Well they mainly sell music as their product. So they are starting with a request from the content providers to get the music even cheaper than they already get it. So the plan is get content for nearly free, give it away for nearly free, get lots of customers (because they have a great service that they are giving away for either free or very cheap), go to capital markets and show eyeballs and growth of service (plus growing revenue, even if no profit), get additional rounds of capital funding, pay upper management, go public and get even more funding, upper management sells stock and retires millionaires (or move on to new venture).
This basically isn't a real business, at least not with its give away content for free and hope that they don't have to pay for what they are giving away. But they don't have to be a real business, they just need to seem like one until they can go public and cash out. Or they can get bought out by other internet companies that have already gone public and don't really have revenue streams that justify their stock valuation.
Here is an article from last year:
Spotify — a top player in online music streaming, is about to close a round of financing that will set its value around $3 billion.
According to the Wall Street Journal, Spotify wants to raise more than $100 million in its latest deal. The $3 billion valuation at that mark would be a nice step up from last year’s financing, during which Spotify was valued at $1 billion — though it looks like it’s short of Spotify’s goal of being valued at more than $ billion. In light of the plunges in IPOs like Facebook (NASDAQ:FB), Zynga (NASDAQ:ZNGA) and Groupon (NASDAQ:GRPN), however, the enthusiasm for hot social deals is waning.
Spotify, founded in 2006, might generate as much as $900 million in revenues for this year. The company charges $10 per month for its service and has more than 15 million subscribers.
It’s unclear how much Spotify has to pay music labels for its content, but considering deals at other streaming services, the amount’s likely substantial, which means the company’s margins probably are tight.
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