Commentary

How Can Spotify Lose Nearly $3bn And Still Be Worth $30bn?

Spotify valued at $30bn. Anyone else scratching their heads?

How can a company with nearly three billion dollars of losses over the past dozen years be worth $30bn?

To be fair, Daniel Ek, the company's co-founder, has warned of an "up and down" ride. This was almost guaranteed through a direct listing. Without an initial offering to institutions, nobody could have a fair idea of what the shares would trade for. Sure enough, they leapt 25% on launch and settled around 10% to 15% what most analysts had predicted. Many had suggested the company would be valued at $20bn to $25bn. These calculations were shown to be too conservative as Spotify ended the day just under the $30bn mark.

The comments to coverage in The Times sum up my own thoughts precisely. No doubt those commentators and I will be accused of "not getting it" when it comes to the power of streaming. The same goes for cryptocurrency, for that matter. But here's the question. In fact, here's the question again. How can a company that has cumulatively lost nearly three billion dollars over the past dozen years actually be worth 30 billion?

In fact, as Sky News reports, the site, which has never turned a profit, is pinning much on hitting a target to raise its level of paying subscribers from 71m to 96m. 

However, there's a slight problem with this. Take a look at Spotify's revenue and loss graph and there is a striking inverse relationship between its earnings and losses. The more it earns, the more its overall losses continue to mount up. For example, as it went from earning €3bn to €4bn between 2016 and 2017, annual operating losses went up from €349m to €387m. More revenue isn't easing Spotify's issues, it's continuing to compound them.

So the more Spotify gears up for growth, the more money it appears to be losing. By aiming to go from 71m subscribers to 96m, one can only assume it is hoping to buck this trend and reach a tipping point where an extra 15 million people paying GBP9.99 a month takes it into profit, despite the cost of reaching out to and signing up these new subscribers. 

The trouble is -- Spotify has caught a couple of very big tigers by the tail here. Google, Amazon and Apple all have their own music streaming services. Figures from Apple suggest it has around half the number of subscribers that Spotify has. But nobody knows the state of play at Amazon which could easily undercut Spotify by reducing its monthly fee for music streaming or even including it within a Prime subscription package. 

Daniel Ek made a point about Spotify not being the type of company to ring a bell when it floated in New York. It's certainly ringing a few alarm bells for me.

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