Spotify is the big gorilla in the streaming space with more than 70 million paying subscribers and another 70 million or so free users. That’s a big customer base, but Spotify is still losing hundreds of millions of dollars a year. How is this possible?
Actually, it’s inevitable. And according to Fortune, the future doesn’t look good.
Spotify announced its first quarterly results as a public company on Tuesday, and the market was not impressed. Shares of the music streaming service fell over 7%, even though the company met its goals for customer and revenue growth.
Those investors better get used to disappointment. That’s because unlike other tech companies, music streaming services face a fundamental business problem they can’t overcome.
That problem is the price of music or, in this context, what accountants call “cost of goods sold.” The term refers to materials a company must acquire to sell its product—for instance, the flour and sugar a baker must buy to sell donuts.
In the case of streaming services like Spotify, they are uniquely dependent on a single supplier—the music industry—to provide them the goods for their product. And that supplier has both a monopoly and deep political influence to protect it.
Over the last ten years, the music industry has waged a relentless war in Congress and the courts to force streaming companies to pay more for the music they play. The justifications for the payments are often shaky—for instance, record labels and 1960s musicians sued Pandora over and over to pay an unprecedented royalty on pre-1972 recordings (essentially new money for old rope) until the company capitulated.
But regardless of whether such payments are justified, what matters is the music industry has the clout to demand them.