Spotify - Five Years to Break-even

Founded in 2006; launched in 2008. So it’s taken the best part of five years for online music streaming service Spotify to travel from the point of concept to break-even. A good example of the need for investors in start-up businesses to have some patience whilst their investment grows to the scale where profits become possible…

This article in the Guardian reports on recent research by market analysts into how Spotify is doing developing its user base and revenues.

Many of you may be a paid-up user of Spotify, which is an online service offering streaming of selected music from a range of major and independent record labels, including Sony, EMI, Warner Music Group, and Universal. Spotify is currently only available in Finland, France, the Netherlands, Norway, Spain, Sweden, the United Kingdom and the USA.

Spotify has grown using the “freemium” model whereby a user-base (and marketing buzz) is built by offering a basic service for free. Revenues are then built by allowing advertising to the user-base and by offering paid-for premium services to customers.

With Spotify, users can register either for free accounts supported by advertising or for paid subscriptions without ads and with a range of extra features such as higher bitrate streams and offline access to music. A paid “Premium” subscription is required to use Spotify on mobile devices.

It has taken quite a long time for Spotify to build revenues to a level where the significant operating costs of running the business are covered. Their investors will have had to remain patient. But a loss-making business does not mean that the business has no value. Many successful, fast-growing online concepts are able to raise expansion finance even though the prospect of reaching break-even is some distance into the future. For example, in June 2011, it was reported that Spotify had secured another $100 million of funding which saw the company valued at US$1 billion.