How Does Spotify Make Money?

In 2006, the popular Swedish audio streaming platform Spotify was launched to combat dropping music revenues and slowing album sales, due to increasing music piracy over the Internet, which annually costs more than 71,000 American music industry jobs, $2.7 billion in workers’ earnings, and $422 million in tax revenues. Spotify Founders Daniel Ek and Martin Lorentzon consequently developed a system where users could legally stream music–either by paying a subscription fee for premium service, or for free, if they agree to listen to advertisements. In either case, artists and record companies receive their due royalties.

KEY TAKEAWAYS
–In 2006, audio streaming platform Spotify was launched to counter increasing online music piracy.
–Spotify users are legally able to stream music, either for free if they agree to listen to advertisements, or they may pay a subscription fee for a premium service.
–Spotify aims to make sure artists and record companies receive the royalties that are due to them.
–Some artists have accused Spotify of failing to properly pay them.

Spotify went public on April 3, 2018, listed on the New York Stock Exchange, under the ticker symbol SPOT. In its first earnings report for Q1 2018, Spotify reported 170 million daily active users, and a revenue of $1.36 billion. As of April, 2019, there were 217 million active consumers, who use Spotify to legally download secured online music. Since inception, Spotify has paid out over $10 billion in royalties to the music industry.

Unlike other streaming services like Pandora, Apple iTunes (AAPL) and Google Play (GOOGL), Spotify stores all of its music on its own servers, in order to smoothly deliver songs with no delays or latency. Furthermore, individual users keep temporary copies of recently-played tracks on their computers, stored in cached files, so if they wish to replay a tune, they may locally draw from those files, without re-downloading the song.

Spotify also networks users with one another, so they may directly share stored songs among themselves. This prevents Spotify’s main servers from overloading, and lets music play uninterrupted, around the clock.

• A free advertisement-supported tier. This lets users play any song from Spotify’s catalog, on demand, after they listen to ads. Advertisers pay money to Spotify for exposure, which in turn funds the royalties Spotify pays out.
• A paid subscription premium tier. This gives subscribers free access to unlimited music across all of their devices, including smartphones, tablets, and televisions. Users can also temporarily download songs to their devices, in order to listen to music offline. The range of monthly subscription rates include $4.99 for students, $9.99 for standard accounts, and $14.99 for family accounts.

According to its 2017 F1 SEC filing, Spotify reported annual revenue of $4.99 billion–70% of which was funneled back to the artists, record labels, publishers, and distributors, resulting in a $460 million loss for the company. But despite its pledge to fight online piracy, Spotify has been repeatedly accused of failing to fairly compensate its artists, by bands like The Black Keys, Radiohead, and a host of independent musicians.

In November of 2014, award-winning artist Taylor Swift famously pulled her entire music catalog from Spotify, following a dispute over the streaming of her new album, entitled 1989. Swift argued that it was more lucrative for artists if iTunes users pay to download their albums, than to take royalties from Spotify. In fact, in 2013, Spotify revealed that on average, it paid record labels merely a fraction of a penny per song play (between $0.006 and $0.0084), while the artists themselves received even less cash. 

In response to Swift’s criticism, Spotify has since limited its offering to free ad-supported tiers. In March 2018, Swift released a special version of the music video for her new song “Delicate”, exclusively to Spotify. She restored her entire song catalog back to the platform, soon after. 

[Important: Spotify closed a $1 billion round of debt funding in 2016.]