Spotify’s Challenge of Profitable Music Streaming

Spotify is leading the way in music streaming services. The Swedish based company appeared seemingly out of nowhere in 2008, and it has since gone on to shape just how consumers are listening to their music. Recent years have showing increasing challenges facing the service, including the viability of having most of its subscribers using the free based subscription option.

2014 was therefore a very polarising year for Spotify. They reached annual profits of over €1 billion for the first time in the company’s existence. It is up from €746 million from the previous year, a year on year increase of 45%. So surely it’s a cause for celebration?

Looking at their net loss raises some worries however, as it has significantly increased in that same period, from €55.9million to €162million. Couple this with its operating losses of €165.1million, which is also an increase from the previous year’s amount of €91.2million, and its clear everything is as rosy as it seems.

Spotify themselves have branded 2014 a “transformative” year, yet are adamant that the losses are nothing to worry about, citing them as part of an overall strategy. As stated in their management report

“We believe our model supports profitability at scale. We have already proven that we’ve created real value for our users, and we know that the more time people spend with our product, the more likely they are to become paying subscribers,” they wrote.

“We believe we will generate substantial revenues as our reach expands, and that, at scale, our margins will improve. We will therefore continue to invest relentlessly in our product and marketing initiatives to accelerate reach.”

With more competitors now upping the ante, Spotify have been pressured into dropping their free subscription tier, as it is viewed by many as non-profitable. Yet this makes up three quarters of Spotfy’s subscribers – a number of which has steadily increased. With 36 million users in 2013, the end of 2014 with over 60 million subscribers signing up for the streaming services.

They now have a market reach of 58 countries, with recent expansion in the likes of Brazil, Canada and the Philippines. Expansion doesn’t stop there, with deals being struck with 16 telecoms firms along with 30 home audio firms too. This combines to increase the availability fo the services throughout the globe.

Spotify’s income can a be attributed to those paid subscribers, who account to a massive 91% of all revenues of income. €982.9 million of the total income came from subscribers in 2014, with only €98.8 million made from adverting used on the free tier subscription. After accounting for royalties and distribution costs, €882.5 of the €1.08 billion is already spent.

It is though Spotify’s next big step is into online video, similar to YouTube. This would provide a massive opportunity for additional income from advertising, and with rumours of deals with various corporations such as Fox, Viacom and Time Inc. it cold very well be their newest venture.

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