Spot the big bucks in music streaming

Spotify (/ˈspɒtɪfaɪ/) is a music and podcast streaming platform developed by Swedish company Spotify AB, headquartered in Stockholm, Sweden and listed on the New York Stock Exchange. Launched on 7 October 2008, it is currently (as of 14 November 2018) available in 79 countries and regions throughout the world. It provides DRM-protected content from record labels and media companies. Spotify is a freemium service; basic features are free with advertisements or automatic music videos, while additional features, such as improved streaming quality are offered via paid subscriptions.

Spotify is available in most of Europe, most of the Americas, Australia, New Zealand and parts of Africa and Asia. It is available for most modern devices, including Windows, macOS, and Linux computers, iOS, Windows Phone and Android smartphones and tablets, Chrome OS devices, as well as TVs via factory-installed means, Roku Players, Amazon Fire TV devices, the PlayStation 3, PlayStation 4, and Xbox One home consoles. Music can be browsed through or searched for by parameters such as artist, album, genre, playlist, or record label. Users can create, edit, and share playlists and tracks on social media, and make playlists with other users. Spotify provides access to more than 40 million songs. As of February 2019, it had 207 million monthly active users, including 96 million paying subscribers.

Unlike physical or download sales, which pay artists a fixed price per song or album sold, Spotify pays royalties based on the number of artists’ streams as a proportion of total songs streamed. It distributes approximately 70% of total revenue to rights holders, who then pay artists based on their individual agreements. Spotify has faced criticism from artists and producers including Taylor Swift and Thom Yorke, who argued that it does not fairly compensate musicians. In April 2017, as part of its efforts to renegotiate license deals for an interest in going public, Spotify announced that artists will be able to make albums temporarily exclusive to the Premium service if they are part of Universal Music Group or Merlin Network. On 28 February 2018, Spotify filed for a direct listing on the New York Stock Exchange. Spotify’s shares began trading on 3 April 2018. Spotify operates under a freemium business model (basic services are free, while additional features are offered via paid subscriptions). Spotify generates revenues by selling premium streaming subscriptions to users and advertising placements to third parties. In December 2013, the company launched a new website, “Spotify for Artists”, that explained its business model and revenue data. Spotify gets its content from major record labels as well as independent artists, and pays copyright holders royalties for streamed music. The company pays 70% of its total revenue to rights holders. Spotify for Artists states that the company does not have a fixed per-play rate, instead considers factors such as the user’s home country and the individual artist’s royalty rate. Rights holders received an average per-play payout between $.006 and $.0084. Spotify offers an unlimited subscription package, close to the Open Music Model (OMM)—estimated economic equilibrium—for the recording industry. However, the incorporation of digital rights management (DRM) protection diverges from the OMM and competitors such as iTunes Store and Amazon Music that have dropped DRM. Spotify encourages people to pay for music, with subscriptions as its main revenue source. The subscription removes advertisements and limits, and increases song bitrates to 320 kbit/s. For example, in Norway, the figure of 1.2 billion unauthorized song downloads in 2008 is compared to a figure of 210 million from 2012. BBC Music Week editor Tim Ingham wrote: “Unlike buying a CD or download, streaming is not a one-off payment. Hundreds of millions of streams of tracks are happening each and every day, which quickly multiplies the potential revenues on offer – and is a constant long-term source of income for artists.”

In 2007, just after launch, the company made a loss of 31.8 million Swedish kronor ($4.4 million). In October 2010, Wired reported that Spotify was making more money for labels in Sweden than any other retailer “online or off”. Years after growth and expansion, a November 2012 report suggested strong momentum for the company. In 2011, it reported a near US$60 million net loss from revenue of $244 million, while it was expected to generate a net loss of $40 million from revenue of $500 million in 2012. Another source of income was music purchases from within the app. This service was removed in January 2013. In May 2016, Spotify announced “Sponsored Playlists”, a monetisation opportunity in which brands are able to specify the audiences they have in mind, with Spotify matching the marketer with suitable music in a playlist. That September, Spotify announced that it had paid a total of over $5 billion to the music industry.In June 2017, as part of renegotiated licenses with Universal Music Group and Merlin Network, Spotify’s financial filings revealed its agreement to pay more than $2 billion in minimum payments over the next two years.

As of 2017, Spotify was not yet a profitable company. In February 2010, Spotify received a small investment from Founders Fund, where board member Sean Parker was recruited to assist Spotify in “winning the labels over in the world’s largest music market”. In June 2011, Spotify secured $100 million of funding, and planned to use this to support its US launch. The new round of funding valued the company at $1 billion. A Goldman Sachs-led round of funding closed in November 2012, raising around $100 million at a $3 billion valuation. In April 2015, Spotify began another round of fundraising, with a report from The Wall Street Journal stating it was seeking $400 million, which would value the company at $8.4 billion. The financing was closed in June 2015, with Spotify raising $526 million, at a value of $8.53 billion.

In January 2016, Spotify raised another $500 million through convertible bonds. In March 2016, Spotify raised $1 billion in financing by debt plus a discount of 20% on shares once the initial public offering (IPO) of shares takes place. The company was, according to TechCrunch, planning to launch on the stock market in 2017, but is instead planning on doing the IPO in 2018 in order to “build up a better balance sheet and work on shifting its business model to improve its margins”.

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