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I recently wrote a post about the Spotify music revolution. Everyone I talk to loves the product for its pure simplicity, me included.  But everyone I talk to questions the business model, again, me included.

Spotify are obviously cagey on quoting specifics around revenue, forecasts and profitability.  So I decided to have a bash at a ‘back of a napkin’ dissection of Spotify’s business model.  The figures I gleaned from media reports and comments CEO Daniel Ek made at a Glasshouse event in London last week. For arguments sake I used the goals Ek stated.  These were:

• 10% premium subscribers vs free (premium paying 10 euros a month)
• 60:40 revenue split between premium subs and advertising

Then what I did was a basic guesstimate of their staff and overheads:

• 140 staff (they were quoted at having 70 in March here)
• Average salary of 100k euros (Swedes are expensive)
• Overheads of 25% of salaries

I’m estimating their monthly overheads before royalties to be 1.5M euros.

The billion $ question (literally) is their Cost of Sales, specifically the royalties they pass onto record companies.

When you crunch the numbers what becomes immediately clear is that Spotify’s success or failure hinges on 4 crucial levers:

1. Average # of streams per user
2. Royalty fee per stream
3. % conversion to paid subscription
4. % revenues split between ads and premium subs

For example, I plugged into my excel spreadsheet a 0.02C euro per stream fee and then assumed each of their current 8M users listened to 100 streams a month. Excel spat out a 6M euro a month loss based on a staggering 16M euro monthly royalty!

But half the average # of streams per user to 50 and the story looks completely different.  Suddenly Spotify is profitable.

So then I tried scaling them up to 50M users with the same 50 and 100 stream per month average.  You have a 31M euro loss per month versus an 18M euro profit.

What is really interesting is that the labels would stand to make a cool 50M a month from royalties.  That’s 600M euros a year!!!  600M reasons why the record companies need this experiment to work!

Of course things don’t look quite so rosy if the uptake of premium subs falls below 10% or the ad revenue model doesn’t deliver.

These are BIG numbers. They are based on some equally big assumptions on my part but what they demonstrate is that the opportunity here is real.  Providing the labels can avoid choking the life out of it, Spotify really could be the saviour of the music industry!

One Response to “Spotify ‘back of napkin’ revenue forecast”

1. Stig says:

   September 28, 2009 at 11:38 am

   Napkin or not it’s interesting. My guess is they are simultaneously confident and shitting themselves.

   The fact is they are creating a new music consumption paradigm so making confident projection on consumer behaviour is difficult.

   But then the service looks good, works well, is adequately funded and has the majors on board. So they are in a better place than anyone else, while acknowledging that everyone else trying any streaming service either has failed or is in the process of failing.

   I just hope they add in better indie music distribution, rev sharing (if their 18% partners don’t mind).