Digging Into Spotify's Numbers

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.

Comments

What about the advertising revenue?

How does the income from advertising effect the turnover? With 8 million as opposed to 0.8 million free users the value of advertising should increase. I assume, but don't know, that the Spotify ads are on a pay-per-impression basis, with 8 million listeners that should help to rebalance the cost of free users.

Advertising income is in fact

Advertising income is in fact a comparatively small share of revenue. The license fee costs per user outweigh the ad revenue. So more free users typically translate into more loss.

Perhaps this freemium model

Perhaps this freemium model for Spotify would work better if the music labels get more comfortable with freemium models, instead of raising their fists at piracy. Maybe then they can lower their ridiculous license fees a little.

I agree. I've long argued

I agree. I've long argued that free can only be fought effectively with free itself. File sharing networks and other illegal alternatives evolve for more quickly than enforcement technologies or judicial or legislative processes can ever hope to do.

Of course a programme of enforcement must remain in place, but as the supporting strategy to licensing truly compelling alternatives. Not the other way round. The carrot should lead not the stick.

I think you are being short sighted

I still remember my father telling me how ludicrous it was that people invested in Amazon as it was making enormous amounts of loss each year... look who came out smiling.

A more recent example is YouTube - although it still is not there where it should be it is hard underway to going byeond break even.

I also agree with Ruben - for the ad agencies reach (and relevance) still is king. As Spotify is infinitely more targettable than radio and thus could take the largest chunk out of this advertising $.

As with Spotify - as most people in the industry know Spotify is more or less owned by the Record labels - this means that most of the money in their loss goes right back into their own pockets - so don't be fooled by these numbers.

The real question is a) how much money does the streaming cost them and b) how much money do they actually have to pay to the artists/writers - the rest just is going out of one pocket and going back into another.
So the real loss is a minimum (as opposed to the other two examples I mentioned)

It was actually the ex manager of Pink Floyd who calculated a couple of years ago that if 300 million people were to get all-you-can-eat streaming music for $ 10 a pop - the music industry would earn more than they were doing in that year.
Now look at Spotify.... I see some similarity.
The question is not IF it will get to this point... the question is how fast can this happen.

Disclosure: I am an avid user of Spotify and think it is the best thing that has come to music since the guitar.

Amazon / Spotify comparisons are problematic

Every start up has a profitability road map that assumes a period over which recurring losses will be made to ensure that sufficient funds are invested to enable growth occur at desired rates. This is what Amazon did.

But that does not mean that any company that loses money will eventually turn a profit. Of course the opposite is true. 1 in 10 funded companies don't ever generate a return. In my ten years+ of covering this space I have seen far too many start-ups burn through bucket loads of cash promising the world, only to eventually fold. And lots of them were licensed free music services, such as Spiral Frog and imeem.

Whilst the record labels certainly have stakes in Spotify, they do not 'own' it. Spotify has had multiple formal rounds of funding, building on Daniel Ek and Martin Lorentzon's original $8million. A total $85 million has been invested, with the last formal round of 'C' funding in February for $16 million.

So as much as the record labels have a unique business relationship with Spotify that gives them the ability to take a portion revenue that doesn't need to be shared with artists, Spotify's $85 million's worth of investors will take issue with the claim that it is in fact the record labels that own the start up!

Also, for the record, YouTube is a long way yet from operational profitability, despite being one of (perhaps 'the') most popular music destinations in the world. And Google have (rightly or wrongly) pointed the finger at rights costs for being a key factor.

Thanks!

Thanks for the update - I stand corrected.
Though I still do believe that this is another thing as the iMeem's of this world.
It still is a Freemium model. And the iMeem's of this world never got that done - they all are just free.

I should have factschecked myself - so thank you very much for correcting my figures (and enlightening me on the fact that it is not primarily owned by the record companies)

The problem they have is that they are not converting enough people to premium users. I think their service still has too many hours of music for non-paying customers for the people who do not really LOVE music to convert.
I also think that though their open structure is great - they should make sure that all added services (like playlistify.com etc) which use the services of Spotify but do not have their listeners a) counted to their stats in reach and b) undermine their Freemium business model, should pay in full for these services (or only subscribers can listen for instance to more than an hour of music)..... as these can put an extra load on the costs.
But Last.Fm was able to convert most of their users - even though it is a far inferior sercvice, so I do not see why Spotify willl not be able to that in a while.
It first has to build up it's user base - make sure that there is more product in their catalog in order to satisfy the people who listen to more fringe-like groups (as these often are the most avid Spotify users - willing to pay, but often having the problem that the more obscure bands they love are not listed)
When this is done (and untill that moment they will lose money) - they should be able to really start turning up the amount of paying money and turn down the amount of free they serve.

I still have faith in this model - but especially in this company.
They are the first to understand that it's not just about the tracks - it's also about being able to find the right track - the way things are presented is such a lep forward to any other service.
The social aspect of music as well & the fact that music lovers want to be creative with their taste - much more than any other company they have found what music lovers want and built on top of that. I do not believe that there is no business model to be built on top of that... and I believe the freemium model is the ideal way

But that is my belief - I do not have the time to research if that is completely correct.