The company’s latest consolidated financial results, published in Luxembourg, reveal that Spotify’s 2013 revenues of €746.9m (£592.9m) were up 73.6% from 2012’s €430.3m. However, its operating losses also rose 16.4% from just under €80m in 2012 to €93.1m in 2013.
Spotify’s net losses after tax may have fallen from €86.7m in 2012 to €57.8m in 2013, but that was largely due to €38.7m of “fair value gains on derivative liability” – an accounting term relating to the value of share options. Operating losses are a clearer indication of financial trends for Spotify’s business.
The consolidated results cover Spotify’s global business, including individual countries like the UK and France, where its local subsidiaries recently reported their own financial results for 2013, when both were profitable.
Globally, Spotify ended 2013 with 36m active users, with more than 8m of them paying subscribers. Since then, it has grown to 50m active users and 12.5m paying subscribers – a milestone announced as CEO Daniel Ek defended Spotify amid its dispute with Taylor Swift.
Spotify’s letter to shareholders within its 2013 results puts a bullish spin on the company’s growth. “We believe that music has mass market appeal – and as such, we believe we are just at the beginning of a much larger market opportunity. We believe our model supports profitability at scale,” it claims.
“ We have already proven that we’ve created real value for our users, and we know that the more time people spend with our product, the more likely they are to become paying subscribers. We believe that we will generate substantial revenues as our reach expands, and that, at scale, our margins will improve.”
That’s backed up by the company’s last few years’ of consolidated accounts, which reveal that its “cost of revenue” – mainly royalties paid out to music rightsholders – were 82.5% of its revenues in 2013, down from 90.5% in 2012 and 97.7% in 2011.
However, the fact remains that Spotify has yet to break its run of annual operating losses: €21.9m in 2010, €43.1m in 2011, €80m in 2012 and €93.1m in 2013.
In the latest results, Spotify’s management describes 2013 as a year when it made “a clear transition from desktop to mobile” fuelled by its launch of a free tier for its mobile apps.
“Today, the majority of all new users signing up for Spotify are mobile. Making this transition from desktop to mobile means that our front door is always open,” explained the management team. “We know that a significant number of users who activate and engage on our platform convert over time to becoming paid subscribers.”
As a business, Spotify is already mainly about those paid subscribers. In 2013, it made €678.7m from subscriptions and €68.2m from advertising in 2013, up 81.1% and 22.8% respectively year-on-year.
Cross-referencing that with the active and paying-user figures suggests that in 2013, 90.9% of Spotify’s revenues came from the 22.2% of its users who were paying for the service.
Spotify’s combination of free and paid listening is what sparked its dispute with Taylor Swift, who removed her back catalogue from the service earlier this year after Spotify refused to let her block it from being played by free users.
The company has argued that placing as few restrictions as possible on its free tier has been crucial in persuading those free users to upgrade to paid subscriptions, and fuelling Spotify’s $2bn of payments to music rightsholders since its launch in 2008.
“Our free service drives our paid service,” wrote Ek earlier in November. “Here’s the key fact: more than 80% of our subscribers started as free users. If you take away only one thing, it should be this: No free, no paid, no two billion dollars.”
Spotify also says that its subscriber growth has been faster in the most recent quarter (in 2014) than at any point in its history, to support its claim that more free usage is also driving more paid subscriptions.
Spotify’s 2013 financial results also revealed for the first time how much the company paid for music technology company The Echo Nest in March 2014.
“On March 10, 2014, the Group acquired all of the issued and outstanding shares of The Echo Nest Corporation (“Echo Nest”), a leading music intelligence company, for approximately €55.0 million,” explained the results, backing up a report by TechCrunch at the time that the price agreed was $100m.
“The purchase consideration consisted of €6.6 million of cash, 61,897 shares of common stock in the Company [Spotify] and estimated share based payment awards valued at €5.4 million,” revealed the financials filing.
This article was written by Stuart Dredge, for theguardian.com on Tuesday 25th November 2014 16.08 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010