Music News: Is Spotify's business model broken?

Adz

Quote:

Spotify's financial performance in 2011 was abysmal.

As revenue increased 151 percent from 2010, the on-demand streaming music service saw losses widen 60 percent for the same period, according to documents posted today by PrivCo, a company that sells data on non-publicly traded companies.

A Spotify spokeswoman told CNET that the numbers posted to PrivCo.'s site were accurate. But it turns out that the figures aren't exactly new. They were first reported in August by The Wall Street Journal, which tucked them into a story titled "Spotify to launch in Canada" and the revelation failed to generate a lot of attention. I wonder why?

Spotify's financial performance for the years 2011 and 2010.

(Credit: PrivCo )
Spotify is the hit music service that attracted a large and loyal following in Europe before making the jump to the United States last year. The privately held company is now building a large audience in this country.

But there have long been skeptics who say that Spotify won't ever generate profits while supplying users with free music and paying the royalty rates it does. The company offers songs free of charge to new users, which it must still pay for, and then tries to convince them to sign up for a monthly subscription fee. How's that working out?

Spotify appears to be struggling.

In 2010, Spotify, which is led by founder and CEO Daniel Ek, reported a net loss of $37.5 million on $97 million in revenue. For 2011, the company's revenue increased to $244 million, but losses also widened to $59 million, PrivCo reported.

PrivCo said Spotify's business model is "unsustainable" and wrote to its clients that "Something must change soon on Spotify's business model if the company is to survive."

Spotify isn't in any danger as long as it's able to convince investors music is still a worthwhile venture. According to reports, the company has recently received new funding based on a $4 billion valuation. I haven't met any industry watcher who has heard that figure and not smirked.

Spotify's play is to build market share and the strategy for accomplishing that in the online music sector is old but proven. Give away songs for free and you'll find an audience. This method isn't cheap and the trick for music services has always been about getting into users' wallets once you get them to your site.

For Spotify, the question is can the service eventually shift enough users to the company's paid-subscription offer to make any profit?

That hasn't been determined yet. While multiple music industry sources have told me Spotify has improved its ability to convert users of the free service to the paid service, some insiders worry Spotify still isn't drawing enough people into the free service so it can later funnel them to a subscription plan.

Spotify should have enough investor money to keep going for a while. It will be interesting to see if the service can continue to expand into new overseas markets, while paying for free music and maybe also spend more on advertising, which is what some at the labels want to see.

Hope they can figure things out.

stoopidjenna

I'm not even sure how Spotify works... So you do have to subscribe to keep using it after a free trial period right? I would never bother with anything like that tbh.

iLays

I love Spotify. Come on now

Sawdust

Spotify is everything. I hope it doesn't shut down.

Sky Ferreira

rdio >

Kang.

Well that sucks... but more free music for me. I'm not complaining.

Doc

I mean, I don't pay for it, and I've been using it free since it first launched in America. Yay for me, but.

Haus

They need to get rid of the 30 day trial or improve their system. People are taking advantage of the 30 day trial by starting a new one every 30 days and then canceling instead of paying after the 30 days is up. I did that at first but now I pay

They should also start doing TV and magazine ads. Advertisement = more users. More users = more people listening to ads. More people listening to ads = advertisers making more money. Advertisers making more money = advertisers paying Spotify more. It's not complicated.

Sawdust

Quote:

Originally posted by Haus

They need to get rid of the 30 day trial or improve their system. People are taking advantage of the 30 day trial by starting a new one every 30 days and then canceling instead of paying after the 30 days is up.

Wait...

Honestly I would pay for it, but I don't mind the ads.

Ryan

I love Spotify. Been a subscriber since they launched in the US. They should shorten the trial, increase the adds and start finding ways to promote their business. I'd suggest doing a deal with The CW, ABC Family and Teen Nick to increase their exposure among the young demographic. They should also team up with ABC to provide music for shows like Nashville.

I'm not too worried about their numbers.

Alejandrо

Quote:

Originally posted by Sawdust

Spotify is everything. I hope it doesn't shut down.

It would be TRAGEDY for me

BTrisc

Spotify >

I love having EVERYTHING available instantly from my computer and my iPod. That's what the premium account is best for, tbh.

BTrisc

Quote:

Originally posted by Alejandrо

It would be TRAGEDY for me

+1

I haven't bought music in a year and a half now.

Adz

I've bought 2 cds this year. Love the premium option.

WillingtonHH

I listen to spotify all day >>>

VertigoStick

Spotify, no!

That's all I use now. Been a Premium user for a couple of months now and I will never let it go.

Changes

I thought Dust said Spotify would take over itunes soon.

Miguel.

Isn't Rhapsody better?

Patri

Quote:

In 2010, Spotify, which is led by founder and CEO Daniel Ek, reported a net loss of $37.5 million on $97 million in revenue. For 2011, the company's revenue increased to $244 million, but losses also widened to $59 million, PrivCo reported.

That is ridiculous

Edit: Their financials

they lowered their cost of sales by 6% and TRIPLED their personnel costs. How is that even possible?

Alejandrо

Quote:

Originally posted by iggie45

Isn't Rhapsody better?

Nothing is better than Spotify, Spotify is like God and the others are just his disciples.