The business of music streaming isn’t faring well. A look at Spotify’s finances paints a bleak picture not just for the Sweden-based service but for streaming music companies in general.
Spotify, which has been taking heat for honoring its reported $100-million deal with podcast host Joe Rogan despite racist remarks and anti-vax comments he made, has reported cash flow totaling $1.37 billion over the past five years. Compared to video-streaming services such as Netflix, which spent $6.5 billion for programming in the same period, Spotify sounds like it’s doing well.
Jay-Z’s venture into music streaming, Tidal, didn’t live up to the hype. It lost a tidal wave of subscribers and struggled to gain any real market share against Spotify, Apple Music and Amazon Music. In March 2021, Jay-Z sold Tidal to digital payments company Square for $300 million.
Cash generated by Spotify has come chiefly from collecting subscriber fees faster than it pays out the money to music companies. Analysts frown on this business model, describing it as a hand-to-mouth existence, The Information reported.
Also, unlike Netflix, Spotify doesn’t have a library of content because music companies own Spotify’s content.
“It has to be a little bit concerning that a substantial proportion of your cash flow is made up of simply managing your payables,” said accounting expert Bob Willens, who runs a consulting firm bearing his name. “It can’t be a good thing.”
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Because of this, Spotify is diversifying beyond music and has added podcasting to its content. Despite the Rogan controversy, he has helped beef up Spotify’s advertising business, offering a way to make money that yields much higher margins than subscribers. In fact, Spotify’s ad revenue jumped 62 percent in 2021, lifting it from 9 percent to 12 percent of total revenue, the company reported during the week of Jan. 31.
Still, this might not be enough to save Spotify.
“To understand the real profitability—or lack of it—you have to look at the working capital in Spotify’s business model,” said Richard Kramer, founder of London-based equity research firm Arete Research. “They collect from subscribers each month, but pay music labels like UMG and publishers at the end of the quarter, divided up based on what was listened to.”
Spotify has also had artists abandoning the service. Some have left due to Rogan’s remarks, others over low payments. Spotify pays rights-holders between $0.003 and $0.005 per stream on average, according to Business Insider. Approximately 70 percent of the total revenue earned per stream goes to the artist, while the rest goes to the platform itself.
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