Spotify has been grabbing tons of headlines—not to mention new users—since its big U.S. debut earlier this year. Long reputed among Americans as "the coolest music service you can't use" because of its past difficulties in making licensing deals beyond its home base in Europe, it finally made the great leap across the pond in July, snapping up over a million users in just a couple of weeks.
Shortly afterward, the service cozied up to Facebook, grabbing even more users and mind share with ubiquitous ticker updates about which songs your cool friends were listening to. Tons more listeners signed up.
Cause for celebration? Perhaps, but the champagne's is probably still on ice at Spotify headquarters. Not only has the service never been profitable, but the company's loss is increasing, according to documents Spotify filed with Companies House, part of the U.K. government's Department for Business (Spotify is based in London), reported by Forbes and others. Whereas in 2009 Spotify lost almost $26 million, those losses ballooned to $41 million in 2010.
The Cash Chasm
The mounting losses aren't because Spotify is failing to make money. Revenues shot up last year, from $17.5 million to $98.1 million. But so did expenses. In fact, the "cost of sales" line item—which appears to include royalites paid to record labels—was $100.8 million, erasing every last penny of those revenues. So before Spotify even pays its staff, it's already in the red.
With cutthroat competition and a bleak financial picture for the next few years, the biggest losers in the whole game will be the artists. Every time someone steams a track, the artist gets paid, but those payments are usually measured in hundredths of a cent. Unless you're a Madonna or Kanye West, that doesn't add up to much. The business model will need a couple more years to shake itself out, and by coincidence royalty payments are due for an increase around the same time. Looking at the numbers, Spotify can probably afford to wait that long. But can musicians?
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