The issue… is that Spotify’s primary cost driver is not, like most tech companies, fixed investments in R&D or Sales & Marketing, but rather marginal payouts to record labels.As Ben Thompson of Stratechery framed it recently: While Spotify has, on occasion, successfully negotiated with the labels to pay out smaller royalties, on balance, the business is inhibited by its own success: The more they stream music that’s owned by the labels, the more they have to pay out. This royalty model creates a unique drag on Spotify’s potential long-term profitability. But there’s one flaw that limits this particular business model’s upside, and has muted Spotify’s value on Wall Street: For every $1.00 they take in from advertisers and subscribers, they pay out roughly 75 cents to the labels. In other words, if Spotify can grow its paid subscriber base at a faster clip, the business has the potential to become much more profitable-at a faster rate.Īs it stands today, we believe Spotify’s current operating model is a lucrative business over the long-term, and we expect it to grow at healthy pace over the next few years. The key dynamic here is that paid listeners are roughly 2X more profitable. One important piece of context to understand here is that 90% of Spotify’s 2019 revenue came from its premium subscribers-which is significantly more profitable than its ad-supported listener-base. Spotify is well ahead in the streaming music wars. On a paid subscriber basis, Spotify is also well ahead of its competitors: Apple Music has reported 60 million paid subscribers while AmazonĪMZN music has 55 million music subscribers. As noted in Spotify’s corporate filings, Spotify have has become “one of the largest engines for revenue growth to artists and labels in the music industry.” Importantly, MAUs have grown consistently at 30% per year-an indication that users are loving the platform. The music industry initially fought Spotify-but now they depend on the company to survive. I’m going to skip a great deal of history here, but suffice it to say the company has been quite successful in that domain: As of Q1 2020, the company reported some 286 million monthly active users (MAUs) and 130 million paid global subscribers-while growing its topline revenue 22% YoY.Īs of 2020, users enjoy access to more than 50 million tracks, including over a million podcast titles. The business model Ek devised from there was just as elegant as it was disruptive to the incumbent music industry: Aggregate customers through a freemium model, pay out royalties to the labels, and scale upwards.
People don’t care so much to own specific records or songs-but they do want the benefit of listening 24/7.
Ek’s early insight was that the future of music for the consumer wasn’t about ownership (i.e.