The financial issues of music streaming: Why is Spotify struggling to turn a profit?
Over the years, the music industry has been forced to adapt to a variety of changes and problems, particularly surrounding the introduction of new musical formats. From vinyl records to MP3 downloads, the introduction of each new format has caused endless headaches for virtually every aspect of the music industry. In the modern day, the advent of online music streaming services like Spotify has proved to have its own unique set of problems for the industry, mainly with regard to the financial aspect of streaming.
From the get-go, Spotify, in particular, has been plagued with problems. Founded in Sweden back in 2006, has been essential in lowering levels of online music piracy as well as levels of digital downloads. On the face of it, a platform which allows users to access an unimaginable wealth of music at their fingertips is a pretty appealing idea. With Spotify, though, the deeper you dig, the more problems you encounter. The biggest issue currently experienced by Spotify is the seemingly endless struggle to become profitable.
Probably the most notable criticism of Spotify is its funding and payout model. Despite being, on paper, one of the most successful music streaming platforms based on user numbers and notoriety, Spotify offers one of the lowest royalty rates for artists, paying out around $0.003-$0.005 per stream. This lack of support – financial or otherwise – for artists has helped to create a negative image of the streaming service among music fans. Couple this with the fact that the streaming quality on Spotify is far lower than that of the majority of its competitors, and you can begin to understand why Spotify is in a difficult place lately.
In an attempt to combat the struggling bank balance, Spotify has enacted a series of changes over the past few years. Some of the more drastic changes include a recent price hike for subscribers and a mass lay-off of employees at the company. While these changes did help to improve the profitability of the service, turning over €32million in income in the third quarter of 2023, the business model of the company still does not seem to be entirely sustainable. One of the largest costs involved in the running of Spotify is the licensing of the over 100 million songs it hosts; it is these costs that the company can’t seem to get on top of.
Another issue that Spotify encounters on a regular basis is the limited operations of the company itself. If you look at Spotify’s two main competitors, Apple Music and Amazon Music, these services are wings of colossal companies. If Apple’s streaming service begins to struggle, the company can fall back on the seemingly endless profits of their other endeavours – whether they be Apple TV, iTunes, or the gigantic tech sales that the company was originally built on. In contrast, if Spotify’s profits begin to fall, the company will be forced to take drastic measures, as was seen when the Swedish company chose to lay off 17% of its total workforce in 2023.
Spotify has also been impacted by the recent renaissance of physical music formats. Especially given the reputation of streaming, that it does very little to support or pay out to artists, many fans are moving further towards physical media like vinyl records, which tend to offer a lot more revenue to artists – in addition to answering growing levels of digital fatigue among the population.
At the time of writing, it is too early to tell whether Spotify’s recent price hike for subscribers will help it finally become commercially viable or whether the increased price tag, coupled with the low streaming quality, will merely drive more users to other services and music formats.
The idea that Spotify could eventually go under is not entirely out of the question, though it does seem to have enough active users and subscribers to keep it going for a while yet.