Will Spotify be profitable by 2017?

Let’s take a closer look at “Europe’s biggest tech hope”

Growth, Growth, Growth• “Up until now, I think it’s been growth, growth growth,”

said Par-Jorgen Parson, VC, Spotify board member and one of the company’s first investors.

• “Maybe profitability will start to become a priority too.”

• Based on a funding round last year, the company has a value of over $8 billion.

• It has reported an operating loss of 184.5 million euros ($195.5 million) in 2015, up from 165.1 million in 2014.

Reuters

Some facts• Spotify, present in 60 markets worldwide, charges users monthly fees for access to huge

libraries of music to play on phones or computers.

• Profits largely depend on royalty licensing deals it strikes with powerful music labels every few years.

• The cost of growth for Spotify has been very high because, as it expands to new markets, it has to pick up the initial cost for music royalties for new users and it takes time before it can generate advertising or subscription revenues from each additional subscriber.

• Par-Jorgen Parson states that the moment the company optimizes on profitability rather than growth, then these unit economics will kick in right away, and they are really solid.

• Some analysts have argued Spotify has a flawed business model and it is hostage to the record labels.

• With 40 million paid users however, the company could be near a tipping point and may have greater leverage in its negotiations with the music industry.

Reuters

The figures• Revenue for 2015 was $2.18bn (€1.95bn), an 80% growth in income in the year.

• Net losses stood at $194m (€173.1m), widening by just 6.7% compared to 2014.

• Advertising revenues nearly doubled in 12 months, up 98% to $219m (€195.8m).

• Subscription revenues grew by a slightly slower pace, up 78% to $1.95bn (€1.74bn).

• Ads claimed 10.1% of Spotify’s total income – an improvement on the 9.2% share seen in 2014.

• In a financial filing in Luxembourg uncovered by MBW, Spotify told its investors that “in many ways, 2015 was our best year ever”.

MBW

The figures (continued)• Spotify’s payouts to the music industry reached

$1.83bn (€1.63bn) in 2015 – up 85% year-on-year.

• 84% of Spotify’s total income last year went back out the door to the music industry.

• Its total active user base increased from 60m at the end of 2014 to 89m at the end of 2015.

• Of these active users, over 28m were paid subscribers at the close of last year.

MBW

Spotify’s UK arm• Spotify’s UK subsidiary, Spotify Ltd.,

became a profitable entity in 2015.

• Why the big disparity between the company’s UK and worldwide results?

• The secret, according to MBW’s calculations, is one of subscription price.

• If Spotify could have applied its average UK subscriber spend to all of its global subscribers last year, it would have been profitable to the tune of €240m ($264m).

• The difference between Spotify’s global average monthly sub spend and its UK was €1.27 per month, per head.

The MBW Review

Its latest and biggest ad campaign yet

• Spotify has launched a global outdoor ad campaign with the tagline "Thanks, 2016. It's been weird.”

• Different versions of the ads, which will be rolled out across 14 markets, contain localized messages from Spotify, driven by data from listeners and pop-culture topics relevant to events from 2016.

• One ad in NYC says: "Dear person in the Theater District who listened to the Hamilton soundtrack 5,376 times this year. Can you get us tickets?"

• The ads were developed by Spotify's internal creative team, according to AdAge.

Business Insider

Original Music Content

• Spotify is launching two new programs that will bring original musical recordings to listeners around the world: Singles and Live.

• The Singles program sees big name acts and exciting and up-and-comers recording a pair of songs for the service and releasing them only on Spotify.

• Live is similar, in that artists will stop by Spotify to record live renditions of their own music, which the company says it will begin allowing power listeners and superfans of the site to attend.

• Spotify has had artists come into its offices to perform for employees and industry people for years now, so it’s great to see that content finally come to life and make it to the masses.

Forbes

Conclusion• The real answer is, I do not know if Spotify will be profitable by 2017.

However, there are some developments that make me believe it is possible.

• Firstly, their revenue has been increasing at a healthy rate. (80% in 2015)

• Secondly, their UK entity has already become profitable and that is likely to stimulate their other entities to perform better.

• Their ad campaigns have only been getting bigger and more effective.

• They will reduce their costs significantly with Original Music Content. 84% of Spotify’s total income last year went back out the door to the music industry and if this percentage can decrease, profitability will be more achievable than ever.

Sources• Why an Early Investor at Spotify Thinks 2017 Will Be a Profitable Year. (2016) Reuters.

Retrieved from http://fortune.com/2016/12/01/spotify-profit/

• How Spotify can get profitable fast: Be more British. (2016) Music Business Worldwide. Retrieved from http://www.musicbusinessworldwide.com/how-spotify-can-get-profitable-fast-be-more-british/

• Spotify revenues topped $2BN last year as losses hit $194M. (2016) Music Business Worldwide. Retrieved from http://www.musicbusinessworldwide.com/spotify-revenues-topped-2bn-last-year-as-losses-hit-194m/

• Spotify says: 'Thanks 2016, it's been weird,' in its largest ad campaign yet. (2016) Business Insider. Retrieved from http://www.businessinsider.com/spotify-global-ad-campaign-signing-off-2016-2016-11

• Spotify Is Investing In Original Musical Content With New Programs 'Singles' And ‘Live' (2016) Forbes. Retrieved from http://www.forbes.com/sites/hughmcintyre/2016/11/30/spotify-is-investing-in-original-musical-content-with-new-programs-singles-and-live/#24bc1113ab07