How can you make €1.95bn and still lose money? Ask Spotify

The world’s largest music subscriber service Spotify says 2015 was “in many ways, our best ever year.” The number of users jumped 50% to 89 million. Its subscriber figure hit 30 million, marking about a third of its users.

According to a filing from the Swedish company, registered in Luxembourg, revenues rose by 80% to €1.95 billion (A$3.03 billion). Net loss for 2015 was €173 million ($269.6 million), up 6.8% from €162 million ($252.5 million) in 2014. (In comparison, its loss between 2013 and 2014 was 180%).

Subscriptions are still Spotify’s biggest revenue maker, up 78% to €1.74 billion ($2.7 billion). Revenue from the ads played on its free tier makes up just 10.1% of monies, but still rose 98% to €196 million ($305,5 million).

In its filing, Spotify called itself “The No.1 pure play music service – the second largest revenue source to the music industry, both globally and the US.”

That certainly seems the case. As with all streaming services, Spotify’s biggest cost is payment to the music industry through “royalty, distribution and other costs”. In 2015, that reached €1.63 billion ($2.54 billion) – up 85% year-on-year. In other words, 83.6% of Spotify’s revenue went back into the music industry. How much of that is seen by artists is not known.

Some analysts wonder if the subscription model for streaming services can sustain if they make money but still haemorrhage from gross margins. But others insist that Spotify is still in positive territory, with how it expands its user and subscriber bases globally. It is slowly turning more users into paying for the privilege.

Spotify certainly believes it can turn a profit in the future. In its filing it stated, “We believe our model supports profitability at scale. We believe we will generate substantial revenues as our reach expands and that, at scale, our margins will improve. We will therefore continue to invest relentlessly in our product and marketing initiatives to accelerate reach.

“Music has mass market appeal – and, as such, we believe we are just at the beginning of a much larger market opportunity, benefiting from significant first mover advantages. Subscription-only models have not yet proven scale and free user models, while scaling, have not proven a path to profitability. Spotify has the combined power of both.”

Streaming revenues to the music industry rose 45.2% last year to A$4 .07 billion – around 20% of total revenue.

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