Spotify, one of the largest digital music services, doubled its revenues in 2012 but still failed to turn a profit.
The recently released financial results highlight a concerning paradox within the music industry: while demand for streaming services grows, some of the largest companies in the market still aren’t making money. In fact, Spotify has increased its losses every year.
Pandora Media Inc (NYSE:P) and Spotify are going against one of the fundamental rules of business: sell something for more than it costs. Instead they are relying on the “Field of Dreams” platform: build an audience and profits will come, which is why they believe they can afford to lose money while they gain subscribers and market share.
But that business model is designed to work for a startup expanding into new markets within the burgeoning technology sector—not a digital music service trying to expand within a declining industry.
Rolling Stone reported last week that the record industry may have finally hit bottom this summer, and noted the news coincides with widespread accusations that Spotify and Pandora are not fairly compensating rights holders.
Spotify payouts are not yet a sustainable replacement for record sales. The average gross payouts are just shy of a half-cent ($0.005) per play for ad-supported streams, about three-quarters of a cent ($0.0075) for “unlimited” streams, and around one-and-a-half cents ($0.015) for “premium” streams.
If rights holders are making so little per stream, can this business model ever be profitable for anyone but the major labels and financial wizards behind the veil?
Like most of its rivals, Spotify offers unlimited access to a library of more than 20 million songs for $4.99 or $9.99 a month. At the end of 2012, it had more than 5 million paying subscribers—double the number from a year earlier.
Sales and subscriptions might be rising, but losses are accelerating year-on-year at both Spotify and Pandora, and profitability looks more distant than ever.
Although Pandora’s audience also doubled in the last two years to roughly 70 million listeners a month, it has racked up more than $56 million in net losses since going public in 2011.
And while Spotify’s revenue rose 128 percent to $577.5 million in 2012, its net losses also increased from $60.3 to $77.9 million as the company continued to invest in new features and markets including Mexico, Hong Kong, Malaysia, and Singapore.
Some argue these alarming numbers are relatively normal for young tech companies that are continuing to expand. In fact, Spotify chief executive and co-founder Daniel Ek told the Wall Street Journal last week that the company’s focus “hasn't really been about when we're going to show profitability.”
But the streaming music business has yet to prove it will ever be profitable.
Fiercer critics even believe Spotify is actually a lossmaking scheme designed to make the company an ideal candidate for a lucrative acquisition or IPO.
Spotify raised about $100 million last year from a group of investors led by Goldman Sachs in a round that puts a $3 billion valuation on the company, according to The Financial Times—roughly the same as Pandora’s current market valuation of $3.2 billion.
While a Spotify IPO could give executives, venture capital firms and major labels a chance to make bank, it’s unclear how it would ultimately impact artists, music creators and indie labels. However, it is safe to assume they would not fare as well.
Since its IPO, Pandora has become embroiled in a war with representatives of music publishers, songwriters and artists over the royalties they earn from its streams.
It has also proved unprofitable.
Pandora reported net losses of $14 million in 2008, $28.2 million in 2009, $16.8 million in 2010, $1.8 million in 2011 and $16.1 million in 2012. Meanwhile, its executives, including co-founder Tim Westergren, have been profiting by selling shares of stock since the IPO. Pandora executives have cashed more than $87.6 million in shares since the initial public offering last year.
Some on Wall Street say Pandora may have ruined Spotify's chances of a successful IPO thanks to a combination of heavy and continued losses, bad stock performance, and insane cash outs.
With mounting money problems, it’s unclear whether Pandora, Spotify or their rivals will survive long enough to ever turn a profit. Then again, it’s also unclear whether their executives and investors, who apparently stand to gain either way, even care.
April White is a writer, recording artist, producer/DJ, label owner, and the former Manager of Communications and Public Relations for eMusic. She is currently the President and Founder of her own firm, April White Communications. Her label is Daisy Pistol. She is also part of the electro-pop trio, Tiny Machines. Follow her on Twitter @iamaprilwhite.
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