Top Analyst Reviews Spotify’s Financials, Declares Business “Unsustainable” [CHART]

image from, a financial analysis firm focusing on private companies, got a look at Spotify's just closed full year financials and declared the music streamer's business model "alarming" and "unsustainable". While Spotify revenue jumped 151% in 2011 to $244 Million, "virtually every new dollar of revenue went directly to music companies as royalty payments, evidencing the fact that the more members Spotify adds, the more money the company loses".

It's a problem that Pandora and most other ad supported music services are facing , as well.

Spotify's 2011 cost for 311 employees also grew 173% year over year,  according to PrivCo, "outpacing revenue growth, and adding to the red flags that this business model needs to address".

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The financials that PrivCo analyzed were first reported in the Wall Street Journal earlier this year, but Spotify has just confirmed their accuracy. Summing up his concerns, PrivCo Founder and CEO Sam Hamadeh also said today in a statement:

"Spotify's 2011 results indicate that drastic changes must be be made quickly to its business model in order to generate growth while actually improving operating margins so that break-even, let alone profitability, is somewhere, anywhere, on the horizon."

"Either the online music royalty payment model to artists and music companies needs to change, which is highly unlikely in the near term given that digital royalties are record companies only growing revenue stream, or Spotify needs to ASAP introduce a tiered subscription system, as opposed to its current flat monthly fee model, which is clearly a broken business model.   Spotify's heaviest users will have to pay, for example, for a "Spotify Platinum" level for $25/month with more song plays allowed.  No matter how we slice the math, it is patently clear that something's gotta change soon on Spotify's business model if the company is to survive."

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  1. I think it goes without saying that the success of streaming services has been based on mass-scalability from the start.
    The financials look ugly right now, but it will be very interesting to see the 2012 income statement. One can already forecast that revenue number will have fantastic growth again with Spotify penetrating new markets. Furthermore, the company size grew by a huge amount from 2010-2011 – companies take on debt and turn losses in these phases.
    2012-2013 will be very telling of the sustainability of this service. The fact is, they’re buoyed by millions and millions of funding dollars and have to financial latitude to figure it out. A two year snapshot from 2010-2011 during a serious growth phase seems like a short-sighted way to evaluate this company’s sustainability.

  2. Being fairly neutral in my feelings about Spotify and being a CFA charter holder ( I say these numbers actually look pretty good for a growth company in Spotify’s stage of development. Color me surprised.
    The numbers you really want to look at are year-over-year (YOY) changes in gross profit and in the ratio of net loss to revenue. Obviously there is a big swing up in YOY gross profit, and the YOY ratio of loss-to-revenue has shrunk from about 40% to less than 25% in 2011. In both cases that’s strong movement in the right direction at a stage of business development where losses are to be expected.
    There’s certainly a question of where those staff numbers come from: if they are engineers and product managers building new features (and their numbers do not go up/down as a function of revenue) then that’s good. If they are people whose numbers are proportional to revenue then it’s not-so-good and there’s a general question why that’s not rolled into cost of sales. Not clear if the numbers shown are pro forma or IFRS conformant, so I can’t make that call.
    PrivCo may have some other reasons to be bearish on Spotify, but such an outlook isn’t well supported by this table. Overall these kind of numbers don’t look alarming for a low-margin high-growth company at Spotify’s stage of development. The real question is whether these trends continue in 2012 and 2013 and point to profitability in the next 2-3 years.
    – Tungsten Carbide,

  3. Profit will not come from ad sales but from the value brought by using analytics & metrics (on Spotify’s audience) for advertisers.
    A&M is in infancy. As media and ad buyers learn what they can do with the number supplied in a closed environment, like Spotify, the value of reaching those persons goes up.
    Current advertising sales financials, and the basis of the article’s negative report, depend on serving an “impression.” That’s ad-speak for delivering one person to an advertiser. Impressions are tremendously devalued due to a flood of billions of them online.
    Don’t calculate Spotify’s valued based on how many people it reaches with ads, but on how many people reach back through those ads – and the new ability of improving ad performance on the fly. Rates for these services are being established. Be sure that they will be higher than today’s average audio ad CPM – the price for delivering 1,000 persons to an advertiser – which rests around $2.16.
    When will this change to A&M occur? Putting your finger on the degree of a leaning curve for media and ad buyers will give you a good guess. More ad buyers are moving on this than media.

  4. I don’t really understand why Spotify still offer a free service at all. Surely even a $2-5 per month fee, with ads still included, isn’t super deterring to those who are currently paying nothing.
    I would still pay double what I’m paying for my unlimited account, if I knew that they had the ability to increase royalty payments.
    Great, informative article, cheers.

  5. Imagine there is a parking space right in front of your workplace. If you pay $10/month, you can park there. If you don’t, you’ll have to park 100 yards down the street.
    Many people will pay $10/month for this convenience, but if you bring the price up to $30/month, 99% of those people will just take the free parking space which is slightly less convenient.
    What I’m saying is, they’re not raising the price because if they do, people will go right back to pirating music in a second.
    TL;DR This whole article is a pile of ignorant bullshit.

  6. I found this to be very insightful. Thank you! I’ve also been getting a lot out of drummer Brian Doherty’s website as well. He has some interesting views on music and the music industry at

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