It started all in 2006, when Daniel Ek founded his company. He has actually founded this company because of his passion for both technology and music. Soon his company came to the fore as being one the best well-known music streaming services around the world1. As you might have guessed, we are talking about Spotify right here. To elaborate a bit on this, its music library now contains approximately 30 million songs, and about 20 thousand songs are added on a daily basis. By means of its users Spotify has been a huge success over the past years. It now claims to have 80 million subscribers, which is way more than its competitor Apple Music (40 million subscribers)2. More than that, in total the company has 159 million active users. Besides the fact that so many people use its service, the existence of Spotify has not only been a success story however. Last year the company reported a revenue of 4 billion euros (which sounds pretty good, right?), but also reported a loss of 1,2 billion euros (well, that changes everything).
But why is Spotify making such huge losses? The main reason is because of the fact that Spotify has to pay royalties over the songs that are being played on the platform, of which it does not own the copyrights. This has led to the situation where 70 percent of Spotify’s expenses exists of paying these royalties. Since the day the company has been founded, it had already paid an astonishing 8 billion euros of royalties. To make it even worse, the more songs played the higher these expenses become since they increase simultaneously3.
The question here is, what should Spotify do in order to lower this percentage? One of the options is to create its own music label. In this way the company will be less dependent on the current labels and thus the expenses on royalties can be lowered. This is a difficult strategy to pursue however, since the existing music labels have so much power in the industy4. Another option would be to make a switch to hardware and create its own (smart) speaker system, just like Amazon and Google did. The competition in this sector is fierce as well however, but it could be an escape from its current oppressing financial situation. The question that remains for us is: What will Spotify do to get rid of its current financial situation? We are probably going to find out soon…
1Wikipedia contributors. (2018, September 17). Spotify. In Wikipedia, The Free Encyclopedia. September 20, 2018, from https://en.wikipedia.org/w/index.php?title=Spotify&oldid=859974663
2Hall, P. (2018, September 13). Apple Music vs. Spotify: Which service is the streaming king? Retrieved from https://www.digitaltrends.com/music/apple-music-vs-spotify/
3Verhagen, L. (2018, March 3). Zo moet Spotify’s verdienmodel veranderen om winst te gaan maken. Retrieved from https://www.deondernemer.nl/nieuwsbericht/173084/spotify-verdienmodel-veranderen-winst-maken
4Kain, R. (2016, November 28). Hoe meer Spotify oplevert, hoe meer verlies het bedrijf maakt. Retrieved from https://decorrespondent.nl/5750/hoe-meer-spotify-oplevert-hoe-meer-verlies-het-bedrijf-maakt/
Hi Emiel, thanks for your interesting blog! It’s astonishing to see how much is being paid in royalties and striking that while being such a major player it is still unprofitable..
My comment is a bit unrelated to your content, but wanted to share it anyway – as it’s still about Spotify. I don’t know if you’ve heard about Spotify’s engineering culture, but it is super interesting and fits in well with our classes on agile methods with DBA. If you’re interested in finding out about how Spotify integrated some agile principles, check out the following videos:
https://labs.spotify.com/2014/03/27/spotify-engineering-culture-part-1/
https://labs.spotify.com/2014/09/20/spotify-engineering-culture-part-2/
Think a lot of companies can learn from their principles!