- The music streaming service Spotify has operated at a loss since its inception in 2006.
- The company, which filed to go public on Wednesday, said that its losses come from royalties and licensing fees for musical artists.
- In 2017, Spotify generated $US4.99 billion in revenue but posted $US1.5 billion in losses.
Licensed content and music royalties are keeping the music streaming company Spotify in the red.
The Swedish company has lost a cumulative €2.4 billion – or $US2.9 billion – since its inception in 2006, according to the paperwork Spotify filed on Wednesday for a public offering.
“We have incurred significant costs to licence content and continue to pay royalties to music labels, publishers, and other copyright owners for such content,” Spotify wrote in its filing. ” If we cannot successfully earn revenue at a rate that exceeds the operational costs, including royalty expenses, associated with our service, we will not be able to achieve or sustain profitability or generate positive cash flow on a sustained basis.”
It turns out these music royalties aren’t cheap. Spotify spent more than €8 billion – or $US9.76 billion – in royalties to artists, labels and publishers since 2006. In 2017, the company’s expenses related to music rights grew by 27% from the year before.
Licensing fees area a necessary part of Spotify’s business, and the company knows that its relationships with music labels could make or break it as a company, according to the F-1.
While the hefty music fees are a necessary cost of doing business, Spotify can recoup those costs by reeling in more paying subscribers and advertisers.
So far, Spotify has struggled to do that: In 2017, Spotify grew its revenue 38% year-over-year, bringing in €4.09 billion. But its losses more than doubled during the same period, expanding from €539 million to €1.235 billion.
Spotify said in its filing that it intends to introduce new services and features that could help boost its subscribers and outpace its music competitors at Apple, Amazon and Google.
And, of course, it’s having a splashy IPO – a great way to advertise its music service to new potential subscribers.