Music streaming service Spotify is well on its way to becoming a $500 million business. According to a recent report the company could earn $500 by year end. During the first six months of 2012 Spotify reported revenue of $200 million.
The streaming service has been on a role over the last 10 months. In 2011 Spotify earned $60 million on revenues of $244 million, numbers they will almost surely surpass by years end.
Spotify relies on two specific business models. The first model is to charge a fee for ad-free service. Customers can pay $5 for web access with no ads or choose a $10 monthly plan to also remove ads from their mobile devices. The other model offers free service with interjected ads that play after several song choices.
Under its current deal with record labels Spotify must pay $200 million per year or 75% of total revenue, whichever amount is higher. If current numbers hold up 2012 will be the first year in which Spotify must pay more than $200 million to record labels.
Based on current numbers Spotify is set to earn around $60 million after cost-of-sales.
While the music streaming service may earn that money it will lost approximately $40 million after engineering, marketing, sales and other operating costs add $100 million to the company’s total 2012 costs.
While losses still exist for the company TechCrunch notes that record company’s have been happy with Spotify because it has massively expanded the music streaming business which in turn has offered a semi-solution to piracy, theft that record company’s claim was costing them billions of dollars each year.
Spotify is now working to raise $100 million in a new round of funding, money that would valuate the company at $3.25 billion. While that type of valuation might sound insane for a company that is losing money, it is actually lower then the estimate provided by the Wall Street Journal which placed its value at $4 billion.
The biggest question will be how many more users Spotify can attract to its free and ultimately pay to play ad free systems. Currently 4 million of Spotify’s 15 million users pay for a subscription (as of July 2012) and the company will need more of those users to jump on board if it plans to succeed.
Spotify has a long way to go before it proves its profitability over the long-term. However, the streaming music services integration with Facebook and its major record label support has definitely placed the company on the right footing.