The release of Spotify’s 2013 financial information (via an article at The Guardian) comes amidst heavy criticism about the company’s freemium business model and the amount of royalties it pays to rights holders — especially from its free tier. Although the numbers have little to say about the fairness of royalty rates, they provide good insight into Spotify’s business model and growth. Here are the main takeaways.
1. Spotify got a lot bigger in 2013. Spotify increased its revenues 73.6 percent last year, down considerably from 128-percent revenue growth in 2012. This growth is the reason the company’s operating loss has increased to €93.1 million ($116.1 million) from €21.9 million ($27.3 million) in 2010 (the year before it launched in the United States). But more importantly, revenue gained was larger last year: Spotify’s revenues grew €317 million ($395.4 million) in 2013 compared to €240 million ($299.4 million) in 2012.
2. Losses aren’t necessarily a bad thing. Growing Internet companies lose money. Growing Internet companies seeking the largest share of a new, growing market lose money. A market-leading company that’s part of a massive shift in consumer behavior should have a high tolerance for losses.
3. Spotify isn’t losing money everywhere. As previously reported, the company turned a profit in both the United Kingdom and France, both countries where Spotify launched early. The story is probably different in many other markets. It launched later in the United States and other big markets like Brazil, and it hasn’t even launched in compact disc-loving Japan yet.
4. The freemium model shows signs of success. In theory, Spotify’s two-tiered, freemium model works by luring large numbers of free users, some of whom will later become paying customers. As people upgrade, Spotify should get a greater share of its revenue from subscribers. This is exactly what has happened. Spotify got 90.9 percent of its revenue from subscribers in 2013, up from 87.1 percent the prior year.
5. The bottom line is actually many bottom lines. Spotify’s financials are a mix of mature, more financially successful markets and less mature, less financially successful markets that will become more stable over time. It’s a mix of countries that quickly took to the subscription model and countries that will undoubtedly have a slower transition from CDs and downloads to subscriptions. As a result, the operations of more successful markets like the U.K. and France are aggregated with operations of new markets like Mexico, Brazil and Italy.
6. Does Spotify have good growth or bad growth? Determining the level of Spotify’s operating leverage is difficult. In this context, a business exhibits operating leverage when it decreases losses as it increases revenue. In other words, a company should become more efficient as it gets bigger. This didn’t happen. Spotify’s operating loss grew 16.4 percent as its revenue grew 73.6 percent. But this is hard to interpret because Spotify’s financial statements are an aggregation of dozens of markets in varying stages of maturity. As mentioned above, Spotify has turned a profit in at least two markets where it launched early. Those profits are being weighted down by the costs of launching and growing in other markets around the world.
7. Spotify is burning cash, but we don’t know its burn rate. The reports of the company’s earnings don’t include the year-to-year change in cash. Knowing its cash position would also provide hints on the company’s future financing needs. Spotify’s last known raise was $250 million in November last year.
Spotify’s 2013 earnings have something for everyone. Critics can point to deepening losses. Supporters will point to growing revenue and subscribers. An objective look, taking into account both numbers and context, will see a company with a “go big or go home” strategy that hasn’t blown up and could end up working.
