October 8, 2014:Spotify is now profitable in the UK, but what does that mean?

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Amid the regular arguments about whether streaming music pays off for artists, another important question sometimes gets forgotten: does streaming music even pay off for the companies that provide it?

To date, running an on-demand streaming music service has tended to involve heavy losses, particularly as they expand globally at an aggressive pace. Is Spotify sustainable for musicians? That’s one question, but there’s also a debate to be had about whether Spotify is sustainable for Spotify. Yesterday, though, that service had some positive news to report in the UK.

Its Spotify Ltd subsidiary’s financial results for 2013 were published, revealing that it had moved from an £11m net loss in 2012 to a £2.6m net profit in 2013. This based on a 42% growth in revenues from £92.6m in 2012 to £131.4m in 2013.

What drove that growth? A rise in subscription income from £64.8m in 2012 to £92m in 2013, fuelled in part by Spotify’s 4G bundling partnership with Vodafone UK and its half-price offer for British students. Subscription revenues were up 42% compared to a modest rise of 12.3% for advertising revenues, which reached £10.2m in 2013.

But the big news was that net profit, despite Spotify Ltd paying out 73.2% of its revenues in cost of sales, which includes royalties.

Conclusions? Turning a profit in one of its largest (and more mature) markets is good news for Spotify, although we’d counsel against expecting a similar move into the black when the parent company reports its 2013 financial results, given its global expansion that year.

As Spotify itself noted yesterday, its UK subsidiary’s growth mirrors that of overall streaming trade revenues for the music industry there, which rose 41% in 2013. Spotify Ltd’s results also offer more evidence in favour of hard telco bundles as a driver for streaming subscriptions, although the risk may be churn if and when the Vodafone partnership comes to an end, and subscribers have to stump up themselves.

But let’s not hide the real boost to Spotify from its UK profits: more evidence in favour of streaming being a sustainable business to show to potential investors in any IPO.

Moving out of the red in one country does not settle the wider arguments around slim streaming margins, and the politically-sensitive question of whether paying out 70% of revenues is still too much in particular.

But as Spotify progresses towards its long-anticipated IPO, it will relish any additional data that could assuage the concerns of potential investors nervous about sinking their cash into a company so dependent on music rights.

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Stuart Dredge
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