Spotify’s annual report in perspective. 2011–2014: Tripled losses but grew user base x6!
Another year, another annual report from Spotify Technology S.A. Some media go for the doomsday headline.
$181.5M it’s a big number. But so is the scale!
Rather than looking at a big number in isolation, what if we allow for a few seconds of analysis — what can be read from the numbers that would actually qualify as a proper thought rather than knee-jerk-journalism?
1) Unicorn Schmunicorn. Aren't losses evidence of a non-working business model?
Long term, yes. While scaling and growing, no! Some rhetorical questions:
What is the addressable market for music streaming? YouTube has 1 billion users doing streaming, Apple has 800M credit cards on record that pay for online content and there are at least 1.2 billion Spotify-enabled smartphones on the planet. It seems that the total addressable market is somewhere between 13–20 times bigger than the current 60M user-base of Spotify.
Would you stop growth? Would you start optimising for profits with only 60M users?
Another perspective on addressable markets — Geography! If you're only in 1/3 of all the countries in the world — why would you stop? (Spotify is currently in 59 countries, there are 193 countries in the UN). Spotify hasn't even launched in major markets like Japan, South Korea, Russia or China.
Would you go big or go home?!
2) Perspective — Looking at the user numbers instead
If you divide the losses ($181.5M) with the total active users (60M) you get a loss per user of $3.03 per year. The same number was $6.4 in 2011. This is a decrease of 52% and means that Spotify shows scale.
Loss per user is shrinking and seems like an important metric. Since 2011, Spotify has tripled losses but increased users 6 times!
A $3.03 per year loss is $0.25 per month. Assuming a 70% content spend, Spotify “only” need an additional $0.84 month/user to reach break-even (assuming all things equal).
How could Spotify do that? Here’s a quick list of things that could increase ARPU (Average Revenue Per User)…not that this list is in any way unique or super creative — Spotify got extremely talented staff to plan and execute a far superior list!
- Diversify into other areas of online media (the rumours about video..?)
- Capture the car use case (stealing FM / Sirius Radio usage)
- Increase premium conversion (PS4 style features…)
- Increase prices (?)
- HiFi tier (maybe too niche to make actual impact, let’s watch Tidal…)
- Use brands as alternative funnels to free (improving premium conversion)
The list could go on, the point is — there’s a lot of additional ways for Spotify to get higher ARPU if they wanted to. Now, you could say that the loss per user should be higher since Spotify only hit 60M users in the end of the year. But even so, the additional ARPU needed is not out-of-reach by any stretch of imagination.
But my guess is that they're not lying when they say that the company’s priority one, two and three are growth, growth and growth.
What would you do?
3) Royalty payouts
Divide the licensing cost ($919M) with the revenues $1.21 bn) and you get 76% total rightsholder payout. That’s more than the 70% Spotify state themselves. It’s more than what Tidal said they would pay…
Make a headline of that!
(Full disclosure: I am a (small) shareholder. I am biased. All info in this post is public domain. All math is “back-of-the-napkin”-style and may or may not be accurate).
