Spotify Continues to Navigate Uncharted Waters for Subscription Streaming Music Services

As we have reported on these pages before, Spotify is an interesting case to watch as they attempt to bring online music streaming to

As we have reported on these pages before, Spotify is an interesting case to watch as they attempt to bring online music streaming to mass audiences while fairly compensating the artists who make the music, essentially trying to right the fifteen-year-old wrong that is digital file sharing.Spotify is succeeding at compensating artists where otherwise there wouldn’t be any compensation, as well as bringing their service to mass audiences, but turning a profit is another story.As a privately owned company based in Sweden, Spotify only recently made public its earning numbers for the year 2013. While the company grossed over $1.03 billion in revenue, it reported a net operating loss of $80 million. Overall revenue was up 74% since 2012, while losses fell $35 million from $115 million in 2012.With 12.5 million subscribers paying $10 a month to use the ad-free service, the potential for revenue is certainly there. Subscription revenue accounts for 91% of Spotify’s total revenue, with the rest coming from advertising on the free version of their service.The income from users who subscribe is tenfold the income from those who sit through ads on the free version- and record labels are compensated accordingly. This much smaller pool of high-value subscribers is what led Taylor Swift to abruptly pull her entire catalogue last month, citing a concern that when all is said and done, both revenue streams together are not enough to properly compensate her efforts.Swift probably wouldn’t have pulled her music had Spotify been entirely subscription-based or entirely paid (like Apple’s iTunes), but the company argues that this freemium model with the ad-supported version is needed first to hook users into becoming subscribers. CEO Daniel Ek states that Spotify has paid over $2 billion to the music industry since 2008, $1 billion in the last year alone, money that would never have made it to the artists had it been pirated illegally.Ek is essentially trying to create a new music economy in the way that radio stations did for popular music from the 1950s all the way to end of the 1990s. This is a tall order, as they struggle against the strong currents of consumer preference toward obtaining free music and the erosion of potential revenue by the free version. Despite all this and paying a whopping 80% of their revenue toward licensing fees, Spotify continues to gain investors and close the profit gap.

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