The first profit in the history of Western streaming services: why it is not so good news

    European and American streaming services remain unprofitable. Only in 2018, one of them showed a profit. This pioneer was Spotify. In the Swedish company, however, do not celebrate the triumph. We delve into how Spotify made a profit, why it reacted to its achievement with coolness and what prevents streaming services from getting a plus.

    Photo of Sunil Soundarapandian / CC BY

    Why streaming platforms are not profitable

    Despite popularity among users, streaming platforms are losing money. Moreover, financial problems face a variety of services: from niche Tidal to giants Spotify and Apple Music.

    Some companies do not meet the ends because of the imperfection of the monetization models. SoundCloud has not made a profit for the past ten years. At first, the startup tried to follow the path of Spotify and sell subscriptions, but did not gain a sufficient subscriber base and almost went bankrupt. Now SoundCloud is trying to make money on services for musicians. However, so far this has not brought the company a plus.

    The situation is similar with Pandora. Until 2017, only “radio stations” were available in the service according to genres or the manner of individual performers, and the listener could not play specific songs and albums at will, which led to an outflow of the audience . Recently, the platform introduced the ability to listen to music of their choice, but the moment was missed. User activity in Pandora continues to decline, and most of them do not pay for a subscription.

    Another reason for the lack of profit - the cost of paying music labels. Apple Music and Spotify have encountered it: the second spends on royalties and does about 80% of the income .

    For Apple Music, short-run profit is less important. The main task of the product is to attract users to the Apple ecosystem. However, with Spotify, the issue of earnings is acute.

    The Swedish company worked at a loss from the very start: it lost up to one and a half billion dollars a year. It would seem that the first profit in the history of the service should have inspired the leadership of Spotify, but not everything is so simple.

    How Spotify Profits

    According to the financial report for the third quarter of 2018, Spotify really managed to get a plus. The organization announced a net profit of € 43 million. Although this amount is only 3.2% of Spotify's turnover, Q3 financial results were better compared to the first two: from the beginning of 2018, the company lost $ 563 million.

    In 2017, its loss poured into € 1.24 billion

    The reason for the unexpected profitability "in the moment" is a reduction in costs. Compared to the previous quarter, Spotify spent less money on developing new features and marketing. Also, according to company CEO Daniel Ek (Daniel Ek), costs have decreased due to the reduction in the number of employees.

    In addition, there are other prerequisites for potential growth. For example, getting a share in Tencent Music (China). In 2017, these two companies exchanged minority stakes of their shares, as a result, Spotify now has 9.1% Tencent Music, and the latter has a 7.5% share in Spotify. In the third quarter of 2018, the Chinese organization submitted an application for an IPO in the United States. Prior to that, she reassessed her value, which led to an increase in the share price of Spotify.

    Why is the company dissatisfied with the financial situation?

    Spotify does not express enthusiasm for these financial indicators. We are talking only about the third quarter, so there’s no way to talk about a plus for the year.

    In fact, the Swedish company continues to lose money. This negatively affected the attitude of investors to its securities: several large financial institutions, such as Goldman Sachs, lowered the target price of Spotify shares.

    It is expected that following the results of the IV quarter of 2018, the company will again go to minus. Including because it invests in the development of new functionality. According to Spotify CFO Barry McCarthy (Barry McCarthy), this is her top priority.

    The financial situation of the Swedish music giant threatens to deteriorate in the long term. The company expects a fall in average revenue per user (ARPU) due to rising popularity in the markets of Latin America and Southeast Asia (see page 3 of its report ). There are popular cheap rates for students and family subscriptions to the service. Paul van de Velde / CC BY


    What Spotify will do

    In the near future, the company hopes to start earning more from developing its own product. Possible points of growth are advertising and podcasts.

    Advertisers Spotify plans to use Ad Studio's automatic ad placement technology, which is designed to provide more effective advertising targeting. The company expects this to increase the demand for advertising.

    Podcasts are interesting to streaming service by increasingtime spent by users in the application, and hence the number of advertisements per listener. Moreover, releasing podcasts is cheaper than buying license rights to use music. While Spotify users spend on this format only 1% of the total time in the service, but the company plans to increase this figure.


    Multi-million subscriber armies do not help streaming services to be a plus in the short term: companies spend too much money on royalties.

    The financial situation of Spotify and Apple Music may deteriorate even more with the introduction of new laws in favor of performers. The United States recently adopted the Music Modernization Act , which will oblige streaming platforms to pay more to musicians. Although Spotify and Pandora supported the law, it is not clear how it will affect the welfare of companies.

    The way out for services can be podcasts. Today, they are already attracting large advertisers, such as Chanel and BMW, and are bringing more and more money to the authors. In addition to Spotify, podcasts are being developed by Pandora: the company has developed a new recommendation algorithm for audio shows.

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