Why Spotify is Losing Money
Spotify is the world’s largest music streaming service with users across the country and globe. The ability to create personalized playlists and listen to a specific genre or artist makes this app so popular. What makes it even better is that the app is free to download and use. Spotify is attracting customers by providing a free service and charging companies to run ads on their app. Despite Spotify’s popular product, ability to sell ads, and $2 billion in revenue last year, they are still unable to turn a profit.
Spotify is different from other companies we discussed, such as Facebook and Google, because it has high costs that it dispenses to labels and publishers. Thus, their revenues are not realized into profits. They rely on these labels and publishers to provide the service that their app was built on. Revenues come from ads, similar to Google and Facebook. and Spotify charges ads on a CPM basis or cost per thousand views. This way of selling ads is difficult, as we discussed in lecture because of how hard it is to approximate the amount of views. What is interesting is that the amount of genres, popular content, and popular usage times allow for them to charge different prices and do a type of revenue management to capture the greatest amount of revenues based on what advertisers are willing to pay and the value they place on ad slots. However, it would be too much work to post all of the prices for each slot available, so its optimal pricing strategy would be to run a second price auction. It is unknown how Spotify matches ad slots to advertisers, but they should look into their algorithm to make sure they are capturing the maximum value they are able to when determining market clearing prices, as this is their main source of revenue aside from the ad-free service. Since Spotify is vying to go public, it needs to ensure potential shareholder confidence that there will be future cash flows for their investment and ads will be essential to that.
Article: https://www.bloomberg.com/news/articles/2016-10-14/spotify-co-founder-lorentzon-steps-down-as-company-chairman