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Spotify’s asking valuation of $3.5 billion is ballpark reasonable if you compare it to Apple’s iTunes on revenue and growth.But long time digital music entrepreneur Michael Robertson thinks that iTunes and Spotify are like apples and oranges, and Spotify can NEVER be profitable.
“I think Spotify is a tremendous service. Their technology is outstanding, their speed to stream is terrific, and users love it. It’s just a maths problem. Under the maths they’re forced to agree to, they will never generate a profit.”
Apple’s iTunes earns about $3 billion a year in music sales and, as a percentage of Apple’s overall market cap, has a market cap of about $9 billion. It’s growing at about 40% a year.
Spotify has a revenue run rate of only $280 million or so. But it’s growing much faster — about 200% per year. So valuing it at one-third of iTunes seemed ballpark reasonable.
But that ignores profits.
Robertson says Apple makes decent margins from selling digital music because it signed straight retail deals for iTunes – Apple keeps a percentage of each sale (probably 30%) and the content owners get the rest.
The record labels feel “irked” by that deal because Apple made billions off the iPod and other hardware, and the labels never saw a dime of that money. “Their view of the world is ‘you built your business on my catalogue.'”
So with new contracts – particularly for subscription services like Spotify – content owners usually require a percentage of revenue even from unrelated businesses. So, for instance, if Spotify starts selling TV shows, or movie rentals, or even band t-shirts, content owners can claim some money from those businesses as well, Robertson thinks. (There are other tough terms as well, Robertson claims, and he laid them out in detail in GigaOm back in December.)
Robertson acknowledges he hasn’t seen Spotify’s contracts with the labels, but says “I know this because I worked in the digital music business for more than a decade,” starting companies like MP3.com and MP3tunes, two music locker services. “My former employees are in at many of these other companies.”
But couldn’t Spotify get too big to ignore, then come back to the labels and negotiate better terms?
Robertson thinks not, because there will always be some newer venture-funded service that is willing to pay whatever the labels ask to get started.
“If you’re a label, and companies like Spotify are willing to pay whatever crazy number you throw out there, you’d be an idiot if you started discounting the price.”
He reminds us, “Remember this isn’t the first wave. Go look at the archive from 3 years ago, 6 years ago, 9 years ago, you will find the iLikes, MySpace Music, Napster. They all paid up front and did the same deals, and they’ve all gone to heaven.”
He also observed that even big companies like Google – which has still not signed a deal with Warner, one of the three big major labels, for its music service – can’t afford to subsidise these money-losing services forever.
Robertson is still interested in digital audio, but from a slightly different angle: his latest startup, DAR.fm, is an online recording service for radio programs – mostly talk, but about 20% music, with specialty music programs being the most popular. The programs are recorded in the cloud – with ads included – and then can be streamed to any computer or smartphone; there’s also a way to download them to smartphones.
Robertson told us that DAR.fm (which stands for “digital audio recorder”) now has more than 50,000 users recording more than 20 million of minutes of radio per month. Users can get one series of shows for free, then must pay $40 per year for a subscription. So far, most broadcasters are happy with the exposure, Robertson says, although Univision did complain.