Spotify financial results show struggle to make streaming music profitable

Spotify has hailed 2014 as a “transformative” year in which its annual revenues passed €1bn for the first time, but the music-streaming service’s growth came at a cost – a sharp increase in its net losses.

The company’s financial results, published in Luxembourg and seen by the Guardian, reveal that its revenues increased from €746.9m (£537.87m) in 2013 to €1.08bn (£777m) in 2014 – year-on-year growth of 45%.

However, Spotify recorded an operating loss of €165.1m (£119m) in 2014 compared to €91.2m (£65.7m) in 2013, while its net loss nearly trebled from €55.9m (£40.3m) in 2013 to €162.3m (£117m) in 2014.

In its management report accompanying the financials, directors Martin Lorentzon and Pär-Jorgen Pärson maintained an optimistic view on the sustainability of Spotify’s business.

“We believe our model supports profitability at scale. We have already proven that we’ve created real value for our users, and we know that the more time people spend with our product, the more likely they are to become paying subscribers,” they wrote.

“We believe we will generate substantial revenues as our reach expands, and that, at scale, our margins will improve. We will therefore continue to invest relentlessly in our product and marketing initiatives to accelerate reach.”

Lorentzon and Pärson also had a note for the music labels and rivals like Apple that have been putting Spotify under pressure to abandon its unlimited, on-demand free tier, which three quarters of its 60 million users are on.

“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,” they wrote, although Spotify has yet to prove it has found the latter path.

The management report described 2014 as a “transformative year” for Spotify, as it grew from 36 million active users at the end of 2013 to 60 million a year later, including 15 million paying subscribers.

2014 also saw Spotify launch in the Philippines, Brazil and Canada, taking its total of launched markets to 58. The company also signed partnership deals with 16 telecoms firms that year, as well as 30 home-audio firms to put its Spotify Connect technology in their devices.

The financial results reveal that the 25% of Spotify users who pay for the service account for 91% of its income: the company made €982.9m (£709m) from subscriptions in 2014 and €98.8m (£71m) from advertising.

Of that overall €1.08bn of revenues, €882.5m (£636m) was spent on royalties and distribution costs. Spotify’s average headcount increased from 958 in 2013 to 1,354 in 2014, with its personnel costs rising from €114m to €180.9m in that period.

Unsurprisingly, the financial results do not mention Spotify’s rumoured next move: an expansion into YouTube-style online video. The company is holding a press event on 20 May in New York, at which it is expected to announce its plans.

The Wall Street Journal claimed that publisher Time Inc and multi-channel networks Tastemade, Maker Studios and Fullscreen were in talks with Spotify to provide videos for the expansion, while the New York Times added broadcasters NBCUniversal, Fox and Viacom; publisher Condé Nast and Vice Media to the list.

Competing with YouTube and other online video firms will load more costs on to Spotify’s business model, although it will also bring new opportunities to make money from video advertising.

The company recently raised $350m in new funding to fuel its expansion on both music and video fronts, in an investment round reportedly valuing Spotify at $8bn (£5.2bn).