The massive success of Spotify has followed up the Apple iTunes Music revolution with revenue, from subscription-stream royalties, that is helping to invigorate the commercial music industry. But the well-being of the company's bottom line lags behind. As an online platform, growth in subscribers and online visitors is a race that must be won. Reports on the revenue from Spotify's first half of 2017 indicate a 40 percent year-over-year increase. Good news.
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What creates the perception that Spotify's business well-being is lagging behind is the combination of continued losses, the limited profitability of Spotify's business model, and most of all — the fact that Spotify has not yet become as successful as Netflix.
Investors such as those buying private positions in Spotify want to see their money grow. Losses at Spotify have shrunk so far in 2017 as adoption is booming. Gross margins have gone up to 22 percent for 2017 from 15 percent last year. However, those artist royalties are still Spotify's biggest expense — the biggest slice of its budget, so in some ways those margins are the size of its potential profitability.
Private trading estimates Spotify's corporate worth at $16 billion. There is no way to say if its stock can repeat Netflix's success, but the general public doesn't have to gamble on where its numbers are going. YouTube is everywhere and with Netflix, the two account for a big slice of internet traffic, but Spotify is increasingly a go-to reflex for music consumption as well. Non-subscribers and consumers who subscribe only to competing services enjoy turning to Spotify Free for quick hits. That reflex is ultimately what investors are banking on.
