Spotify has gotten the user model right. Sales are up 52% in the last year, with users continuing to climb. This is not only financially beneficial for them, but a critical part of strengthening their recommendation algorithm that is fueled by user generated input. In just a few short years it has become the world's largest streaming service globally, surpassing its key competitor, Pandora.
However, Spotify doesn't seem to have mastered its financial cycle yet. Paid subscribers do not offset the large cost of paying royalties to musical artists, and not enough free subscribers are 'trading up' to the premium paid service. Advertising costs only represent about 10% of revenue, so paid subscribers, must continue to deliver the lion share without a change in business model.
Spotify is rumored to already be in conversations with banks to facilitate an initial public offering. However, it is unclear whether they will be under or overvalued given the history of losses. This negative is offset by the sheer size and value of a dedicated subscriber base. On the other hand, users may face increased subscription costs or reduced free services once Spotify becomes beholden to wall street and profit pressures increase.
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