What's crazy is that Apple DOES pay more than Spotify, but even on Apple you'd still have to listen to your own artists for over 100 hours in a single month to give them your full $10 fee in streaming royalties. Otherwise you are subsidizing the listening of other users.
That was based on songs being 4 minutes long and some figures from June 2017. Spotify pays .0038 per stream. Apple pays .0064. Tidal pays nearly double at .0110.
Also, my math may be totally wrong... these numbers are so small that it hurts my brain.
The disparity between what Apple pays per stream and what Spotify pays per stream (on average) is caused by:
(1) Spotify having an ad-supported tier which generates far less revenue and, possibly
(2) Spotify listeners streaming more songs than Apple Music listeners do (on average and relative to how much revenue they generate).
The average per-stream rate that they pay isn't a set figure. A portion of their (subscription or ad) revenue effectively goes into a pool to pay for licensing rights (or different pools for different kinds of licensing rights). That pool is divided up based on how many streams there are. So, for a given number of subscribers (who generate a given amount of revenue), the per-stream payout depends on how many songs they streamed. Both services - Spotify and Apple Music - pay around the same portion of their revenues to rights holders. In other words, the music industry earns about the same amount from an Apple Music subscriber paying $10 a month as it does from a Spotify subscriber paying $10 per month.
Spotify's ad-supported service generates far less revenue per listener, so rights holders receive far less money from it. That brings Spotify's average per-stream payout down.
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If I understand correctly... Amazon didn't post a profit in the early years because they spent every dime they made on expanding their business. They made a profit... but they invested that extra money back into themselves. That was a choice they made... and it worked out for them.
Spotify doesn't make a profit at all because it costs them MORE to acquire the music than the money they get from customers. They don't have a choice. There is no "extra" money to play with.
For instance... if Spotify gets $3.1 billion in revenue... it actually costs them $3.5 billion to pay the record labels for royalties and to run their company. (a $400 million loss)
And those losses have gotten bigger every year... despite their growing userbase.
In short... Spotify's business model is broken. Would you agree?
There is no opportunity for Spotify to make a profit when their costs exceed their revenue. And simply adding more users hasn't helped in the 9 years they've been around.
While Spotify is now up to 60 million paying customers... they also now have 80 million free customers. That's a big part of the problem.
If Spotify got rid of the free (freeloading) tier... they might be able to make a profit. Who knows.
Or... maybe streaming music isn't a profitable business at all because of the insane royalty costs.
Apple, Google, Amazon and Microsoft could afford to lose money on streaming music because they have other profitable businesses.
But Spotify's business is streaming music. They don't have anything else to fall back on.
Spotify's cost of revenues - which includes not only royalties, but distribution, payment processing, customer services and other costs as well - is less than the revenues it generates. That's true even including its ad-supported tier, for which the cost of revenues does exceed revenues. For 2016, Spotify's gross margin (its revenues minus that cost of revenues) was about 15%. Considering just the paid tier, it was about 18%.
There are headwinds for Spotify. But the business model can work and there are actually some pretty advantageous (and unusual) aspects of it. Notably, its primary suppliers are willing to price their products (collectively) as a portion of the revenues generated from those products. They have agreed (for the most part, though Spotify does some deals that diverge from this model somewhat) not to be paid a certain amount per unit, but rather to be paid certain percentages of what Spotify brings in - regardless of how many times their songs are streamed.
When it comes to profitability, the main things this model needs are (1) scale and (2) a reduced need to spend money creating or maintaining that scale. Spotify's current situation is similar to what you describe with regard to Amazon. It is spending a lot of money trying to grow its business. It now has great scale - probably enough that it could be profitable now (or very soon) if it chose to. But it chooses to continue to spend a lot of money trying to build its customer base. The music streaming market is just now - over the last couple of years - experiencing its boom. Spotify understands that this is the important time to be focused on market share rather than profits. A lot of people are just now trying streaming services and will be deciding, among other things, which are their go-to services. Pulling (fairly new streaming) customers into your service now will be easier than pulling customers away from other services will be later.
So Spotify is spending a lot of money on, among other things, sales and marketing. (To be clear, a portion of that which is spent on sales and marketing represents royalties - it's the cost of providing free or significantly-reduced price trials. But those amounts still aren't enough to make Spotify's gross margins negative.) It's also spending money trying to enhance its services. And it has pretty significant financing costs.
But the key thing is that, on the whole, it does make money on incremental business.
A note about the free-tier: For 2016, its cost of revenues exceeded its revenues by around $40 million. It does cost Spotify money, but Spotify apparently believes it is worth offering the free-tier as a conduit for bringing people into its paid-tier.
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