After reports that Spotify lost a bunch of money in 2009, Om Malik ran the numbers and estimates that Spotify will do over a hundred million dollars in revenues in 2010.We’re not surprised.
Spotify operates on a classic freemium model, where people are encouraged to pay a fee to listen to music without advertising, be able to listen to it offline and use it on mobile, etc. It’s become conventional wisdom that people won’t pay for music, particularly young people. But people will often pay for convenience. (We’re a happy Spotify Premium customer.)
Sean Parker has famously argued that once people have all their friends and their playlists on Spotify, they have them “by the balls.”
This tracks with what we know about the freemium business model. Phil Libin, the CEO of note-taking app Evernote, outlined the three things that need to be there make freemium work:
- Get plenty of free users;
- Have a product whose value increases over time;
- Keep costs down.
Spotify has the number one and, more importantly, it has number two. This is the key, and this is why Parker’s point matters: once you have playlists and preferences on Spotify, its value to you is much higher than when you started using it. That’s why Parker says they have you by the balls.
Number three is the big issue, of course. In theory, Spotify should have it: they use an innovative semi peer-to-peer architecture that prevents them from breaking the bank on servers to stream all that music. But of course, they have to pay an outrageous amount in licensing fees to the record labels.
People wonder, Spotify has plenty of users, but can it have the revenues? We say yes.
But once it has the revenues, can it have the profits? We think ultimately that’s up to the music labels.