Spotify nearly doubled its revenues in 2015. Huzzah! But the company’s financial results for last year should also be a spur for the music/tech world to have some hard conversations about the sustainability of pureplay music-streaming in its current form.
Spotify’s revenues may have grown 79.8% year-on-year to €1.95bn in 2015, but the company still recorded a net loss of €173.1m – up from €162.3m the year before.
Digging in to the key figures first: Spotify’s cost of sales grew faster than its revenues – up 85.3% to €1.62bn, accounting for 83.5% of Spotify’s turnover.
The company’s investment in R&D grew 18.4% to €143.3m and its general and administrative expenses rose 51.8% to €116.4m, while Spotify’s sales and marketing costs grew by 42.5% to €246.5m.
The concerning thing here is the margins involved: sales and marketing costs alone sucked up more than three quarters of Spotify’s €321.7m gross profit. In a market where Spotify’s key rivals are now Apple, Google/YouTube and Amazon – tech giants with hefty cash reserves and built-in marketing platforms to take advantage of – Spotify’s marketing costs are only going to increase.
Bright spots? Spotify’s subscription income grew by 78% in 2015 to €1.74bn, as it ended the year with 28 million subscribers. Its advertising revenues grew faster though: up 98.2% to €195.8m, although ads remain just over 10% of Spotify’s overall turnover compared to nearly 90% for subscriptions. That 10-90 ratio of ads-to-subscriptions hasn’t changed since 2013.
Meanwhile, Spotify hailed 3bn streams from its Discover Weekly playlist in 2015: “This is the future of music and you should expect to see a lot of progress in this area during the coming years,” claimed the financials report.
But back to those hard questions, anticipated in the directors’ notes to the financials. “We believe our model supports profitability at scale,” they claimed. “We believe that we will generate substantial revenues as our reach expands and that, at scale, our margins will improve… Subscription-only models have not yet proven scale and free user models, whilst scaling, have not proven a path to profitability. Spotify has the combined power of both.”
That combined power, though, has so far seen Spotify accumulate net losses of more than €566m since the start of 2009, arriving at a point in 2015 where cost-of-sales were 83.5% of its turnover; and where R&D, sales/marketing and general/administrative costs were 7.4%, 12.7% and 6% respectively.
In an increasingly-competitive market with wealthy 900lb gorillas as rivals, Spotify can’t let up on its spending any time soon.
Yet any attempt to rework its margins – something that a growing number of voices within the music/tech ecosystem are mooting, quietly – risks further inflaming the artist community, and would meet resistance from rightsholders.
In 2016, publishers want a bigger share of streaming income, and labels want Spotify to match Apple Music’s payout percentages. And this is the state of affairs that Spotify will be taking out to investors if and when its long-awaited IPO gets underway.
There are positives to be found in Spotify’s financials but if, as PRS for music boss Robert Ashcroft recently told Music Ally, the health of the digital music ecosystem should be judged on how sustainable its pureplay services are, the figures present some harsh realities too.