Spotify Struggles with Business Despite Growing Revenues

There is a whole gamut of small companies with revenues in the range of $50 million-$150 million that are gearing up for an IPO in the next 18 months. However, it is reassuring to see that there are also a few others that have amassed a much higher revenue base and are still working hard to keep themselves private as they set up more robust business models.

Spotify’s Financials
Online music service provider Spotify is one such player. Spotify is a Swedish music streaming service that first launched its application in October 2008. Since then, the company has grown internationally and its services are available in 15 countries, including Australia, Austria, Belgium, Denmark, the Faroe Islands, Finland, France, Germany, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the United States. In the U.S., Spotify’s services were launched only last year.

The company is known for its application that lets users listen to music without any buffering delay. Spotify offers streaming music from various record labels, including Sony, EMI, Warner Music Group, and Universal. Its app is accessible on multiple platforms, including Microsoft Windows, Mac OS, and Linux for desktop devices and iOS, Android, BlackBerry, Windows Mobile, Windows Phone, and others on mobile devices. Users can create playlists based on several categories such as artist, album, and genre to access Spotify’s library of more than 17 million tracks.

Spotify lets users access services either through a Facebook account or through individual accounts they create on the Spotify site. Users can listen to ad-supported music content free through these accounts. They can also opt for an “unlimited” version at a cost of $4.99 a month that comes with unlimited hours of ad-free music. At $9.99 a month, users can also subscribe to the “premium” version that comes with additional features such as offline access to music, exclusive content, and the ability to play Spotify content through music players.

The company has more than 18 million users accessing its services globally. Of these, there are nearly three million paid subscribers. Analysts believe that Spotify will earn more than $889 million in revenues this year, recording 160% growth over the previous year. It has received venture funding of $189 million from Creandum, Northzone, Li Ka-shing, Wellington Partners, Sean Parker, Kleiner Perkins, Caufield & Byers, Accel Partners, and Digital Sky Technologies. The company’s valuation is pegged at $4 billion.

Despite the high revenues, there is concern about margins. Like others in the industry, Spotify pays high costs for its content. Royalty and license payments are expected to account for 70% of revenues, and the company has yet to turn profitable.

Earlier this year, analysts were expecting Spotify’s IPO. However, given Facebook’s disastrous performance on the stock exchange, it looks as though Spotify may have put its IPO plans on hold.

Spotify’s Expansion Plans
Earlier last month, Spotify added features to the iOS versions of the app to let free subscribers listen to a free mobile radio service. Unlike with the earlier version, users no longer have to create playlists and can listen to music of a genre or artist of their liking. They will now be able to create limitless streaming radio stations from single songs, playlists, albums, or artists; share playlists; and “like” tracks to be able to listen to similar music. The Android version of the app is also expected to be launched soon.

A few weeks ago, Spotify also tied up with Yahoo in a global deal to increase its market. Yahoo will integrate and promote Spotify’s music service on the Yahoo Media network, and Spotify will get a Yahoo app on its platform. Spotify seems to have replaced Rhapsody, which was Yahoo’s earlier music streaming partner. Yahoo users will be able to see links to Spotify songs and will be able to play them only when they download the Spotify software. In return, Yahoo will earn commission on all paid subscriptions made through its reference.

Overall, while the company has seen enormous growth and adoption, and will continue to do so, I don’t find the business model compelling, and unless something is done about it, when it does make its entrance, this company could very well implode in the public market like many other Internet “experiments.” The public market is not a good place for experiments. It performs best for viable, scalable businesses with solid fundamentals.