Two bits of unsurprising news could be found in a Wall Street Journal report containing Spotify's 2011 financials: Spotify grew fast and lost money.
To no surprise, Spotify's losses mounted as it expanded in the U.S. and elsewhere in 2011. The company's net loss increased to €45.4 million ($56.6 million) in 2011 from €28.5 million loss in 2010. Spotify's losses are important but not paramount at this point More on that below.
Revenue increased 130.5% to €187.8 million ($130.48 using the exchange rate at the midpoint of 2011). Subscription revenue rose 198% to €156.9 million ($109 million) from €52.6 million. Advertising revenue grew a paltry 30.8% from €27.6 million, making it hard to tell if Spotify is just poor at monetizing its free users or it vastly improved its ability to convert free users into paying customers.
Not that this is terribly important, but the Journal noted there were 32.8 million registered users at the end of 2011. That figure does not reflect the number of people actively using the service. Spotify does not reveal how many people are currently using its service. AppData, a service that tracks users of Facebook apps, says there are currently 22.5 million monthly active Spotify users.
One could interpret the company's financial history in various ways. Digital Music News found an oddball metaphor in the West's colonial failures and warned of an "obscenely expensive Spotify expansion" that has resulted in accumulated losses of over $100 million. If only we could have small, mom-and-pop record stores and no aspirations for expansion, right?
Here's a better way to think about Spotify's financial history. First, it has raised capital and from day one paid out royalties it negotiated in good faith. (In other words, it has paid rights holders as it has posted losses.) Second, its product and leadership is good enough to have raised enough capital to fund its expansion to 15 markets and beyond. Third, and most importantly, innovation begets financial losses. If the market for its product already existed, there would be no risk - but there would be no reward.
And here's a good way to think about the future of Spotify and its peers: Losing money is part of building a successful marketplace. People routinely say, "Record companies need to innovate." True, but labels can only do so much. They can become innovative in how they license their music, but it's the entrepreneurs like Spotify who must build the products, find the capital, hire the employees and nurture the relationships with consumers - and take the financial losses in the process.
Spotify should continue to grow fast in 2012 - although profitability is unlikely. In 2012, the company will have a full year in the U.S. under its belt as well as over half a year in Australia and nine months in Germany. In addition, it will be able to further capitalize on the groundwork in laid in Europe between 2009 to 2011.