Spotify’s crossroads: dominates the music industry, but remains unprofitable

Imagine dominating an industry that has generated billions of dollars over the last few decades., raised passions and generated some of the greatest idols. Sport, cinema, music? Let’s put the third. You are the channel of distribution for the majority of artists on Earth with their listeners, and yet you remain unprofitable. That is, in a nutshell, the situation of Spotify.

Behind it are many vicissitudes that make a flat reading completely irresponsible (royalties, agreements with record companies, percentages of uptake…) but that does not prevent it from being flashy. Spotify currently has 31% of the market share of streaming music platformsfollowed by Apple Music with 15%, and still not profitable.

To do this, in 2020 the Swedish firm led by Daniel Ek (let’s not forget, the only big name in the digital economy direct to the European consumer) opened a registry. The signing of Joe Rogan exclusively by Spotify signed the official start of what here we call Podcast Wars. “Our real market is beyond music, it’s audio,” Ek said.

Spotify was betting that each brand or company had its own programs in the face of the open nature of podcasting in an original way and, also, to create an equally closed ecosystem. For example, he bought Anchor to make it easy for everyone to start a podcast for free and Gimlet to produce them. The objective? Capture podcast listeners, who are likely to be impacted by adsdespite the fact that they do not pay for the premium subscription.

That has worked halfway.

The accounts do not come out (for now)

At the account level, Spotify continues to invest and spend more than it generates, like a startup, with the difference that it was born in 2006. It’s not something that rare. Netflix, until recently, did the same.

However, the blow of the economic context has affected him especially. Its shares have gone from trading at $364 two years ago, at its all-time high, to now around $90.. A drop of 70%.

In recent years, Spotify has spent $1 billion to enter the podcast market and has hired celebrities like the Obamas, Prince Harry and the Kardashians as well as Rogan.

Now, with the new situation, that investment is beginning to be questioned.

Spotify’s most recent results posted a loss of $0.99 per share, more than expected. “We believe 2022 will be the peak in terms of the negative impact of our investments on gross margins, and we expect podcast gross margin to become profitable in the next year or two and ramp significantly thereafter. “said Spotify’s chief financial officer, Paul Vogel, during the results presentation.

A race to grow

The positive part that justifies this investment is that its number of monthly active users has exceeded 456 million this 2022, of which 195 are paid.

But what has brought them here? For that, it is convenient to know something more about the Spotify business and its ways of income.

Founded by Swedish entrepreneurs Daniel Ek and Martin Lorentzon in 2006, Spotify was born as a solution to music piracy and officially launched two years later, but soon changed its approach to approach labels and help them distribute their music while avoiding piracy. His current model was born.

Spotify’s services were initially available in some European countries such as the UK, Spain, Sweden, France, Norway and Finland, before entering the US market in July 2011.

Spotify’s business model

Spotify made its public debut in April 2018, and shares opened for trading at $165.90, giving the company a valuation of $29.5 billion.

Since then, Spotify’s business model is based on both paying and ad-supported users. In addition, he has tried to sell software created by purpose for your needs.

The company’s main source of income is premium subscribers, as subscription fees represented 87% of revenue in the third quarter.

The company’s primary goal is to enter the podcast industry to reduce its reliance on premium subscribers and expand its advertising business.

That is where, in defense of Spotify, his bet may not have gone well too affected by the current context, where the advertising market continues to suffer enormouslyto which is added the impatience and fall of the shareholders.

The question is: How long will it be sustainable? For now, Spotify has begun to restructure its podcasting business and has also announced that prices will go up of their premium plans to try to start plugging holes. The holes in a leading platform in one of the markets that move the most money.