November 20, 2019

Don’t Look Now But Spotify Is Profitable

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Spotify unexpectedly showed a profit, and a handsome one at that, as it reported a figure of more the $60 million in its recent Q3 return. This was more than 30 times more than it had predicted as a highpoint, so as you can imagine, company execs and Wall Street are pretty happy that it’s finally profitable.

This is actually the second time it had a profitable quarter, as it had posted some $106 million in profit in Q4 of 2018. It that case it was because of some skillful financial engineering, but this latest round came down to the fact that it was finally able to stand on its own to make some dough.

One of the reasons is that Spotify finished the quarter with 113 million paid subscribers, which was up 31% over last year at the same time. In fact, the paid subscriber growth was actually greater than free user growth during that time, a fact that no doubt warmed the hearts of its execs. The company makes a lot more money on its paid subscribers than on its free users, even though advertising revenue is strong.

The company is also spending less money on marketing and promotion that in previous quarters. Spotify is pretty mature and well known in the marketplace by this time so there is less need to broadcast its existence. Plus, it gets tons of free publicity and seems to be in the news every other day.

But by far the biggest reason that the company made money is that it’s now paying less to artists, record labels, and publishers thanks to new license agreements with the major labels. You’d wonder why the labels would cut a better deal for the distributor, but it seems like there was a real fear that the company might not make it since the margins were previously so thin, which scared the labels to death. The latest agreements were meant to shore up Spotify’s business model and bring about some health, which is exactly what happened.

I still believe that the company will be acquired at some point, and that point may be coming sooner than believed now that it’s profitable.

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