Can music streaming service Spotify finally stop its losses?

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Spotify recently announced its public listing on the New York Stock Exchange, with help from Morgan Stanley, at a reference price valuing the company at $26.5 billion (£19 billion).

This listing on the NYSE is a significant increase over the $8 billion (£5.7 million) valuation in March 2016.

The company’s valuation on the NYSE was extraordinary and the streaming service’s rise seems never-ending but the underlying problem still seems to be the company’s ever-growing amount of losses.

Since its inception, the company has amassed an accumulated deficit of $2.98 billion ($2.13 billion) with losses being attributed to the license fees and royalties associated with the music from labels, artists and other logistical issues surrounding copyright.

Spotify’s strengths

With a powerful brand combined with global scale, rapid growth and a positive free cash flow, Spotify is in a dominant position in an already over-saturated marketplace with competition from tech giants such as Amazon Prime, Apple Music, and Google Play Music.

According to a report by Statista, the global music streaming market is expected to grow from $11.44 billion (£8.2 billion) in 2018 to $14.79 billion (£10.6 billion) in 2022. User penetration was at 24.7% in 2018 and is expected to grow to 26.6% by 2022.

Spotify’s growth

Founded by by Swedish entrepreneurs Daniel Ek and Martin Lorentzon in 2008, the service went global at a time when the music industry revenues were declining due to growth in piracy and digital distribution, which saw users listening to music, but the artists not seeing a penny for it.

What Spotify did was implement a way in which consumers could legally listen to music, allowing access to high-quality, streaming access to its catalog. For artists, Spotify meant a better way to monetise their music and also gain exposure.

It was a win-win idea and mutually beneficial to both artists and listeners.

Currently, Spotify’s freemium model allows access to an ad-supported streaming radio service and customers can also select a membership fee of £9.99 a month for an ad-free service.

Spotify’s finances

The streaming service has seen strong revenue growth over the past years. For the years ended December 31, revenues have grown from $2.38 billion (£1.7 billion) experienced in 2015 to $3.62 billion (£2.59 billion) in 2016, with revenues for last year again increasing to $5.02 billion (£3.59 billion).

A look at the company’s losses during the same period, grew from $282.39 million (£202 million) experienced in 2015 to $661.78 million (£474 million) in 2016, with net losses for 2017 standing at $1.52 billion (£1.08 billion).

The future for Spotify?

A look at the streaming landscape now shows hot competition. Spotify must feel its rivals breathing down its neck, some of these include: Amazon Prime, Apple Music, and Google Play Music, all of which are backed by companies who have much deeper pockets than Spotify, meaning their music streaming platforms can afford to take losses, something Spotify can not.

For Spotify, everything hinges on the success of its global music streaming platform. And the question of  how the company finally turns profitable? – will surely have to be asked sooner rather than later.

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