What's going on?
Music streaming giant Spotify reported on Tuesday that losses swelled to a crescendo last quarter.
What does this mean?
Spotify’s the undisputed king of music streaming, but when it comes to actually turning a profit, the titan isn’t quite up to scratch. That means that the firm’s still facing challenges, despite adding an impressive 10 million new subscribers last quarter. See, the company hands a whopping 70% of its revenue over to the owners of the music. And while Spotify has sunk billions into exploratory projects like podcasts, those moves aren’t bearing much fruit, and only seem to be tightening the firm’s already thin margins right now. To top it off, Spotify’s bloated workforce added to its piling costs, and in the end, the firm ran up a $290 million loss last quarter – nearly seven times more than the same time the year before.
Why should I care?
The bigger picture: Expect ads.
To be fair, Spotify’s doing its best to turn a profit: just last week the firm announced that it’s cutting its workforce by 6% in a bid to lower costs. That’s not likely to be a true game-changer though, and the real money might just lie in – shock horror – advertising. Remember, Spotify’s got the ear of almost half a billion users, so growing its ad business could bring in some serious dough – as YouTube’s ads do. The firm’s headed in the right direction: ads accounted for a chunky 14% of total revenue last quarter.
For markets: Siren song or a tune that rings true.
Investors rallied behind Spotify’s upbeat outlook for subscriber numbers and revenue, and probably liked its efforts to get on track too. They brushed off the loss and sent shares up 10% – but let’s not get ahead of ourselves. The stock’s still down nearly 70% from its two-year high, and investors won’t think twice about jumping ship if Spotify doesn’t make good on its promises.