Beset by rivals and
record labels, Spotify plots path to profit
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[June 01, 2016]
By Mia Shanley
STOCKHOLM (Reuters) - Spotify is a
household name, with more paying users than any other
music-streaming service in the world. But it doesn't make a penny.
Those 30 million paid subscribers help it rake in almost half the
revenues in the global industry. But most of the money goes to
record labels and artists, while the privately owned Swedish company
faces growing competition from Apple with its deep pockets and
massive iPhone user base.
To reduce its dependence on labels and stand apart from rivals,
Spotify is broadening beyond its music library. It is making its own
videos, such as interviews with artists, and producing other content
like pop-ups that explain lyrics. This drive is being led by a
senior executive poached from YouTube.
The company is also looking to capitalize on its mobile app's
dominant subscriber base - and expand it - by investing in
algorithms that "learn" users' tastes and by offering personalized
services such as concert recommendations and artist memorabilia.
How the 10-year-old company fares with this drive in coming years
could determine whether it can stay independent, and perhaps go
public, or go the way of many other European tech start-ups and be
swallowed up by bigger Silicon Valley fish.
Its success or otherwise will be a test of whether Spotify's "freemium"
business model is viable - most of the firm's 75 million users
listen for free with commercial breaks.
It could also point to a wider reality of whether music streaming
can survive as a standalone business, or must simply be one of the
services offered by a big diversified tech company like Apple,
Google or Amazon.
"Can streaming be a big enough business on its own, to stand on its
two feet forever? I think the answer would have to be yes if you
look at Netflix and what they are doing with TV," Jonathan Forster,
a Spotify vice president and one of its first employees, told
Reuters at the company's Stockholm headquarters in a meeting room
called Rolling Stones.
"Even our 75 million is nothing compared to the number of people
with smartphones and who like music."
Mark Mulligan, managing director of media and technology analysis
company MIdiA Research, said Spotify could become profitable -
though that might be a long way off if the company continues to
prioritize growth, which he believes it will.
He said any new products and content would have to prove popular,
allowing the company to weather the onslaught from Apple and attract
even more subscribers.
Spotify does not have the luxury of being able to rack up losses in
music and recoup them from phone and tablet sales. Mulligan said it
was crucial for the firm to cut better deals with the music
industry, which he said may not happen until it had the stronger
leverage of closer to 50 million paying users.
"Investors have got to take the long view - absolutely."
Spotify was born in Sweden in 2006, and was one of the biggest early
drivers of music streaming, popularizing the idea of people
listening to tracks they did not buy or own.
It offered digital music fans and the record industry an alternative
to peer-to-peer file-sharing services like Napster which ran into
legal trouble over copyright infringement.
The company, founded by Daniel Ek and Martin Lorentzon, is now
present in 59 markets, and a funding round last year valued it at
over $8 billion. It employs 2,000 people, with about half of them
working in Stockholm in a building dotted with crates of vinyl
records from the likes of John Farnham and Midnight Oil.
It makes more than $2 billion a year from subscription fees and
advertising, a big slice of the $4.5 billion made in music streaming
last year, an industry which MIdiA Research sees growing to $8.5
billion in 2020.
But it pays more than 80 percent of that income to record labels and
artists. Last year it made an operating loss of 184.5 million euros
($205.5 million), widening from 165.1 million in 2014.
Competition is fiercer than ever, from the likes of Pandora and
rapper Jay Z's Tidal. After launching last year, Apple Music already
has 13 million paid subscribers.
[to top of second column]
Headphones are seen in front of a logo of online music streaming
service Spotify in this illustration picture taken in Strasbourg,
February 18, 2014. Spotify is recruiting a U.S. financial reporting
specialist, adding to speculation that the Swedish start-up is
preparing for a share listing, which one banker said could value the
firm at as much as $8 billion. REUTERS/Christian Hartmann
"If things continue as they are, Apple should be No. 1 by the end of next year
if not the start of the year after," said MIdiA's Mulligan.
Google is also competing on two fronts with Google Music and YouTube, the go-to
site for free music videos.
In 2014, Spotify nabbed YouTube's consumer experience head Shiva Rajaraman, now
a product head in Stockholm who spends half his time making sure users are
getting offered the right music on their home screens and the rest on new
"One of the things we are trying to do is simplify Spotify so that it actually
does more of the work for you instead of you coming to do all the work," the
41-year-old, who moved to Sweden from Silicon Valley, said in a meeting room
called Elton John.
Recent purchases of companies like music data firm The Echo Nest have helped
Spotify use algorithms to identify users' tastes and build them personalized
playlists, an area where rivals have also been active.
"(Users) give us a signal and then machines take that input and effectively use
machine-learning models to find out what your tastes are and try to get you to
have an affinity for it," said Rajaraman, who has three test phones and a folder
on his iPhone with every streaming service in the business.
Spotify will also start rolling out music-related videos to users, including
exclusive performances, interviews, back-stage footage and short music
The company has also partnered with tickets website Songkick to offer its
subscribers personalized concert recommendations based on their location and
It is also similarly looking to offer a merchandising service whereby users can
buy T-shirts and other paraphernalia from their favorite artists from external
Whether new content drives user growth remains to be seen.
Spotify, whose investors include North zone, DOST Global and Accel, does not
disclose details about its ownership but the co-founders no longer own a
majority, having sold off stakes.
One investor that says it is in for the long run is U.S.-based investment firm
TPG which backed the music streamer this year through its credit and growth
units, teaming up with Dragoneer and Goldman Sachs.
David Trujillo, who led the TPG Growth investment, said while Apple was a
formidable competitor, Spotify had the advantage of being an independent
provider that could address a bigger part of the mobile market.
He said the most natural path for it was to be a standalone public company.
Back in Stockholm, Forster - who said he was employee no. 7 or 8 at the music
streamer - also feels that "Spotify likes being Spotify", though rules nothing
"It would be emotionally hard not to be us - but who knows?"
(Additional reporting by Jonathan Weber in San Francisco and Se Young Lee in
Seoul; Editing by Alistair Scrutton and Pravin Char)
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