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Spotify has found its groove. News this week that the Swedish music streaming service had paid more than $10bn in royalties last year highlight just how big it has become — and how much more profitable.
Just think that, while in absolute terms royalties rose from the $9bn it had paid the previous year, as a percentage of total revenue they fell to 59 per cent from around 63 per cent.
That speaks to the speed at which chief executive Daniel Ek has cranked up revenue — which jumped 18 per cent last year to €15.6bn. While raising subscription fees certainty helped, higher prices notably did not deter more users from joining. The company ended 2024 with 675mn monthly active users, a 12 per cent increase. Within this, the number of paid subscribers rose by 27mn to 263mn. The remaining users are on the free accounts supported by advertising.
Spotify also focused on profitability. It laid off a chunk of its staff and made sharp cuts elsewhere too. It slashed nearly €500mn in marketing, research and developing spending and general administrative expenses last year. The results: a gross margin of 30 per cent, four full percentage points up from 2023, which helped the company swing to a net income of €1.1bn.
The mood music has changed dramatically. Between 2014 and 2023, royalty payments and a costly foray on podcasting helped Spotify rack up more than €4bn in net losses on €64.6bn of revenue.
Investors have rewarded this new tune handsomely. Spotify more than doubled its market value last year and has gained another 16 per cent since the start of January. This sets a high bar for the $106bn company to keep the hits coming.
There are good reasons to think that it can. True, the next leg of growth will look different. There might not be much room for further cost cuts. And after raising subscription fees in each of the past two years, the group may hesitate to implement another price increase on premium users, lest they decamp for services at Apple and Amazon.
But that doesn’t mean it doesn’t have options. A new ultra-premium tier for diehard audiophiles is one. It may also want to start charging a small fee to the 425mn users who are currently on the free ad-supported tier. Netflix does this already.
Spotify’s size now gives it a durable advantage over rivals. If management can stay vigilant on costs and keep converting the freeloaders into paying subscribers, it should be able to keep profit growth humming.
pan.yuk@ft.com
