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.
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