Spotify Business Model: How the Company Makes Its Money

Spotify Technology S.A. is an online music broadcasting platform currently traded on the NYSE market. Its idea came in 2006 from Daniel Ek and Martin Lorentzon to offer users access to music streaming at a cost in Sweden. Spotify has grown to become one of the most demanded and used platforms today with an average number of 3500 employees to serve consumers, raking in over $208 million annually in net income.

Spotify Tech S.A. offers users access to music and podcasts from several record labels and media houses and operates a service where consumers are allowed to stream while online but will need to pay to get extra perks such as music free ads and installing music directly to their devices.

As a media streaming platform, Spotify adopts the freemium basic model which means that basic services come at no price while advanced features are offered to paid subscribers, this is known as premium service.

Although the organization was founded in 2006, the platform didn’t begin operations until 2008. Users can download the Spotify mobile application to gain access to over 50 million songs. The Spotify app, which is user friendly, categorizes its music into albums, genres, and by artist names and allows users to create their own playlists.

It can also be downloaded on all flagship devices today, making it very accessible in several continents such as Europe, America, Asia and some areas in Africa with over 280 million monthly active subscribers and 130 million monthly paying users.

Spotify’s online streaming service pays a large percentage of its revenue due to its obligation to pay royalties to record labels based on a fixed rate per number of streams and the record labels in turn pay artists according to their pre-signed contracts.

Spotify Technology S.A. allowed artists to renegotiate payment plans with them and gave them the freedom to make new albums only accessible to paid subscribers when they were largely criticized by record labels and owners for not compensating them well. This was also a bid by Spotify S.A. to increase profits as they wanted to go public in the same year of 2017.

Acquisition and Partnerships

Over the years, Spotify has had a lot to do when it comes to partnerships with other companies as well as the acquisition of startups.

Acquisitions

In March 2014, the company took over the ownership of the music intelligence platform The Echo Nest after an agreement was reached between the boards. In the following year, Spotify acquired data analytics inclined firm Seed Scientific to improve its data services through advanced data analytics.

In April 2016, the company announced the buying of Crowd Album, a startup that helps artists manage their audience by promoting their online presence.

Spotify went on to acquire five more media inclined firms in 2017, these include Sonalytic, Mighty TV, Mediachain, Niland, and SoundTrap. Loudr, a music licensing service platform was added to Spotify’s list of acquisitions in April 2018 as the firm garnered a wider audience and looked to reach out to more customers across the globe.

From there, it looked like never going back for Spotify as the company acquired three podcasts networks in Gimlet Media, Anchor FM Inc., and Parcast between February and March 2019. Towards the end of that same year, Spotify announced the acquisition of SoundBetter, a platform for artists to collaborate on production, distribution, and licensing of their songs and projects.

In May 2020, Spotify acquired the broadcast license to The Joe Rogan Experience in a deal that was worth about 100 million dollars.

Partnerships

When Sony introduced PlayStation music in January 2015, the company also revealed Spotify as its exclusive partner and pre-installed Spotify streaming service in its Sony Xperia smart device, PlayStation 3, and 4 game consoles. Other notable partners include Microsoft, Discord, ESPN, Netflix, Tencent, and Hulu.

Between 2010 and 2016, Spotify was able to raise funds on six occasions. The first was in February 2010 when the company got an investment fund from the Founders Fund. A year later, Spotify received a 100 million dollars fund to aid its launch and expansion in the United States. Notably, the company was able to raise a 500 million dollars fund through convertible bonds in January 2016. 

Spotify Financial Performance in 2018-2019 (Q4 results for each year)

In the fourth quarter of 2018, Spotify Technology S.A. made a gross profit of $399 million with a gross margin of almost 27%. By 2019 Q4, the firm recorded a 1% loss in gross margin from the previous year’s fourth quarter but declared almost $475 million in pure profits. Their operating margins respectively for 2018 and 2019 Q4 were 6.3% and 4.1% respectively which indicates that Spotify Tech S.A. cut costs in 2019 even though they made over $350 million in total revenue from the $1.5 billion in Q4 of 2018.

The organization exceeded all its targets for the respective quarters and has experienced a significant increase in subscribers as well as streaming hours for music and podcasts which puts them in a very good seat for exponential growth in the coming years.

2020 Financial Details

The COVID-19 global pandemic had its toll on all businesses and Spotify is one of the few companies that had it good. The lockdown imposed by governments around the world meant that most individuals had to stay indoors and, of course, spend more time streaming on their mobile devices for over two months. This looked to have favored Spotify S.A. as the firm experienced an increase in its total monthly active users from about 270 million to 285 million listeners given that subscribers had more time to make use of their platform as the lockdown was imposed in several parts of the world. 

While the organization recorded a $7 million decrease in revenue from the Q4 in 2019, the financial records still look plausible as all metrics for the first quarter of the year were met. Spotify Technology S.A. recorded a gross profit of about $472 million and a decrease in gross margin of about 1% from the previous quarter. Despite the change in demand for some genres of music, the streaming platform is quite impressed that some other albums have been increasing sales and predict an increase in premium subscribers.

Spotify’s Sources of Incomes

Spotify primarily makes money through its Premium Service and Ad-supported Service. Its Ad division recorded annual revenue of about €1.8 billion in 2019 with a gross margin of over 25%.

Premium Service

Spotify S.A. allows both its free and premium paying subscribers to stream music at no cost but one major perk of being a Premium subscriber is the ability to listen and download music offline without the commercials. Its premium service offers a lot of packages and this generated annual revenue of over €6 billion which makes up about 90% of its total revenue in 2019.

The firm experienced an exponential increase in both its revenue and gross profit of about 30% each and while its profit for the year decreased by 25% from the previous year, it still maintained the same gross margin of about 28% from 2018.

Ad-Supported Service

Spotify S.A. provides options for users to stream music free but makes money from its customers in this segment by showcasing audio and video ads on their streaming space. Such ads are sponsored by the firm to market products to its users who might be interested in purchasing such services. These users are restricted to online streaming but this division still managed to generate almost €700 million in income which is the remaining 10% of the annual revenue for 2019.

Spotify’s Latest Developments

Several Tech websites announced that the firm was planning on becoming a publicly-traded company as at 2017 but the firm needed to balance their books and improve their profits so they used an Initial Public Offering which was valued between $6 billion and $24 billion; that’s one of the highest raised for a tech company in recent years. The firm later made it to the stock exchange market in April the following year with over 20% increase in its initial asking price.

The firm is constantly working to make its mobile streaming app better and some of its significant changes include custom playlists that can house both podcasts on the latest happenings and recently played or favorite songs. Its app also allows users in the same location to simultaneously play music at the same time.

Spotify’s streaming service is one of the major streaming platforms and its constant service improvements and innovative ideas have been pivotal to the accelerated growth of the platform. The firm is currently one of the top 100 publicly traded firms, taking the 82nd position.