Spotify, revenue, and the billion dollar question

By Richard Nieva , written on December 19, 2012

From The News Desk

Spotify has been popular among users, but the record industry is still suspicious of the service. Ever since Napster, the music business -- hopelessly tone deaf to the changes in the media landscape – has had a hard time trusting Internet music companies. Spotify, which Napster cofounder Sean Parker invested in, has tried to go legit with licensing music, but many record execs and artists don’t think Spotify offers a payout that is fair yet.

So how can Spotify prove it's got a winning model? If the company began to make a larger amount of annual revenue, would it begin to convince the music industry that the model is viable?

Regardless of the good it would or wouldn’t do to win over artists, Eliot Van Buskirk at wrote an interesting report earlier this month, calling it that Spotify should make $1 billion in revenue next year. The editor at that digital music blog Nate Silver’d the financial situation at Spotify, suggesting revenue could spike to as high as $1.2 billion in 2013. (Is it sad for our profession that any mathematical journalistic analysis today conjures up images of one guy?)

But just how on-point is that prediction? Using statistics that the company has released publicly – 20 million users, 5 million of which are paid subscribers – Van Buskirk crunches the numbers to estimate Spotify will make about $621 million in 2013 if the site stops growing completely, taking on no new users. He also factors in some reasonable assumptions about the pay model and advertising that don’t seem to raise any eyebrows.

Van Buskirk arrives at the billion-dollar conclusion because the company says it has doubled its user base in the past year. Of course, he takes into account that growth may taper off, so he predicts revenue will land right at about the billion mark, and not a few hundred million dollars above it. Still, user expansion is quite a big variable, and it's hard to tell just how well it will hold up. It seems a big jump to arrive at a $621 million revenue estimate, then say, “Okay. Double it.”

But Van Buskirk isn’t alone in thinking the company can hit that milestone next year. “It seems very likely,” says Paul Resnikoff, editor of Digital Music News, a popular trade publication. “Subscriber numbers are ramping up pretty rapidly. They definitely have some very aggressive numbers,” he says.

Other reports aren’t so bullish. The research firm PrivCo, which digs into the financials of private companies, in October called Spotify’s business model “broken” and in need of “drastic changes.”

“No matter how we slice the math, it is patently clear that something's gotta change soon on Spotify's business model if the company is to survive,” said PrivCo CEO Sam Hamade, in the report.

Still, Spotify claims that it’s scaling quite well. And though Van Buskirk’s and PrivCo’s reports are incongruous, they can cobble up at least some type of financial picture, at least for Spotify’s current situation.

PrivCo estimated that Spotify’s 2011 revenue was $244 million. Taking into mind Van Buskirk’s report, 2012 likely brought in somewhere between that figure and $621 million. Then apparently $1 billion is next. Of course, each of those reports presumably used different methods and numbers to arrive at those estimates, and you’ve got to take into account that one source has a very negative outlook while another has a brighter one. But it’s helpful to look at those two figures as extremes for a 2012 estimate.

But the bigger question, Resnikoff says, is whether or not Spotify’s model is sustainable for a long period of time, given how expensive licensing deals are. Convincing the holdout artists to reconsider will only help the process for both parties. I suppose the way to fortify the model is a bit circular: Spotify has to make sure user numbers keep mushrooming. One way to do that is to make sure the music catalog is expansive. And that means convincing more artists to come on board.