Reuters logo
Breakingviews - Spotify’s business model is an unfinished symphony
August 25, 2017 / 1:25 PM / 3 months ago

Breakingviews - Spotify’s business model is an unfinished symphony

LONDON (Reuters Breakingviews) - Spotify’s business model is an unfinished symphony. The digital-streaming service is closer to listing on the New York Stock Exchange now that it has secured licensing deals with all three major musical labels, including Warner Music, which signed up on Thursday. But with the likes of Universal and Sony reportedly budging only slightly on royalties, Spotify’s ability to turn a decent profit is still in doubt.

Headphones in front of Spotify logo, February 18, 2014. REUTERS/Christian Hartmann

The loss-making Swedish startup led by Daniel Ek renegotiated the licensing agreements in the hope of cutting the amount of money it pays in royalties. But if the terms of the Warner deal are anything like those reported for previous agreements, concerns about Spotify’s future profitability will persist.

The company has 140 million active users, 60 million of whom are paying subscribers, and made just over 2.9 billion euros in revenue in 2016. But its 2.5 billion euro cost of revenue – mostly payments to labels, publishers and other suppliers – meant little was left over to cover product development, marketing and administrative costs. The result was an operating loss of 350 million euros.

Young tech companies often put expansion before profitability. Take Netflix and Uber. But Spotify looks set to stay loss-making until at least the next round of royalty negotiations. Universal and Sony Music have accepted a cut to 52 cents per dollar from 55 cents previously, the Financial Times reported citing people familiar with the contracts. Assume those terms apply across the board, and Spotify would still have made an operating loss of more than 260 million euros last year, according to Breakingviews calculations.

True, labels may have to compromise further if they want to maintain pricing power in the face of tech behemoths like Apple Music. But a bet on Spotify is a gamble that the company can either substantially raise subscription prices or persuade artists and their labels to take a much smaller slice of the digital-streaming pie. The first will be difficult if cash-rich rival Apple keeps subsidising its music offering. And there’s slim chance of the second coming true anytime soon if the recent round of royalty negotiations are anything to go by. Investors may decide this is one gig they can miss.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below