Why Spotify Loses Money
How the audio giant compares to other unprofitable, not quite mature businesses
Welcome:
I was planning to write about personality-driven media in an expansion on my Axios piece from last week, but after reading Lucas Shaw’s latest, I was inspired to pivot. We’ll discuss that topic some other time. This week, we’re talking about making money. Who is, who isn’t, and why that’s the case.
One Big Trend: You simply must spend money to make money
Those are Euros because Spotify is a Swedish company
Photo by Mathieu Stern on Unsplash
In the latest edition of his weekly column, which I cannot recommend enough by the way, Lucas Shaw lays out what’s going on at Spotify. The core takeaway is that the company is focused on finally turning a profit and making the moves necessary to do so. That includes ending some of the mega-deals they made for exclusive content from celebrities, which have not panned out, and instead focusing on the nitty gritty world of mass market advertising.
My initial reaction to this story was a simple one. Spotify isn’t profitable? Why not?
Spotify is an enormous company. As Shaw points out, it has more than 450 million users and more than 200 million paid subscribers. It generates hundreds of millions of dollars in ad revenue every quarter. How in the world can it be that a company with those numbers does not turn a profit?
While it might seem strange at first, the answer becomes clear after some consideration. First, it should be noted that music rights are notoriously expensive, it’s hard for any streamer to make money from actual music. That’s why the company has pushed so strongly into podcasting. That’s our focus here.
Spotify, though a public company, is still relatively young. It operates in the relatively new space of audio streaming, and podcasting is a very new industry. That means it is expected to grow. Generating that growth requires massive investment. Investors are fine putting money into a company that doesn’t turn a profit because the company is using that money to power improvements. The expectation is that the company will eventually generate profits at a significant level and generate a massive return. Everybody wins!
This could come from lowering costs. It could come from adding subscribers. It could come from the introduction of some new tech which provides the company with a new way of making money. Shaw lays out an example of how that last bit might come to fruition by sharing that Spotify is creating a new way to bring in ad revenue that it shares with its creators, similar to what YouTube does. This would enable many more podcasters with relatively small but still significant audiences to make money with Spotify.
Currently, larger creators might reach out to brands directly and record their ads as part of their podcasts. Spotify likely has deals with those creators to help with that process. But this takes a lot of time and it isn’t easy to convince advertisers to work with you, specifically. Smaller creators who are independent or podcasting as a passion project probably don’t have time for this. If Spotify can offer an option that is appealing to brands and creators, those parties might opt to use it. That means a larger audience for ads, which means more money from brands for both Spotify and the creators. It makes the creatives lives easier and gives them an incentive to keep podcasting with Spotify.
But it takes investment to build a solution like that. Spotify needs to pour the money it makes back into the business. And that’s more important than turning a profit today.
Of course, some companies that investors support under the presumption that they will eventually become profitable…do not. WeWork is a famous recent example. Uber is a ubiquitous company that, despite its popularity, is not able to turn a profit. How can one determine which of these companies are running at a loss for now and which are running at a loss for good?
One has to dig into a company’s plans to really see how their operation works. Uber’s bet – infamously – is that self-driving cars will eventually eliminate the need to pay drivers, making the company wildly profitable. That bet is one that investors are willing to make, meaning they’ll put money into Uber despite the fact that the company loses money on every ride. To me, that seems like a bad business. Uber seems to have noticed something similar, as it has raised its prices, differentiated its offerings, and even gotten into subscriptions. It hasn’t been enough to date, and I’m not sure it ever will be.
Contrast that with Netflix, which took cash, including a whole bunch of debt, and invested it into original content. It lost lots of money for a long time. But those investments meant Netflix would both no longer need to pay other entertainment companies huge fees to rent out licensed content and that it would have a large library it could leverage going forward. Once it was created, that content could be used again and again to draw in new viewers. That bet has worked out spectacularly, and even as growth has slowed Netflix has remained at the top of the streaming world.
Spotify is probably more like a Netflix than an Uber. They might need to pivot from some of the more glamorous projects to less appealing focuses like ad insertion, but the pieces are there. Time will tell. Even when you have tons of subscribers and an awesome product, though, it’s hard to make money.
Why should you care?: Business can be confusing. Why would anyone continue to pour money into something that loses a billion dollars in just one quarter? How is it possible that a company with 400 million users and 200 million subscribers does not make money? Why would you buy an ugly digital picture of a cartoon ape? Some of this is explainable and makes sense after some consideration. But certainly not all of it.
Recommended Reading:
Spotify’s Future Isn’t Exclusive Podcasts. It’s Advertising.
Check out the Lucas Shaw piece referenced above and give him a follow.
Wrestling Fact of the Week:
The Royal Rumble happened on Saturday. It was an extremely solid show. Funny enough, though, and a bit unusual for a Rumble, there were hardly any big surprises. Instead, WWE chose to continue telling the stories it had been telling for the past few weeks and months, simply using the Rumble as a place to advance those stories instead of bringing in new or legacy talent.
The fact that this approach didn’t fall flat is a testament to how well WWE has been doing. Now, this is just the start to the Road to WrestleMania, and plenty can happen in two months. We’ll see soon if there are any major surprises on the horizon, or if WWE stays the course.
Have a great rest of your week.