Popular online music service Spotify’s financials show that the bigger the company gets, the bigger its losses. PrivCo has exclusively obtained privately-held Spotify’s just-closed full year financials, and while Spotify’s revenue growth is impressive, its overall financial results are alarming.
While Spotify’s revenues grew 151% in 2011 to $244 Million (€187.8M), over 2010, Spotify was unable to generate any material improvements to its cost of sales margin. In fact, virtually every new dollar of revenue went directly to music companies as royalty payments, evidencing the fact that the more members Spotify adds, the more money the company loses. This is a clear indication that the online licensing fee/royalty model is increasingly restricting Spotify’s ability to generate sustainable margins using its freemium model.
In almost a one-for-one scenario, every dollar Spotify is generating immediately exits the company due to licensing fees as members listen to music and ring up Spotify’s music royalty tab. In addition, in 2011, Spotify’s 311 employees grew salary costs 173% year over year, outpacing revenue growth, and adding to the red flags that this business model needs to address. With 98 cents of every dollar of revenue going to pay music royalties, this leaves only 2 cents on the dollar to cover ALL other operating costs, from all payroll, overhead, office rent, sales, marketing, data server costs, and so on, which is mathematically impossible.
PrivCo Founder and CEO Sam Hamadeh said today in a statement, “Spotify’s 2011 results indicate that drastic changes must be be made quickly to its business model in order to generate growth while actually improving operating margins so that break-even, let alone profitability, is somewhere, anywhere, on the horizon. Either the online music royalty payment model to artists and music companies needs to change, which is highly unlikely in the near term given that digital royalties are record companies only growing revenue stream, or Spotify needs to ASAP introduce a tiered subscription system, as opposed to its current flat monthly fee model, which is clearly a broken business model.
As currently designed, Spotify’s business model is unsustainable. Spotify’s heaviest users will have to pay, for example, for a “Spotify Platinum” level for $25/month with more song plays allowed. No matter how we slice the math, it is patently clear that something must change soon on Spotify’s business model if the company is to survive.”