What Even Is Spotify?
Spotify is a music subscription service. Just like Netflix allows you to watch shows for a set price each month, Spotify allows you to listen to millions of songs and podcasts for a flat fee each month.
As of the first quarter of this year, Spotify has 286 million monthly active users!
How Does Spotify Make Money?
In 2019, Spotify posted revenues of 6.7 billion euros.
Spotify’s main revenue stream is its music subscription service. Because of this, it makes money in two ways: premium subscribers, also known as paid users, and ad-supported subscribers or its free subscribers.
Premium Subscribers
As of the first quarter of this year, Spotify has $130 million premium subscribers. Premium subscribers pay anywhere from $4.99 a month to $14.99 a month for ad-free streaming and the ability to play music on Spotify offline.
In 2019, they generated a profit of $1.638 billion euros from their premium users, making it a 27% profit margin.
Ad-Supported Subscribers
As of the first quarter of this year, Spotify has 163 million ad-supported monthly active users. While Spotify doesn’t charge these users a fee to use its music subscription service, they make up the difference by requiring these users to listen to ads.
In 2019, Spotify generated $217 million in revenue from selling ads to their free users. Obviously, there is a huge difference between the revenues of their premium and ad-supported users.
Two Sided Marketplace
Spotify also recently launched what they are referring to as a “two-sided marketplace” which they hope will allow them to capture revenue directly from their artists. For example, artists can pay Spotify to promote their music to particular groups of Spotify users.
Spotify also offers their artists tools to help them create music or podcasts. In 2019, Spotify earned $30 million euros in gross profit from this marketplace.
Losing Money – How Much Spotify Pays in Royalties
Spotify pays music labels, distributors, and publishers directly based on their licensing agreements. Spotify doesn’t publicize how they calculate royalties but various sites estimate that they pay between $0.006 and $0.0084 per stream. That means that your song has to get played roughly 120 to 160 times for you to make $1. Thus, if your song has a 1000 streams, you’ll make anywhere from $6 to $8.4.
Not that much money, right?
From their conception in 2006 through 2019, Spotify has paid more than $15 billion euros in royalties. In 2019 alone, Spotify paid $1.153 billion in royalties. Those pennies really add up! Unfortunately, these payments eat up a good chunk of their profits, so Spotify is looking for new ways to make a profit without having to pay any extra royalties or fees:
What’s Next?
Recently, Spotify has expanded into hosting podcasts. In 2019, Spotify provided its users with access to 700,000 podcast titles. In May, they announced they were entering into an exclusive licensing agreement with the Joe Rogan Experience which is one of the most popular podcasts ever. They have also spent the last few years heavily investing in creating their own content, where they presumably don’t have to pay royalties. In fact, in the last two years they have made four acquisitions of companies in the podcast space.
In 2019, Spotify bought the popular podcast company Gimlet Media and Anchor, a tool to help people create their own podcasts for an estimated combined $340 million dollars. They also bought Parcast, which is another podcast network like Gimlet. Most recently they purchased the super popular podcast network the Ringer for an estimated $196 million dollars.
Expanding into podcasts seems like a natural progression for Spotify and a great way for them to expand their audience and userbase. Podcasts are clearly growing like crazy and instead of being a record label they decided to vertically integrate with podcasts. It’s actually quite brilliant.
Is Spotify Profitable?
Spotify is still running at an annual loss. In 2019, it posted a loss of $184 Million Euros mostly due to all the acquisitions it undertook recently. Maybe, their venture into podcasts will finally help them make a profit…only time can tell.
Conclusion
As you can see, Spotify is thoughtfully expanding their business by focusing on podcasts and creating their own content. Maybe in a few years, these podcasts will be the main source of net profit for Spotify. Maybe, just maybe, they’ll even start to focus on other audio-based forms of media to make money, like audiobooks or ASMR. The possibilities are limitless!
Until then, though, thank you so much for reading,
Deepak Devjani