Monday, June 20, 2016

Spotify Loses Money Every Year on Purpose

Spotify loses money because that's what it was designed to do. Here's a rosy earnings statement that is designed to make people think everything is fantastic:

Spotify has confirmed that it has more than 100m monthly active users on its music streaming service today.

Based on its last count, the Swedish company is adding 1.8m users to the service monthly, and 30% of users are paying subscribers. 

The news comes as Spotify overtakes Skype as the most highly valued European startup, worth roughly $8.5bn, according to tech investment bank GP Bullhound. 

But wait--Spotify lost again, like it does every year:

This statistic presents Spotify's revenue and net income from 2009 to 2015. In the most recently reported period, Spotify's revenue amounted to 1.95 billion euros, up from 1.08 billion euros in the previous year. The company's net loss amounted to 173 million euros in 2015.

Michael Robertson explains:

Imagine a new hot-dog selling venture. Let's also say there's only one supplier to purchase hot dogs from. Instead of simply charging a fixed price for hot dogs, that supplier demands the HIGHER of the following: $1 per hot dog sold OR $2 for every customer served OR 50 percent of all revenues for anything sold in the store.In addition, the supplier requires a two-year minimum order of 300 hot dogs per day, payable all in advance. If fewer hot dogs are sold, there is no refund. If more than 300 hot dogs are sold each day, payments to the supplier are generated by calculating $2 per customer or 50 percent of total revenues, so an additional payment is due to the supplier. After the first two years, the supplier can unilaterally adjust any of the pricing terms and the shop can never switch suppliers.

Would this imaginary hot dog establishment be able to generate a profit? Never, because the economics are one-sided. The supplier will always elect the formula that captures the largest amount of money for themselves, completely disregarding the financial viability of the store. If the store miraculously managed to generate a profit, the supplier would simply raise the rates after two years.

Such economic demands may be imaginary for the hot dog business, but they are the stark reality that every digital-music subscription service such as Spotify, Rhapsody, MOG, Rdio, and others must confront. These details aren't well-known because digital music service deals are always wrapped tightly with strict non-disclosure agreements.

The end result? Artists are not getting paid for their work any time soon. Spotify is working the way it was intended. Every year, it loses just enough money to keep artists at bay. This year has been no different than any other year.

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