Music Mystery: Can Spotify Ever Make Money?

The streaming music service Spotify is preparing for an initial public offering this year,
which has renewed the focus on the streaming service’s economic health and the
viability of the streaming market more broadly.

While Spotify hasn’t fully cracked open its books, the company reportedly lost nearly $1
billion in just two years.

Despite the bleeding, Spotify has managed to amass a sizeable paying subscriber base of
70 million-plus users and 140 million non-paying users (as of the middle of 2017, the last
time they updated the number). More importantly, Spotify’s royalty payments to the
music industry have become substantial, contributing to a turnaround in music industry
profitability following the lean years of the piracy era. (According to Variety, streaming
services now generate more than half of the music industry’s revenue.)

If streaming is the music industry’s golden goose, than Spotify has more than its fair
share of golden eggs, so its failure to turn a profit should worry all of its stakeholders.

Precisely why Spotify can’t generate a profit is an open question, but the prime culprit is
undoubtedly its royalties. Spotify pays out an estimated 70 percent of its revenue in
royalties—even though many artists complain about being stiffed by the streaming
service, which reportedly dolls out between $0.006 and $0.0084 per stream. In 2017, it
struck a two-year deal with record labels to pay them more than $2 billion over two years.

Beyond its royalty obligations, Spotify hasn’t exactly been parsimonious. Executive
salaries have crested into the seven figures and new office space in the U.S. will cost
them half a billion dollars over 17 years. They also face competition from Apple Music,
which has been growing swiftly, particularly in the United States. In fact, the Wall Street
Journal reported earlier this year that Apple Music subscriptions would likely over-take
Spotify in the U.S. in the summer.

It’s clear that Spotify isn’t banking on growing subscriptions to bail it out. The company
has been broadening its offering to include podcasts and videos. There are also
indications that it’s working on breaking into the hardware market. It’s also leveraging
the data it collects on its users to improve its advertising revenue (something that’s got it
into trouble recently).

Spotify has been a major force wooing users away from piracy and into paid
alternatives. It’s too soon to declare that the fruits of that effort will end in penury, but
the clock is ticking and the searching gaze of Wall Street is about to be turned on the