Spotify just hit a milestone 10 million paid subscribers. Another approximately 30 million people use the free version of the streaming music app. Despite this impressive milestone, the company has yet to make a profit.
Despite its popularly, streaming music is not generally profitable. Even Pandora, a well-established Internet radio service and a top-grossing streaming app has yet to turn a profit. Neither has iTunes Radio, although as a part of iTunes that loss is absorbed by Apple (NASDAQ:AAPL). For Spotify profit is just out of reach at the moment, although it may reach the break-even point soon.
The company earns money from subscriptions and advertising on the service’s free version. About 70 percent of Spotify’s costs are music royalties (although most artists are not making much from streaming music). The remaining 30 percent is used to cover overhead at the company, reported Bloomberg Businessweek. That piece speculated that Spotify is the closest to profit. “Roger Entner of Recon Analytics says streaming music services should be sustainable when they reach 10 million paying users,” wrote Joshua Brustein, who authored the piece.
If Spotify were to actually gain enough users to make the streaming service profitable on its own, it would be a first. It would also prove that streaming music could function as a standalone business. Spotify’s founder certainly believes it is a possibility, despite the fact the company is reported to have lost more than $200 million in its short lifetime.
This lack of profit in Spotify and other streaming music services has led some to speculate that streaming music services should simply be loss leaders at larger technology firms. That is the crux of Slate’s recent analysis piece on the topic. Based on that argument, the only streaming music services that should continue would be iTunes Radio, Google’s All Access, and the like, whose parent companies make enough money to cover any shortfalls in profit.
While this argument makes sense in purely financial terms, the popularity of streaming music makes it unlikely to die based on lack of profit alone. YouTube, Spotify, Pandora, SoundCloud, and iHeartRadio are all in the App Store’s top fifty free apps currently. These are also among the most popular free apps on Google Play. This popularity means that people are listening to music using these services. As all of these services require an account, the companies can gather data that they can sell to help cover operating costs. Also the music industry is not going to allow a revenue source to die out, especially in a post-Napster world. Let’s not also forget the music fans, who want to be able to listen to music whether in their rooms or on the go, using Spotify, Pandora, or another streaming service.