Spotify Is Growing, but So Are Its Losses

By BEN SISARIO 6/16/17 NYTimes.com

Is streaming music a good business?

Streaming has taken over as the dominant music format and is attributed with revitalizing the moribund business of record labels big and small. But for streaming companies, the answer is not as clear-cut.

Last week, Pandora, which has been bleeding money as it tries to adapt its business model to compete with Spotify and Apple Music, accepted a $480 million investment from SiriusXM, giving up 19 percent of its ownership and three board seats.

And on Thursday, Spotify released its annual report, which may be the last piece of financial data available to investors before the company formally moves to go public, expected this year or next.

On the surface, its results are impressive. Spotify, which is based in Sweden, had 2.9 billion euros (about $3.3 billion) in revenue in 2016, up 52 percent from the year before. On Thursday, Spotify also announced that it has 140 million regular users around the world, 50 million of whom pay for monthly subscription plans.

But its revenue growth has slowed — last year, revenue increased 78 percent from the year before — and its losses are mounting. In 2016, Spotify’s net loss totaled about $600 million, up from about $257 million the year before. The company attributed this increase to the costs of servicing its debt — it raised $1 billion last year in convertible debt — and to the effects of foreign exchange rates.

Since the company began, the costs of paying record labels and others for licensing rights has been by far its biggest expense, and the more its users click, the more Spotify must pay. According to a company statement, royalty and distribution costs equaled nearly 85 percent of its revenue. Add in nearly $900 million in salaries, marketing, product development and other costs, and, once again, expenses far exceeded revenues.

When will it be profitable? In its report, filed with European regulators, Spotify repeated a statement it has made numerous times over the years: “We believe our model supports profitability at scale.”

But it has never been clear what scale means. Since it began its service in 2008, and arrived in the United States in 2011, Spotify has grown extremely fast, becoming a household name among young people. It has even brought a once-reluctant Apple into the business of selling music subscriptions — Apple Music, introduced just two years ago, has become Spotify’s biggest competitor, with 27 million subscribers.

As recently as four years ago, Spotify was using 40 million paying users as a threshold number to demonstrate how much money it could contribute to the music economy once its business reached a certain size.

Now, with the company looking to go public, investors will be considering how that expanding girth can benefit Spotify itself.

As Spotify grows, economies of scale will help in areas like product development, said Mark Mulligan, a digital media analyst with Midia Research, and with more financial clout, particularly after going public, it could pursue more disruptive goals like signing artists directly. It is also pushing to improve margins, by renegotiating licensing deals with record labels.

Still, he added, streaming itself has not proved profitable for Spotify or any other service like it.

“Streaming is the content industry’s response to Napster,” Mr. Mulligan said. “We have not got highly viable user propositions, but have yet to develop commercial models.”

Spotify declined to comment on what “scale” means — the number of users, subscribers or revenues at which its losses will tip to profits. In its report, the company indicated that the most important kind of scale it is currently pursuing is signing up more users. It is now available in 60 territories around the world, including Japan, the world’s second-largest music market, which for years had remained stubbornly resistant to streaming.

“We believe we will generate substantial revenues as our reach expands and that, at scale, our margins will improve,” the company said. “We will therefore continue to invest relentlessly in our product and marketing initiatives to accelerate reach.”

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