Despite having more than 70 million subscribers and at least 140 million active users, Spotify isn’t profitable. During its IPO, the streaming service said it generated $4.99 billion in revenue in 2017, but still posted a loss of $1.5 billion. This is mostly due to the high licensing fees charged by the music industry. But one insider suggests that Spotify may be able to earn a profit by entering the record label business in the same way that Netflix is producing original shows and movies.
Duncan Davidson, a general partner at Bullpen Capital, suggests that Spotify could break free from the music industry by operating its own record label. This could allow Spotify to reduce its dependence on the music industry by finding new artists, or striking up deals with existing ones. It would cost Spotify a lot of money, but Davidson believes Netflix has shown that such a model is workable.
“Netflix is now creating more content than all of Hollywood,” Davidson told Business Insider. “So if Spotify can end up finding more artists than the whole of the music industry, that would be quite amazing.”
Despite the fact that major media companies, most prominently Disney, are abandoning Netflix’s platform to start their own, the company has seen better-than-expected subscriber growth in both the U.S. and international markets. A big part of this growth can be attributed to the popularity of its original programming, such as Stranger Things.
The television streaming service shows no signs of slowing down either. Netflix recently revealed a plan to spend $8 billion on 700 new forms of content this year. This has done well not only for its subscriber numbers, but its stock as well. The company’s stock is currently worth $318 a share.
Whether Spotify can create a similar model remains to be seen. If it were to succeed, however, it could greatly reduce the company’s licensing fees and bring in new subscribers on top of that. It might even give the music streamer more negotiating power with the established labels, allowing it to get a discount on licensing fees.
“It’s like a new way of doing what a music label does,” Davidson said. “If they can figure that out, they would be an extremely powerful company.”
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