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Will Spotify Ever Become Profitable?

Scalability isn't the only challenge facing the mega-streamer

NEW YORK — “Is streaming music a good business?” asks a recent New York Times article about Spotify.

On June 15, Spotify released its annual report, perhaps the last piece of information available to investors before the company moves to go public, sometime this year or next. Taken at face value, the results listed in this report are impressive:

The company, based in Sweden, had 2.9 billion euros (about $3.3 billion) in revenue in 2016, up 52% from the year before.It has 140 million regular users around the world, 50 million of whom pay for monthly subscription plans.

However, during 2015, revenue had increased 78% from the year before. And losses are mounting: In 2016, Spotify’s net loss totaled about $600 million, up from about $257 million the year before. The company attributed this increase to the costs of servicing its debt — last year it raised $1 billion in convertible debt — and to the effects of foreign exchange rates.

Will Spotify become profitable at some point? In its report filed with European regulators, Spotify repeated: “We believe our model supports profitability at scale.”

However, Ben Sisario writes in his NYT article: “But it has never been clear what scale means. Since it began its service in 2008, and arrived in the United States in 2011, Spotify has grown extremely fast, becoming a household name among young people. It has even brought a once-reluctant Apple into the business of selling music subscriptions —Apple Music, introduced just two years ago, has become Spotify’s biggest competitor, with 27 million subscribers.”

Spotify hasn’t even defined what scale means in this context. There’s no talk of the number of users, subscribers or revenues at which its losses will turn to profits. In its report, the company indicated that the most important kind of scale it is currently pursuing is signing up more users.

Mark Mulligan of Midia Research is quoted in the article, saying, as Spotify grows, economies of scale will help in areas like product development. “With more financial clout, particularly after going public, it could pursue more disruptive goals like signing artists directly. It is also pushing to improve margins, by renegotiating licensing deals with record labels.”

Mulligan also said that streaming itself has not proved profitable for Spotify or any other service like it.

We also covered SiriusXM’s recent cash injection to the streamer.