With more than 50 million subscribers, 140 million active users and nearly $3.3 billion in annual revenue, Spotify is the undisputed leader in the booming music streaming market. And yet, a look at the company’s latest results leads to one question: will music streaming ever be a profitable business?
According to financial filings released on Thursday, Spotify generated €2.9 billion ($3.3 billion) in revenue last year, up 52 percent compared to 2015. However, the company’s expenses piled up just as quickly, leading to a similarly steep increase in operating losses. Spotify spent nearly €2.5 billion ($2.8 billion) on royalty and distribution costs related to content streaming last year, eating 85 percent of its revenues. Adding to that expenses for product development, sales and marketing and general and administrative costs, Spotify’s operating loss amounted to €349 million ($390 million) last year.
Balancing revenues and licensing costs is a problem that all streaming providers face and one that might eventually give Apple a competitive edge over Spotify and its peers: Apple has a hugely profitable hardware business and billions of dollars to spend. As long as Apple Music supports hardware sales and helps to lock users into the Apple ecosystem, it probably doesn’t matter if it’s profitable. Spotify doesn’t have that luxury and will eventually have to figure out a way to keep royalty costs at bay. The new deals the company recently signed with Universal Music Group and Merlin, which represents a group of independent labels, could be a step in the right direction as they reportedly give Spotify better royalty rates and thus improve its chances of becoming profitable.
Spotify is currently valued at $13 billion and is reportedly planning to go public later this year or early 2018 through a direct listing at NYSE.
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