Loss-making Spotify will continue to put growth ahead of profit for ‘next few years’

Since it launched 12 years ago, Spotify has never posted an annual net profit.

In fact, the company’s cumulative annual net losses in the past decade add up to €2.62 billion – or around $2.8bn at today’s exchange rate.

In more recent times, partly thanks to lower-margin deals with record labels initially signed in 2017, Spotify has gotten closer to profitability.

In FY 2018, for example, its annual operating loss stood at €43m, nearly a ninth of the size of the equivalent figure (€378m) from the prior year.

And in FY 2019, despite a €73m annual operating loss, SPOT actually posted a profitable quarter in Q3 (+€54m).

Despite this recent pattern of narrowing losses, Spotify co-founder and CEO, Daniel Ek, has told his company’s investors not to expect his firm to put the brakes on its spending for some time yet.

That’s because, across podcasts and music, Ek believes that Spotify can lure potentially billions of listeners away from traditional broadcast radio and towards its on-demand platform in the years ahead.

To help Spotify do so, the company has spent close to $600m on podcast-related acquisitions in the past 18 months, including its buys of Anchor FM ($154m), Gimlet Media ($195m) and Parcast ($55m) last year, and Bill Simmons’ The Ringer (up to $196m) in Q1 2020.

Speaking to CNBC’s Squawk On The Street last Wednesday, Ek was asked if Spotify may soon slow down its spending in order to return more profitable quarters for investors.

He replied: “The trend that we’re seeing is linear radio moving to on-demand; we’re talking about something [in radio] that has billions of consumers around the world that are now moving their behaviors online. Something like the COVID [lockdown] will likely accelerate that trend.

“We’re in the growth stage, trying to capture that growth. Eventually we will get to more of a point of maturity where we’ll focus more on profit over growth, but for the next few years it’s going to be predominantly growth for us.”

“Eventually we will get to more of a point of maturity where we’ll focus more on profit over growth, but for the next few years it’s going to be predominantly growth for us.”

Daniel Ek, Spotify

Ek was speaking after the announcement of Spotify’s Q1 2020 results, in which the company posted €1.85bn in quarterly revenue, up 22% YoY, alongside a €47m operating loss.

In Spotify’s annual report for 2019, released earlier this year, the company revealed that, as of December 31 2019, it had paid music industry rightsholders more than €15bn.

That €15bn figure was €5bn up on the €10bn lifetime payout figure Spotify confirmed for December 31, 2018 – meaning that, across last year alone, Spotify paid labels, publishers, songwriters and artists €5bn ($5.6bn), or around $468m per month.

Speaking in the CNBC interview, Ek further suggested that Spotify’s freemium model may help it to weather the COVID-19 lockdown better than its competitors.

“We have a freemium model, you start out being free on our platform and eventually people move into being paid users – more than 60% of them,” he said.

“This is a great thing in an uncertain economic environment like this one, because if you’re feeling economic pain, you can easily go back down to the free service, then back up to the Premium service when you have the means to do so. We think that’s going to be a very strong competitive driver in an uncertain environment.”Music Business Worldwide