Spotify, the largest music subscription service in the world, more than doubled its revenue to over $573 million in 2012. Although it also lost slightly more money last year than in 2011, the jump in revenue adds to the list of signs that this disputed business model can be sustainable after all.
The following figures from the Luxembourg company’s financial statements were reported by the Financial Times on Wednesday. Spotify’s revenue swelled 128% from $246.7 million (€190 million) in 2011 to $573.1 million (€434.7 million) in 2012. This was somewhat offset, however, as net loss also grew from $58.8 million (€45.4 million) to $77.4 million (€58.7 million).
Critics that assert that the company’s business model is unsustainable will surely emphasize this loss as support. A number of artists are similarly adverse to the model out of dissatisfaction of the royalties they receive from the company. Congruent complaints are also frequently levied against other freemium music services like Internet radio service Pandora, who also constantly loses profit while gaining market share.
On the contrary, the recent numbers indicate that Spotify’s business model has potential to succeed–assuming that it can continue to operate on the remaining balance after paying royalties. The more revenue the company generates, the stronger its business model stands, and the greater the share of revenue it gets to retain. Seeing as their cost of sales fell from 97.7% of revenue in 2011 to 83.5% in 2012, Spotify has been able to retain more than the year before to apply to its expenses (i.e. salaries, marketing, IT, royalties, etc.).
This optimistic shift in cost is not a coincidence, though, as Spotify U.K.’s cost of sales also dropped from 102.6% of revenue in 2010 to 85.7% in 2011–another sign that the business model progressed in at least one market and can do the same in others.
These current financial figures at hand show a comprehensive set of results for the company across all markets, and therefore, do not clearly indicate results in any particular market. What we do know is its strength in Sweden, Norway, and the Netherlands, where the service has been present for over five years. It is much newer in the U.S., where it was launched in July 2011–and newer yet in Australia and New Zealand, where it was launched in in May 2012.
It stands to reason that Spotify’s business model will improve its results as the company spends more time in each market. Its freemium business model allows free listening on demand in hopes of spurring paid subscriptions. While the early stages may not be profitable, the model should gain momentum and lead to profitable operations if consumer adoption is sufficiently high.
We can expect the growth trend to continue in 2013. CEO Daniel Ek has publicly stated that Spotify expected to distribute about $500 million in royalties in 2013. If gross margin (sales minus cost of sales) increases by even five percent to 78%, $500 million paid to rights holders would imply a total revenue of about $850 million–up 47% from 2012.
It looks like our favorite music subscription service and the freemium business model is here to stay–at least for now.