Spotify's Financials: Losses Slow, Revenues Jump, Company Generates Over Half of All Streaming Royalties

The Spotify company headquarters in Stockholm

The Spotify company headquarters in Stockholm on Feb. 16, 2015.

Spotify, the streaming market's leader by a mile, saw some stark growth last year as the "new recording economy" continued to mature.

In its annual financial filing to Luxembourg's business oversight body, the Registre de commerce et des societes, it generated €1.945 billion in total revenue, and saw €2.129 billion (about $2.3 billion) go out, for about €184 million in losses. Compare that to 2014, when €1.2 billion went out and €1.08 billion came in, for about €165 million in losses. Despite that, the company is limber, reporting about €781 million in liquidity.

That's a dramatic slowdown in losses coupled with a dramatic increase in revenue generation -- a positive sign for a company facing immense pressure to issue an IPO, after years of steep funding rounds.

Total users increased to 89 million, up from 60 million the year prior. 28 million of those are now on the platform's highly lucrative subscription tier -- more than double that of Apple Music, which last reported 13 million subscribers (Apple's service does not offer free listening.) As the company writes: "Subscription-only models have not yet proven scale and free user models, whilst scaling, have not proven a path to profitability. Spotify has the combined power of both."

The 61 million globally who streamed music for "free" (by listening to paid advertisements) last year generated €195 million in revenues, 10 percent of total. Its 28 million subscribers, meanwhile, brought the company €1.7 billion, 89.7 percent of total revenues. These are both sharp increases over the prior year -- "98 percent year-over-year" for ad-supported revenue, as the company writes, and a 75 percent increase in subscriptions.

Of that revenue, Spotify paid the record industry €1.63 billion in royalties and distributions in 2015, nearly double from the €882 million it paid out in 2014.  "Monthly active users and paying subscribers increased from 60 million at the end of 2014 to over 89 million by the end of 2015, where over 28 million were paid subscribers."

Let's pause for a moment, and emphasize how much money Spotify is generating for the record business. In its Global Music Report, the IFPI said that €2.89 billion was paid to the record industry from both subscription and ad-supported services globally. Unless our math is way off, that means that Spotify was responsible for 56 percent of the total revenues generated by streaming, worldwide. Pandora, which makes use of statutory licenses and does not allow its listeners to fully choose what they hear, paid €528 million in content acquisition costs, from 21.11 billion hours of music streamed, last year.

About 83 percent of Spotify's revenue is paid to the record industry, according to its results. Numbers point to roughly the same amount of listening on each of Spotify's tiers, with that previously mentioned gulf between revenue generated from advertising and subscriptions. This discrepancy explains the consternation over Spotify's freemium model, but perhaps points to a lack of patience for an entirely new sub-economy of the record business. Spotify converts about 25 percent of its free listeners to its paid tier. As the IFPI put it, "streaming growth is fully offsetting the decline of downloads and physical formats." That offset will only continue to increase in weight.

"Providing more transparency and innovative services to this ecosystem is of paramount importance, and will help us create value for the creative community and for Spotify at the same time." Unrecoupable royalty costs -- commonly referred to as breakage on the label accounting side -- were zero in 2015 (€3.5 million in 2014). This points to the streaming economy maturing  -- neither labels nor Spotify are under- or overpaying for licensing. 

The numbers tell the tale: Spotify has taken the iTunes Store's place as the record industry's new financial linchpin. Except this time, they have a stake.


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