Increasing popularity: The downfall of Spotify?
Spotify is growing, no question about that. But they fail to achieve profitability. Something needs to be changed within their current business model if they want to stay in the market. Even when the popularity of the online music streams increases, high royalty costs ensures that the losses are increasing as well. (Of every dollar earned by the company, Spotify has to pay 98 dollar cents to the music labels for its royalties.)
As shown in the figure below, the revenue of the online music stream service increased in 2011 by 151%. However Spotify fails to achieve a positive net income. Because of the increasing popularity Spotify had to hire more staff which led to higher personal costs of 32 million dollars, an increase of 173% compared to the year 2010.
Figure 1: Spotify Financial Overview
It is unclear if Spotify is going to change something within in their business. A solution would be to increase the prices that customers have to pay. But competitors that are entering the same market must be taken into account. Another solution could be found in the fact that singers without a record label would sell their songs directly to Spotify. Something Apple is doing already with iTunes. Disadvantage: Your song has to be streamed for more than a thousand times to make some money.
Looking at the system dynamic model of Spotify (shown in figure 2 below), it can be seen that only 10 percent of all Spotify users are users that pay for the service of Spotify. Another 20 percent of these users are users that defect to other music stream services.
Figure 2: Spotify system dynamic model
It is very clear that something needs to change with Spotify’s business model. But what if they do not change anything, do you think this will be the downfall of Spotify? Or do you believe the company is flexible enough to overcome this challenge?