why is Spotify a loss making enterprise? Where did they mess up?
In: Economics
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.”
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