Even though Spotify earned more than $2 billion out of $4.5 billion that the entire music streaming industry made last year, the company isn’t exactly floating on cash. As per reports, Spotify paid over 80% of its earnings to record labels and individual artists, and as a result ended up suffering an operating loss of over $200 million last year. To ensure that the trend doesn’t continue, Spotify has roped in Shiva Rajaraman, a former consumer experience head at YouTube, to drive the company through a new path to profitability which will include the company making its own videos like interviews with popular artists as well as additional content like pop-ups. The company has also purchased a music data firm named The Echo Nest to build algorithms which will identify users’ tastes in music and build personalized playlists accordingly. “One of the things we are trying to do is simplify Spotify so that it actually does more of the work for you instead of you coming to do all the work,” said Rajaraman.
Out of Spotify’s 75 million users worldwide, less than half, or 30 million, are paid subscribers. The company also makes some money from advertisements which are played for non-paying subscribers while they are listening to playlists. However, such revenues are insufficient to help the company break even, let alone earn substantial profit in the long run. While the company cannot afford to break away from record labels or artists, it needs to create new content and a new business model to stay afloat. Some of these new ideas may revolve around the company either going public or to cut better deals with the music industry after it claims at least 50 million paid users worldwide. The company can also offer new and exclusive content to its subscribers like interviews, backstage footage, live performances and documentaries. Among some of the steps Spotify has taken to diversify its revenue sources is a partnership with tickets website Songkick though which it offers concert recommendations to its subscribers based on their tastes.
The fact that Spotify’s revenue model isn’t working out was blown open late last year when the company was hit by a $150 million lawsuit by some artists who alleged that Spotify was running their music without paying royalties. The lawsuit happened despite the fact that Spotify paid up to $3 billion in royalties since 2008 and had set aside another $17 million to $25 million for paying outstanding fees. In March, Spotify reportedly settled the issue by paying as much as $21 million in royalty payments to a number of publishers and songwriters. Even though the deal covered Spotify for all content the company streamed since its inception, it is just a small straw of hope given the amount of annual losses the company has to put up with. In the coming months, it will be interesting to see if Spotify’s new revenue models will bear fruit or if the company will ultimately go public to save itself from liquidity.