The annual earnings report released by Spotify yesterday won’t do much to quiet the debate within the music industry over the value of streaming rights.
Revenue more than doubled in 2012, to €434.7 million ($576 million) compared to €190.4 million ($253 million) for 2011, which will only further inflame artists and other rights owners who feel they are being ripped off by the current royalty structure that sees payouts to artists grow much more slowly than revenue for streaming services. But Spotify’s earnings losses also grew in 2012, to $77 million, compared to $60 million in 2011, which could discourage investors. A lose-lose.
The good news, for investors at least, is that Spotify managed to convert free users to paid users at an impressive rate. According to CEO Daniel Ek, 20 percent of people who use the service regularly end up paying for a subscription, a much higher conversion rate than for most freemium services.
Another positive data point: revenue grew somewhat faster than Spotify’s cost of sales, which is mostly comprised of licensing fees. Revenue was up 128 percent, while COS grew by 95 percent, from $247 million to $483 million. That difference offers hope that Spotify’s revenue can indeed outrun its marginal costs (i.e. per-stream license fees) and that the music streaming business may yet achieve economies of scale.
That would be good for everyone because it would mean both potential earnings growth and the possibility of a sustainable business whose revenue would be worth fighting over.