As Spotify makes its long awaited move onto the public stock market, the company has filed over 200 pages of information with the United States Securities and Exchange Commission, providing a remarkable insight into the workings of what is currently the world's largest subscription music streaming service. The data reveals that although Spotify has been rapidly expanding its subscriber base, it also has been hemorrhaging money.
The big question hovering over all of this is whether subscription-based music streaming is a viable business model and how long giant companies like Spotify can operate if they're constantly losing money?
The Spotify filing gives a fascinating look behind the curtain at the world's largest music streaming subscription service. The company reports having 159 million monthly active users as of December 2017, including 71 million paying subscribers. While generating consistent revenue growth over several years, culminating in €4.09 billion (US$5 billion) at year end 2017, the company has also incurred consistent net losses, peaking recently at €1.235 billion (US$1.5 billion).
The numbers seem rather clear, as more people subscribe, more songs are streamed, resulting in more royalties paid to record labels and music publishers. Spotify suggests in its SEC filing that its primary growth strategy is to penetrate new markets and expand its subscriber base. But the fundamental concern still remains over whether the numbers will ever be able to generate a profit for a music streaming service.
Music entrepreneur, and current head of Apple Music, Jimmy Iovine has been very vocal about the fundamental issues facing streaming music subscription services. In a frank interview with Billboard last November, Iovine starkly suggested that music streaming, as a sole business model, is "not a great business." And for a company like Spotify, which has no other revenue source, it could be a signal of ultimate doom.
"The streaming services have a bad situation, there's no margins, they're not making any money," Iovine told Billboard. "Amazon sells Prime; Apple sells telephones and iPads; Spotify, they're going to have to figure out a way to get that audience to buy something else. If tomorrow morning [Amazon CEO] Jeff Bezos wakes up and says, 'You know what? I heard the word "$7.99" I don't know what it means, and someone says, 'Why don't we try $7.99 for music?' Woah, guess what happens?"
No one gets paid
Despite Spotify outlining an increasing investment in royalty payments to artists and labels, there is still a large controversy swirling over how little money ultimately filters back to the musician. The online world is awash with stories from artists recalling their horror at how little money they received, even after a song hits millions of streams.
The data is indeed rather depressing, with Spotify reportedly paying as little as US$0.0038 per play. While other services such as Apple Music or Tidal have slightly higher pay-per-play rates for artists, they are also reporting significant annual losses.
So, even though musicians and artists are barely getting any money from successful streaming songs, neither are the big streaming services. It's as clear an example of failed business model as there could be, but what is the solution?
Iovine is spot-on when he suggests Apple, Amazon and Google have the strongest positions moving forward. All these companies have a lot of cash to be able to ride a loss, at least for a few years, and they also all have alternate products that streaming can drive audiences towards. But even if Spotify fails over the next few years and one of the big power players takes control, it doesn't resolve the essential flaw in the subscription music streaming model.
Looking at film and television, Netflix solved a similar dilemma by investing ridiculously in original content. The gargantuan company has been working for several years to grow its own catalog and plans to spend over $8 billion producing original content in 2018 alone. By the end of 2018 it will apparently have around 700 original series and movies on its platform. This clever strategy shields it from having to continually deal with external producers and studios over contracts and royalties.
But streaming music unfortunately cannot play a similar strategy. The business of music production is fundamentally different to film or television and a subscription music streaming service will live or die on how broad its selection is. A music streaming service also relies on an extensive back catalog in a way that is not as important for film and television. Netflix can afford to have a limited selection of 1960s, 70s or 80s content, but in the world of music Spotify needs to constantly service that catalog. After all, if I can listen to whatever song I want instantly somewhere else then why am I paying for a limited Spotify selection?
Too big to fail
When Billboard listed Spotify Chairman and CEO Daniel Ek as the number one power player in its top 100 list last year, it was clear that Spotify had transformed the music industry. The magazine suggested that if Spotify is not already too big to fail, then "it's headed in that direction quickly."
But how long can Spotify keep operating while losing millions of dollars?
How many investors will throw their money into the company once it goes public on the stock market in the coming weeks?
And what happens to subscription-based music streaming if Spotify goes out of business?
These are all questions that don't really have clear answers right now, but as more people become used to having everything they want to listen to available instantly at the click of a button for a small monthly fee, you can be sure the general public will not want to revert to older models. With cheap, subscription-based music streaming Spotify has opened Pandora's box, revealing a fundamentally flawed business model... but there is no turning back now.
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