No one really buys music anymore. Sure, a handful of Target shoppers, crate diggers, and iTunes users buy a song here and an LP there. Compared to the golden age of physical music (any time before the ’00s), digital and physical album purchases are way down.
Despite the lack of actual sales, the music industry isn’t going anywhere any time soon. People spend less money on albums, but streaming services like Spotify make up for the lack of individual sales. By paying a monthly subscription fee or putting up with constant ads, everyone has access to nearly every song ever released.
Spotify enjoyed success in the last few years by becoming the biggest music-only streaming platform. The company has 140 million users across the world listening to music through their computers, phones, and connected speakers. Such an impressive user base and business model let Spotify raise absurd amounts of money at a crazy valuation. They might even go public sometime in the next year thanks to their recent success.
If and when Spotify becomes a public entity, potential investors will want to know how the company plans to generate money and make profit. For record labels, this boils down to albums sold, revenue gained from touring and publishing, and other money-making endeavors. Yet for Spotify, the answer isn’t quite as easy.
Spotify makes money from subscriptions and ads.
Spotify has 50 million paying subscribers as of March. Most of the service’s paying Premium users shell out $9.99 per month. Some users have a “Family” account for $14.99, and students only have to pay $4.99 a month. International users could pay more or less based on their currency. Figuring that the average user pays $9.99, this means Spotify hypothetically takes in around $500 million a month, or nearly $6 billion a year from premium users.
As per today’s announcement of 140 million users, this likely means the company has 90 million non-paying users. These users pay nothing to Spotify, though have less of a say in what they can listen to and have to see/hear consistent ads. How much these ad views are worth to the streaming service is anyone’s guess. Though, with 90 million free listeners hearing dozens of ads a month, ad revenue is probably netting the company tens of millions per month.
Aside from ad-supported listening, Spotify also makes money from the occasional branding event. This could mean anything from a brand sponsoring a playlist or event to another company taking over the Spotify header users first see when the app launches. These brand marketing “synchs” are few and far between for Spotify, and they likely don’t make much from them now. They could, however, increase branded endeavors in the future for even more revenue.
Spotify pays labels crazy amounts of money.
For listeners, $9.99 a month for unlimited music is a sweet deal. For Spotify, this means paying a small amount for every song streamed. This amount (called a royalty) gets distributed between the label and the artist, who get nowhere near as much as they did when album sales were strong. The $9.99 helps pay for the royalty rate, along with marketing and operating costs. Whatever’s left over would be profit, though the company is nowhere near profitable.
Spotify is losing money.
Despite 50 million paying customers and millions more viewing ads, Spotify lost money last year. According to the company’s yearly financial disclosures, the streaming service had an operating loss of $389 million in 2016. This means that after making billions in subscription and ad revenue, paying their operating costs, and paying song royalties, they were still hundreds of millions in the hole.
This doesn’t mean the company will go out of business. Losing money is fairly commonplace in the startup world. The company needs to prove to future shareholders and current investors that they can lose less money and eventually make a profit. Unfortunately, they don’t seem capable of doing that right now.
Can you invest in Spotify?
Spotify is a private company now, though they could be going public in the near future. One day, you will be able to buy stock in the company as they try and raise money by selling their shares. When this happens is anyone’s guess, though the company must first prove they are able to eventually make money with their crazy costs. If they can’t do that, they won’t be around by the time Adele releases another album.