streaming music

Spotify’s Business Model Called ‘Unsustainable’

We're building a Spotify playlist of money-related songs for this.
spotify Spotifys Business Model Called Unsustainable

Spotify playlist (screengrab)

In 2010 Swedish music streaming service Spotify was on the rise, with a 151 percent jump in revenue. According to PrivCo, a company that tracks financial data, the bottom almost fell out for Spotify in 2011 and the service’s current model is “unsustainable.”

CNET obtained confirmation from Spotify that numbers reported by PrivCo were correct–but not news. Spotify’s losses since jumping into the U.S. market were first reported in August by the Wall Street Journal.

Regardless of who reported what first, PrivCo’s assessment might sting at Spotify HQ:

Spotify was unable to generate any material improvements to its cost of sales margin. In fact, virtually every new dollar of revenue went directly to music companies as royalty payments, evidencing the fact that the more members Spotify adds, the more money the company loses. This is a clear indication that the online licensing fee/royalty model is increasingly restricting Spotify’s ability to generate sustainable margins using its freemium model. In almost a one-for-one scenario, every dollar Spotify is generating immediately exits the company due to licensing fees as members listen to music and ring up Spotify’s music royalty tab.

While CNET’s Greg Sandoval writes that “multiple music industry sources” say Spotify is doing well, rapidly convincing free users to subscribe, PrivCo CEO Sam Hamadeh suggests that in order to survive, Spotify needs to adopt a “tiered subscription system.” Mr. Hamadeh suggests Spotify could adopt a Platinum service level for power users willing to pay $25 a month for more plays.

Spotify has tried to be more honorable than Napster but they’re still pissing off bands and solo artists so if Spotify takes the hint and implements something similar, they may even be able to bring more performers into the fold.

We hope they stick around so politicians can continue building cheesy playlists for our amusement.

Follow Steve Huff via RSS. shuff@observer.com