The Playlist and a recent earnings report highlights Spotify’s growing problems

Netflix recently released The Playlist — a short series re-enactment of Spotify’s founding story. It’s really good. Go watch it. The series highlights one of Spotify’s many problems: a lack of profitability.

The Report: Missed the mark

Yesterday, Spotify reported earnings that sent its stock down 13%.

• 456M monthly active users (up 20% from a year ago) and 195M premium subscribers (up 13%).
• Net loss of $165.5M on $3B in sales — forecasting an even bigger loss next quarter.

It doesn’t seem like they’re closer to solving the problem. Sales were hit by a slowing ad market, and higher growth spending hit the company’s profitability.

In recent years, they’ve invested heavily into podcasts and audiobooks — two higher profitable areas. Spotify is cnonsidering raising prices next year after YouTube and Apple already hiked theirs.

The Suits: Power over music

Artists are also barely making a living on Spotify — another problem highlighted in the series. Artists were paid $0.0033-0.0054 per stream. That’s $5,400 per 1M streams in the upper range.

Record labels with song rights have long had power over Spotify and artists. It’s a tough business where the artist gets paid only once everyone else dips their hands in the pot.

• In 2021, Spotify paid $7B in royalties to rights holders, record labels and distributors — who pay the artists.
• That’s 63% of their sales and explains Spotify’s low 24.7% gross income margins.

The Investors: Tough road ahead

Since going public in 2018, $SPOT is down 42% — far underperforming the market. Spotify has a dominant 31% market share, with Apple Music (15%) and Amazon Music (13%) trailing — but don’t confuse a good product with a good business.

• In June, Spotify announced big targets: $100B in sales (nearly a 10x increase) and 40% gross margins within 10 years.
• But market forces like competition with big tech giants, and record labels holding the power isn’t going to make it easy.

Now there’s also an incoming threat from TikTok.

The Average Joe: “We like it in easy mode, and Spotify has a really challenging road ahead. Unless Spotify’s record label situation improves, we’ll take our chances elsewhere.”