Is Spotify Profitable?

I just wrote an answer on the profitability of the music subscription model on Silicon Beach. I used Spotify as my example, cause that’s the one I’m familiar with and most high profile. Here is my full answer in case you are not a member of Silicon Beach.

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Many organisations are banking on the paid subscription model – from music, news, movies etc..whether its the answer is another question.

Clay Shirky understands this better than most people. He explains the paid content model, comparing music subscription vs news subscription model here:

http://www.shirky.com/weblog/2009/03/why-itunes-is-not-a-workable-mod…

I have also been thinking about the music subscription model today. Apple has a whole ecosystem supporting the music experience. People will pay for this convenience and experience.

In terms of music, lets use Spotify as an example since they are most likely to extract value from the rest of the value chain. Is Spotify profitable?

Spotify has 10million users. News articles suggest they have approx 650,000 paying subscribers (~ 1 in 20 paying).

http://eu.techcrunch.com/2010/09/15/spotify-10-million/
http://gigaom.com/2010/11/22/spotify-2010-revenues/

MUSIC REVENUES

90% of users pay $10 Euros/month = $120 Euros yearly
10% of users pay $5 Euros/month = $60 Euros yearly

On a revenue basis, Spotify generated $74m Euros last year on music  subscriptions alone.

ADVERTISING + “VALUE CHAIN” REVENUES

Gigaom reckons that Spotify made $58m in advertising. I take this with a pound of salt cause I don’t see how this could be true. My estimates below are based on the low side.

I project the following revenue streams:

– Advertising (PPC): 10m users x 1% of users click on ads x $0.02 x
365 days = $730k/year

– Ticket sales: $5 commission x 10m users x 1% purchasing yearly =
$500k/year. Using the average Posse commission prices.

– Merchandise: $20 tshirt x 10% commission x 10m users x 1% purchasing
yearly = $200k/year

That’s roughly $76m in revenue.

COSTS

The only cost that’s public is music royalties at $30m. That leaves $46m on table.

I wouldn’t think the operating cost of a lean startup business would be any more than 40% of remaining revenues (assuming 20 staff, low overheads). Opex = $46m x40% = $18m.

Total profit is = 76m – 30m – 18m = $28m profit.

So in short, their music subscription model is profitable.

I’m sure they’ll have other revenue streams from deals with mobile companies. I think that’s where the real value is for Spotify – the mobile apps. People will subscribe to this. They probably need to get it to 10% – 20% of paying users (currently at 5%). Their push into the US is more likely to build a barrier to competition cause it will prevent other people from moving in.

I’m out like Myspace,

Matt Ho.