PrivCo, 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".
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."
