to negotiate with Spotify. And Spotify are trying to become their own record company focusing on independent artists who are able to record their music themselves and then publish it on Spotify under the Spotify terms and conditions.
The latest big efforts Spotify is making is towards podcasts. There is no record label for podcasts so Spotify is trying to start this industry. They scrape any free podcasts and collect them in one place and gives you recommendations on various podcasts based on what others listen to. And they are signing exclusive deals with popular podcasters.
This all costs money but it does help them increase their revenue as they get more and more paying users and more advertisers. In theory they should be able to reduce their expenses at some point but maintain their income and therefore make a huge profit. So you should not count them as a failed loss making enterprise just yet.
They haven’t messed up. They’re building a consumer base. They have 600 million users, currently. About 40% of those users subscribe to their premium, paid monthly service. Those 40% of paid users generate something like 90% of their income. The 60% of free users generate very little income for them. Spotify’s goal is to convert more users to premium, or gradually raise the cost of premium, or some combination of both, until the company becomes profitable. But, the company running at a loss does not mean it’s “messed up.” This is common for companies, as a way to build a customer base. Amazon ran at a loss for years, Uber did, Netflix did (might still, I’m not sure), etc. You subsidize your company with venture capital until it’s big enough to support itself.
They aren’t “losing” money. They’re spending it on making the company bigger, and when it looks like they made a “Loss”, that just means they spent more money than they currently have because they believe they can pay it off in the future, kind of like a person taking a loan to buy a house. It might be a dumb thing to do if you know you can’t pay back the loan but spotify has good reason to think it can. Spotifys yearly revenue has grown by billions of dollars each year, and they expect it to keep growing.
Lets say you decide to only spend as much as you make at first so that you don’t make a loss. Let’s say you made 5 billion dollars 2 years ago, 6 billion dollars last year, and plan to make 7 billion dollars this year. Now lets say you come up with a solid idea for improving the business this year, but it costs 8 billion dollars, 1 billion more than you currently have to spend. Do you just shrug and forget about your plans? Well hey, if current projections keep going, you will make 8 billion dollars next year, so really you’re just spending money early, before you get it. and when you make 8 billion next year, might as well spend 9 billion, because that’s probably how much you will make the year after that. Sometimes this bite a company in the ass, because they think the growth will keep happening and then their projections are wrong, but also most times a company wouldn’t be able to grow in the first place unless they made this gamble. As far as gambles go, betting that spotify will grow by a billion dollars of revenue each year is actually a pretty safe one, so spending up to an extra billion each year in order to buy up more things that will help them generate more profit is a reasonable business plan.
“Profit” might seem like a good thing you want, but to a lot of big businesses “Profit” means “Money you left on the shelf and did nothing with when you could have used it to improve the business.”
Total recorded music revenue is currently half of what it was in 1999, but everyone still wants to make as much money as 1999.
In 1999 $9.99 or so would get you like 12 songs to listen to on an album. Nowadays it will get you access to several million songs.
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