Monday, October 17, 2011

Spotify -- Losses Mount & Facebook Won't Help ... Or Will It?

I have written several times about Spotify. It is the critics' darling online music service. It is Facebook's darling (Zuckerberg's featured music service). It is the biggest thing in the music business to come across the pond since, well, the Beatles.

But, despite all of this hype, Spotify continues to hemorrhage money -- with losses mounting significantly from 2009 to 2010 (growing ominously from $26 million to $42 million during that period of time). That's a lot of digital music! And, the service's revenues are significantly skewed (70%+) to subscription revenues over ad revenues -- significantly more so than Gigaom's Editor and leading pundit Om Malik had expected.

That doesn't bode well for Spotify's recent poster child status with Facebook. Yes, that kind of distribution will be massive. At first blush, that seems great, right? But, here's the rub -- I doubt many Facebookers will use anything more than the free service. And, that means massive COGS from massive free music streaming -- music licensing, bandwidth -- that likely won't be effectively recouped. And, if that is the case, that means ever-growing losses -- with no end in sight.

That ain't a great business model.

Or, is it? Massive mounting losses didn't hurt YouTube ultimately. That was because YouTube was picked up by a juggernaut that didn't really care, because YouTube meant so much more strategically to Google than the service itself.

And, the same thing may be happening with Spotify and Facebook. As a stand-alone independent business, Spotify is difficult to justify. But, in the strategic hands of Facebook the world starts looking altogether different ....