How Rich is Spotify?

On July 26th, Spotify released its Q2 performance report for 2018. With 83 million paid subscribers, Spotify is by far the largest music streaming service in the world, pulling in a 1.5 billion dollar quarterly revenue. Even their nearest competitor, Apple Music, currently stands at a measly 50 million subscribers (some of which are active free trial users).

By every relevant metric, Spotify utterly decimates the competition, holding an estimated 40% of music streaming service market shares (excluding YouTube). Bearing in mind this industrial dominance, one can only imagine the extent of Spotify’s quarterly earnings. 83 million people paying $10 every single month, plus ad revenue from free users. There’s no question that Spotify is killing it; but just how well are they doing? Well, Spotify’s second quarterly profits in 2018 came out to whopping 100 million dollar loss. Oh yes, even the largest music streaming service in the world is hemorrhaging more money than a VHS video store.

Record label payouts accounted for approximately 1.1 billion dollars of Spotify’s quarterly revenue costs. The remaining 400 million in revenue was spent on development and sales, as well as administrative payments. It’s not just Spotify either. While Amazon and Apple don’t isolate their streaming services in their financial reports, all other streaming competitors -such as Pandora and Tidal- are losing money as well. Wait, you may be asking yourself; If streaming services are being bent over a barrel by the record labels, then why are so many companies starting up their own streaming services? Well, I’m glad you asked, because I’m about to learn you a thing or two about Spotify’s long term business strategy.

For companies like Apple and Amazon, the intent of the streaming service is fairly obvious. Apple aims to get more people buying their devices, whereas Amazon is offering streaming service discounts for Amazon prime members. For both of these companies, the strategy is the same:

Step 1) Take a small investment loss from the streaming service.

Step 2) Use the streaming service to grow brand loyalty and sell the products that are actually profitable.

Step 3) Jeff Bezos wipes his ass with golden toilet paper; Steve Jobs gets a diamond encrusted coffin.

Unfortunately for Spotify, this comprehensive, 3 step process only works if you actually have a profitable product to sell. Spotify also lacks the network size of Amazon and Apple. The sheer scale of these companies allows them to take calculated losses, the likes of which Spotify would not be able to maintain. To Spotify, a 100 million dollar loss is a particularly bad quarter. To Apple, a 100 million dollar loss is a glorified rounding error. Spotify’s estimated net worth is around 20 billion dollars, whereas Apple’s net worth sits closer to 750 billion.

None of this is lost of Spotify. The company is desperately seeking solutions. As of September 20, Spotify is trying to surpass record label payout costs by allowing a few indie artists to upload their music directly to Spotify. These direct uploads are much cheaper than record label payouts. While this isn’t a horrible idea, it’s far fetched to suggest that this will make any significant cost differences in the near future. Music from the ‘big three’ record labels, (Sony, Universal, Warner) makes up about 87% of total Spotify streams. Surpassing companies with that sort of industrial control does not currently seem plausible.

While many people understand that Spotify is a long way away from profitability, most fail to recognize just how royally screwed Spotify really is. We’ve already established that Apple and Amazon are not dependant on streaming service revenue. We also know that investment losses, to them, are no big deal. So why, you may ask, do they not just lower their prices! That’s a good question. Regardless of the reason, Apple and Amazon - although holding a smaller slice of the industry pie - hold all the power; and it’s not looking good for Spotify.

If either Amazon or Apple dropped their music streaming prices to say, $9/month, then the other would likely follow suit immediately. In this situation Spotify has two options:

Option 1) They keep their prices right where they are.

This seems unlikely, but possible. If Spotify feels that it can’t sustain the losses accompanying a near 10% revenue decrease (not quite 10%, due to ad revenue), then it’s not unreasonable to keep prices at $10/month. At this point, even the most devoted of Spotify listeners will be questioning whether their brand loyalty is worth 6 ‘Two Buck Chucks’ a year. Listeners will switch to other services until eventually, Spotify goes out of business.

Option 2) They lower their prices to match that of Amazon and Apple.

The more likely, and less moronic move would be to drop their prices to $9/month in order to remain competitive with Amazon and Apple. There is a chance, that if Spotify’s following grows fast enough they might just manage to keep their heads above water. However, even though Spotify’s prices would be lower, their costs would remain the same. Likely, Spotify would struggle on for a while longer before inevitably realizing that a 200 million dollar quarterly deficit is not sustainable. They would gradually lose more

money, until eventually, Spotify goes out of business.

Now, if you were being attentive, you may have noticed that in both scenarios Spotify crumbles into nothingness and has its place taken by massive corporations. On Spotify’s current trajectory, this seems almost inevitable. So, is Spotify destined for failure? Probably. However, they do still have one last hope.

I reference you to ‘Step 2’ of my comprehensive 3 step program. Spotify needs to make a product that’s actually profitable! Would you buy a pair of Spotify headphones? How about a Spotify audio interface, Spotify record player, Spotify underwear. The product itself is irrelevant, so long as it’s profitable. In all likelihood, Spotify is never going to make any money off of streaming. The consumer demand is simply not there. Digital music these days is too devalued to be profitable. If Spotify wants to survive then they will have to use their platform to branch out into an industry where profit is actually possible.

So, this article, - initially designed to laugh at the non-profitability of a 20 billion dollar corporation- has gradually morphed into an intervention-esk PSA for Spotify...

Spotify, I like your product. I want you to stay in business; but you’ve gotta pick up the goddamn slack. Please, Spotify; for all the people who don’t want to look at Apple Music’s shitty white aesthetic. For all the people who want pre-made playlists backed by half-decent algorithms. For all the people who think that Amazon prime is the biggest scam in human history. For all the people who want to support companies that produce phones with actual fucking headphone jacks. On behalf of myself, and the entire world; I sincerely hope that I own a drawer full of Spotify brand condoms sometime in the near future.