Why Spotify Remains Unprofitable
The simple answer is — they are paying artists too much in royalty, yet receiving too little in total revenue.
The longer answer comes down to three main points.
1. Not Appealing Enough To Millennials
About two-thirds of Spotify’s U.S. users are people ages 13 to 29.
Spotify does not have a lot of features. And millennials like things that have many features. One of their features enable users to find friends and see what songs they have listened to and which artists they follow. Many people-not just millennials-do not use this feature because it is too simple. Also, people are simply not interested in just knowing what songs and artists their friends like. If Spotify were to create some sort of platform where users can share songs at their own discretion and write a caption for it, they might get more traction because humans are genuinely curious at what others have to say. Spotify needs to create a community for these music lovers to share their feelings about different songs.
Another feature that may attract more retention is to add live streaming video to their app. In other words, it should be something like Facebook Live with only artists. The audience can leave comments and suggest what the artists should sing or talk about. With the feature, it can also be a platform where not so well known artists can advertise themselves.
Millennials, especially those who do not have a job yet, are more inclined to refrain from purchasing Spotify Premium. Either parents do not allow their kids to buy it, or some may feel as though it is an extra unnecessary expense. If however, Spotify creates more features that will attract them to use the app for a longer time, they may consider paying for Spotify Premium.
2. Royalty Is Killing Them
70% of its revenue goes to royalties. The revenue on royalties is a fixed proportion, meaning even if their user base doubles, the amount of money they pay out will also double. Spotify currently has no control over the amount of royalty they pay and will likely be that way for a while. The only way for them to lower the royalty is to become big enough to dominate the music streaming industry so that record companies will only come to them to sell their songs to. As of Spotify’s current position, that solution is virtually impossible due to the many other music streaming companies in competition. However, the quickest way for them to get back on track is to be bought out by someone, but this is also hard because Spotify has gone too successful. Its valuation is at $8 billion, and to be bought out by someone requires a lot of money to match their valuation.
3. Not Earning Enough in Ad Revenue
Spotify relies on ad revenue to make up for the costs of royalties. However, the numbers show that the revenue made on ads do not make up for the money they pay in royalty. Keep in mind that only non-premium users see ads.
Spotify should try to implement ads not just in between songs but also in other areas. The key to putting in ads that do not disturb users is to add them in subtly, almost as if users would not notice it. This especially goes for visual ads, where people’s attention spans are very limited.
The only way that Spotify can be profitable again is to make a drastic change with either their app’s features or be owned by another company. Previously, Spotify has mentioned that they wanted to go IPO. However, as of its of its current financial situation, an IPO is not expected to be seen anytime soon.