Posted by Mark Mulligan on November 23, 2010
Spotify’s recently published accounts for 2009 show that the service lost over £16 million during the course of the year. But do these numbers actually tell us anything new? Not really.
Spotify has proven that free music products are hugely popular and are the route to mass-market music customers. But Spotify’s experience has also shown us that you can’t make free music pay. The ad revenues just don’t cover the rights owners’ license fees.
And bear in mind that 2009 was Spotify’s first full year open for business. Total free users averaged 780,000 in 2009. The average for 2010 (up to September) is over 8 million. So the costs will be much higher. On the other side of the equation, paying subscribers averaged 140,000 in 2009 but grew to an average of 430,000 in 2010.
Though the premium numbers are much smaller, they have a disproportionately large impact on Spotify’s bottom line. Based on the 2009 costs of £27.7 million and the 780,000 average user number, each free customer cost Spotify in the region of £30 (or £20 based solely on cost of sales). But a premium subscriber, subscribing for an entire year, brings in £120. Even if they just subscribe for six months, a premium customer still brings in £60. (And yes, for the purposes of this blog post, I have heavily simplified the maths!)
Which all brings me back to my starting premise: these numbers don’t tell us anything new. They confirm that the economics of free don’t add up, but that free music in the context of a freemium model can work: that as a driver of premium revenue, free music services don’t need to convert anything close to a majority of their free customers to paying in order to push towards a profitable business model.
Now that Spotify has over 600,000 paying subscribers, its cash burn rate will be significantly diminished and it may even be close to being able to truly afford to be a free success in the US…for a while.