How is Spotify a real business?

I was shocked to see Spotify’s Daniel Ek start a recent tweet with: “Today, with the cost of creating content being close to zero, people can share an incredible amount of content.”

As I thought about it more and reflected on their numbers from 2023 (32% global market share, $15 billion in revenue, and a staggering $576 million loss), I realised that cheap content is their only path to profitability.

I’m still surprised to see him say it so plainly.

Here’s their problem: whether you listen to five songs per month or 5,000, you pay the same $11 monthly fee; even though they pay a pittance per stream ($.003 or less per song), their royalty payment for 5,000 songs is $15. That’s easy to do if you play music in the background all day.

Now, throw in a family plan at $16, which usually means kids (mine play a constant stream of music), and you can see why they continue to haemorrhage money. And if you listen on the free tier, they lose even more on you.

How is Spotify a real business?

Podcasts and audiobooks dilute the hours spent playing music, are cheaper to procure, use existing infrastructure, and may even increase their advertising reach in the near term. They also give their customers the appearance of more value per dollar.

However, ads have diminishing returns and will never cover their costs. They can’t afford to lose their paying subscribers, which are increasingly expensive, and raising prices risks the entire enterprise. So, the only option is to find cheaper content.

Like all the other top players, they hope to lower royalties even more and “Gen AI” their way to endless cheap content. Neither play is a winning hand, leaving aside the fact that no one will pay for such a meaningless service.