Why Spotify Can’t Turn A Profit Despite Dominating Music Streaming

Despite being the undisputed leader in music streaming with over 422 million monthly active users, Spotify has perplexingly never managed to generate a profit in its 18 years of operating history, racking up total lifetime losses exceeding €4 billion.

At first glance, it seems baffling that a platform as popular as Spotify, which has completely changed how we discover and listen to music, cannot make money. This article analyzes the key reasons behind Spotify’s persistent lack of profitability, and examines whether the company can eventually find a path to sustainable bottom-line profits.

Smartphone With Spotify

High Royalty Fees To Record Labels Eat Up Bulk Of Revenue

The crux of Spotify’s profitability woes lies in the unusually high royalty fees it has to pay music right holders. For every $1 in revenue Spotify makes, about $0.70 is paid out in royalties, leaving too little left over to cover its operating costs.

Spotify primarily licenses music from 3 major record labels – Universal Music Group, Sony Music Entertainment, and Warner Music Group, collectively known as the “Big 3”. With the Big 3 controlling about 70% of the global recorded music market, they hold tremendous bargaining power over Spotify.

Without the Big 3’s music catalogs, Spotify would sorely lack content variety, causing users to flock to competing platforms like Apple Music and YouTube Music which do have licensing deals with the Big 3. To avoid this fate, Spotify has no choice but to fork over the lofty royalty fees the Big 3 demands.

High Industry Concentration Limits Spotify’s Pricing Power

The music streaming industry’s stark lack of differentiation is another factor pressuring Spotify’s bottom line. With all major platforms providing nearly identical libraries of over 70 million songs and costing users the same $9.99 monthly fee, there exists minimal product differentiation from the user’s standpoint.

This extreme homogeneity affords the streaming companies negligible pricing power. If Spotify raises prices unilaterally, users can easily switch over to the other platforms without sacrificing content or functionality. Industry-wise price increases only stick when platforms collectively raise prices in unison, as evidenced by the recent synchronized price hikes across Spotify, Apple Music, Amazon Music and YouTube Music.

Owning Content Not Viable Due To Label Contracts

Owning more of the content it streams, like how Netflix produces its own shows, could lower Spotify’s licensing costs and boost profits. Unfortunately, this option is not readily available to Spotify.

In anticipation of such a move, the record labels had shrewdly inserted clauses in their licensing contracts preventing Spotify from owning content that would compete with their own catalogs. These restrictions makes it exceedingly difficult for Spotify to accumulate its own music library without risking severe legal repercussions.

A prior attempt by Spotify in 2018 to license music directly from artists backfired badly when the record labels discovered the move and threatened to pull their content unless Spotify backed down. With over 70% of streamed music belonging to the Big 3 and their cohorts, Spotify had no choice but to acquiesce.

Podcasting Investments Yet To Bear Fruit

In hopes of boosting profitability, Spotify has invested over $1 billion since 2019 to aggresively expand into podcasting, a space with purportedly higher margins compared to music. However, contrary to management’s guidance, margins have trended downwards since.

While podcasts have increased user engagement on Spotify’s platform, the financial payoff has apparently been underwhelming so far. This calls into question the viability of podcasts as the silver bullet to solve Spotify’s profit woes.

Growth Prioritized Over Profits

Despite 18 years of losses, Spotify maintains it is prioritizing growth over short-term profitability. However, shareholders will eventually demand concrete bottom-line results.

Barring major industry changes or a hugely successful new initiative, Spotify is unlikely to produce meaningful profits solely from music streaming as long as the Big 3 record labels maintain their stranglehold.

Ironically, Spotify’s clearest path to profitability may lie in pivoting beyond music into new business lines where costs are lower and competition less entrenched. For now, it remains a waiting game to see if Spotify can finally crack the code on achieving consistent profitability.