Since it’s launch, Spotify it’s struggling to be profitable. Spotify is a service that streams music with occasional ads, whose frequency it’s (at least their PR say so) lesser than most commercial radios (uh-oh!). It only operates in 7 European countries (forget the bigger markets, aside a few), with a different, often timed, offering of mainstream music in each of them, which is not a very smart move.
Well, since Spotify basically gives away things, the service was very popular on the Internet. Since there’s a non-filtered entry for anyone that makes music, the number skyrocketed and many people now uses it to “discover” bands they will never pay money for, just like the old MySpace Music. The huge popularity on the net, coupled by aggressive marketing and number whoring (it’s called social or extreme marketing, nowadays) just made the financial condition of Spotify worse. Streaming is a non-linear business and growing an userbase using indie singers to paint the offering of Spotify on par with Apple, 7digital and Microsoft really helped Spotify image but also made their business a lot harder to operate.
How harder? Well, this year Spotify closed with a huge 19M€ loss. So huge that investors pressed for an US launch ASAP or else. Spotify managed to double its losses every year until 2009 (2M€ in 2007, 4.4M€ in 2008), the huge peak in losses it’s not completely unexpected. Popularity doesn’t always pay off in the streaming business and extreme and viral marketing couldn’t help you cope with the expenses and poor planning.
Despite the licensing issues, the constant losses and the huge amount of crappy music, at the end of 2009 Spotify was valued at 183.8M€, just to receive an investor ultimatum a year later. Another major problem is that despite the user base has already crossed 15M active users, no more than 750.000 premium accounts has been subscribed in three years and the company doesn’t divulge the renewal rates. Gotta love the side effect of this trendy extreme social marketing!
The licensing problem is worse than it seems. Spotify has a very harsh revenue share for musicians. It roughly equates 2.2€ for every 50.000 impressions. This low profitability makes lots of majors to question the service, even as an advertising opportunity. In several occasions talented indie musicians and newspapers complained that most of their potential customers (that may be measured in the dozens of thousands) could be totally satisfied with Spotify, leaving them dry. On the contrary, mainstream musicians and labels can definitely raise more money asking a free donation in exchange for a legal, DRM-free download of their music (Radiohead and David Bowie, among others, demonstrated how effective two different approaches to the direct-sale phylosophy could be), rather than surrendering digital distribution rights to Spotify.
Spotify is trying to fight its battle for profitability in the mobile world. As today, its service is shallow and spotty, its client is iffy, its offline content has zero portability and, more importantly, the premium subscription is 20-30% (depending on regions) more costly than their main really global competitor: Zune Pass. Zune Pass already boasts a more friendly licensing model (that allows you to move offline songs on any PMP supporting WM licensing system, Android and home consoles included) and has a huge technical advantage in adaptative streaming, lowering data and bandwidth costs for the end-users and business alike (Spotify has an astonishing hig 7h/GB bandwidth cost).
While the initiative was even suggested by Wired’s Eliot Van Buskirk a while ago, it may not be what investors expected and the execution is definitely not right.
As a user, I’m happy with Spotify. As a Product Manager I must say that the business did so many marketing and technical blunders that it’s very daring to hope for profitability in the midterm, unless a restructuring of the company mindset will take them away from the web 2.0 whoring attitude, back to the reality.
WOW! A return in style!
Welcome back!