Spotify, the streaming music startup, was having serious trouble paying its bills, if you believed reports from earlier this year. Its 2011 financials showed a loss of nearly $60 million on revenues of $244 million. But this information is out of date, because the company has had a relatively strong 2012.
It made $200 million in total revenue over the first six months of 2012, and is on an annual run-rate that could put it around $500 million by January, according to confidential financial information leaked to me by industry sources. Despite another net loss this year, Spotify’s business model — free streaming music with ads, $5 for web access with no ads, and $10 a month for ad-free plus mobile access — is going in the right direction.
Its deal structure with the labels requires either a $200 million annual payment, like what it had to do last year, or around 75% of total revenue (whichever is higher). 2012 will be the first year that revenue is high enough for the percentage structure to kick in. The company is projecting profit after cost-of-sales to be around $60 million. It still has another $100 million in engineering, marketing, sales and other operating costs, on top of the licensing burden, so it’ll likely post an annual loss of roughly $40 million.
The company didn’t comment on these numbers when we asked.
The situation still sounds painful, but it’s not bad at all. The record labels are happy with Spotify’s progress so far because internal data has shown that it is growing the digital music market, not cannibalizing sales on iTunes and other competitors, according to sources. The service has stayed so popular with users, meanwhile, that churn is nearly zero.
Given the ongoing growth, and the need to cover costs, it’s not surprising to hear that the company is working on a large new round of funding — more than $100 million at a $3.25 billion valuation, according to a Wall Street Journal article from yesterday. The valuation is lower than the $4 billion mark that previous reports had indicated, and the WSJ suggests that more skepticism about tech startups could be the cause. Maybe, but another reason might be Spotify’s past bullishness. It hoped to hit $900 million in revenue this year, so even with all the progress it’s off its own expectations.
Can it get many more users, particularly paying ones, in 2013? The second half of this year would indicate yes. The company said 4 million of its 15 million active users were buying its monthly subscription fee as of July. Today, we can guess that this number has grown along with overall traffic. Because Spotify uses heavy Facebook integration, we can approximate its usage in app tracking tool AppData — 23.7 million people are listening every month, a third of whom are on every single day, according to that source.
Earlier this year we got the scoop that Spotify is building a browser-based version of its desktop software. The ability to use it from public computers or wherever people log on could certainly draw in more listening time and paying subscribers.
Spotify will still need to put up big revenue growth numbers to keep the labels happy and make money after paying its own bills. But it’s delivering better than some may have expected. Unlike most music startups in recent years, it could survive the gauntlet of licensing fees and emerge as one of the music companies of the future.
[Image via Gizmodo.]