Spotify: Bigger User Base, Bigger Losses

Written by Bill Leebens

[Spotify has not issued a press-release on several recent developments which I feel are important, and of interest to the music and audio worlds. Unlike most Industry News columns, in this instance I will outline a string of events based on multiple news reports, and include links to several of those reports. This will of necessity include some history of Spotify  and the precedents set by peer-to-peer music-sharing networks. Hang on—it’s gonna be a bumpy ride!—Ed.]

The Spotify we know, the developer of music-streaming on the web, is Spotify AB, based in Stockholm, Sweden. It in turn is a subsidiary of Spotify Ltd., based in London…which is in turn a subsidiary of Spotify Technology SA, based in Luxembourg. The company is presumably structured that way for financial and tax reasons, but it makes getting direct information on Spotify’s financial situation a little elusive. The company’s annual reports are filed in Luxembourg.

The company was founded in Stockholm in 2006 by Daniel  Ek and Martin Lorentzon, young entrepreneurs who had sold their companies for large amounts of cash, and were looking for something to do. At that time the music industry was still wary and shell-shocked by Napster’s influence/damage (depending on which side you were on) to their distribution models. As often occurs—look at politics—well-intentioned actions have unforeseen consequences. The industry was so focused on getting rid of Napster (which was shut down in 2001 following a long, drawn-out suit by the RIAA) that they seemed unaware that the marketplace, now acclimated  to free or nearly-free music, would fill the void. And so it did: after Napster vaporized, Kazaa, BitTorrent, Limewire, and dozens of other peer-to-peer sharing networks appeared.

So: when Ek and Lorentzon began to talk to record labels about their vision of shared, streamed music, the response was less than enthusiastic. While their vision was of a worldwide network, the reality of rejection forced them to begin more modestly. In 2008, with the cooperation of a few Scandinavian labels, Spotify went live in Sweden.

Over the next few years, Spotify expanded to several European countries, the service went live in the US, and is now available in fifty-eight countries. The company has received half a billion dollars in venture capital, and has licensing agreements with every major label.

Growth wasn’t an easy process, and it wasn’t always a lovefest. Many artists still claim Spotify and other streaming services (including Pandora, Tidal, Qobuz, and Apple Music) systematically underpay them. Viewing Spotify as yet another music-industry structure designed to cheat artists, Thom Yorke of Radiohead referred to it as “the last desperate fart of a dying corpse”.

Along the way, Sean Parker, co-founder of Napster and the first president of Facebook, joined Spotify as a board member. Purely aside from his $7.5B personal wealth, Parker is nearly legendary for his ability to predict trends. He was viewed as  the primary driver of Facebook’s success, which, in the eyes of the tech and music worlds,  eradicated the taint of Napster. More on that in a moment.

With growth comes recognition, if not necessarily respect: earlier this year, Daniel Ek was listed the most influential man in the music industry in Billboard magazine’s “Power 100” list. The news has not all been rosy this year, however. This spring the company announced that 10 million paying members had been added in the previous year, bringing their paying list up to 50 million. Total users (including users of the limited, free version) was up to 140 million, eclipsing the 27 million announced by Apple Music, and the often-disputed 3 million users claimed by Tidal. At the same time of the announcement, Spotify’s newly-launched player was widely condemned as buggy and just plain unworkable.

In June, a class-action suit brought against Spotify by a group of songwriters claiming massive underpayment  was settled for $43M. There had been a number of similar suits filed against Spotify, but all the others had been filed by groups like ASCAP and BMI.

The upheaval continued later that same month. In Luxembourg, the company released its annual report for 2016. It verified the user-stats of 50M/140M, but also showed that the company’s losses had increased from $257M in 2015 to nearly $600M in 2016. In 2016, revenue had increased 52 percent from the year before, up to $3.3B—-but during the period of 2014-2015, revenue had increased 78%.  For a company supposedly eager to stage an IPO, the decline in growth rate and massive increase in losses were not good news.

The bad news continued in June, as Sean Parker left his seat on the Spotify board. The board added new members with substantial credibility in the financial world, but Parker’s departure was viewed by many as indicating a lack of confidence in the prospects of staging the IPO. Shortly therafter, Apple announced a rare price-cut, offering a yearly subscription rate for Apple Music that would reduce monthly cost from $10 to $8.25. The move was clearly designed to draw paying users from Spotify and Pandora while the companies were floundering a bit (Spotify’s IPO stalled; Pandora’s CEO just left after a continuing string of poor financial reports).

As prospects for an IPO to raise new capital seem dimmed, Spotify is reportedly considering the unusual step of a direct listing on a public exchange, which would eliminate the costs of underwriting an IPO, but would also eliminate the influx of cash which accompanies a well-hyped public offering.

Competition between streaming services will likely increase, and undoubtedly some will fall by the wayside. The only thing certain is that it will be interesting to watch.

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