Spotify was already huge in Europe before it jumped to the United States. where it's user base is currently ballooning, but Friday brought the news that the numbers aren't all that impressive for one very fundamental reason: The more users the service gains, the more money it loses. Privco, which conducts business and financial research on major privately held companies, released a report on Spotify's year-end financial report for 2011.
"[In 2011] virtually every new dollar of revenue went directly to music companies as royalty payments," the abstract said. "Evidencing the fact that the more members Spotify adds, the more money the company loses."
This is a clear indication that the online licensing fee/royalty model is increasingly restricting Spotify's ability to generate sustainable margins using its freemium model. In almost a one-for-one scenario, every dollar Spotify is generating immediately exits the company due to licensing fees as members listen to music and ring up Spotify's music royalty tab.
The report also noted some other elemental issues. For example, "Spotify's 311 employees grew salary costs 173% year over year, outpacing revenue growth." Spotify has verified that the numbers are accurate. And unsurprisingly, Privco's conclusion is that Spotify's current business model is unsustainable, and the firm suggested a tiered pricing system. Below are Privco's key financial data points on Spotify:
Revenue (2011): $244.54M (€187.8M)
Revenue (2010): $96.15M (€73.9M)
Revenue Breakdown (2011): 84% Subscriptions, 15% Advertisements, 2% Other
1 Year Revenue Growth Rate (2010 to 2011): 151%
Key Backers: Kleiner Perkins Caufield & Byers, Digital Sky Technologies, Creandum, Northzone Ventures, Li Ka-Shing, Wellington Partners, Sean Parker, The Founders Fund, Accel Partners
Employees (2011): 311
In light, of this, or just in general, would you pay for Spotify if it became necessary?