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Is Spotify financially well in tune?

Nick Brown evaluates the juggernaut that is Spotify

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Revenue at Spotify UK rose by over 37 per cent in 2016 in accounts filed at Companies House this month, just before its expected stock market listing later this year. The Swedish-based firm have continued a trajectory of positive financial results namely due to a 26 per cent rise in subscription revenue.

The online music firm has revolutionised the way music is consumed across the world since its launch in 2008. Initially, Spotify started by using major licencing deals with music labels to grow their online content. Now their content is derived from a variety of sources including independent record labels and artists uploading music every day, amounting to over 30m songs. This business model has proved successful over the past few years. Unlike traditional CD sales or iTunes song purchases which pay individual songwriters and producers a fixed price per song, Spotify pays royalties on the number of streams as a proportion of all the songs streamed on the platform. This contrasts with Apple's iTunes system which arguably brought online music to a mass audience for the first time in 2001. iTunes charges users per song or album whereas Spotify follows a "freemium" model where basic features are provided with advertisement and more advanced features are provided with a subscription.

The firm generates revenue both from free users as other companies pay advertising fees and through subscribed users.

This model's success is revealed by the 60 million paid users Spotify has. Many firms are therefore trying to catch up. A p p l e Music was launched in 2015 as a way to diversify the i Tu n e s p l a t form. As of June 2017, Apple Music had 27 million users. However, it has not fully captured the online streaming market. Tidal and Deezer are other names in the industry but neither have captured Spotify's huge market share.

Spotify has identified that it must expand its services to create new revenue streams. It has been reported that the streaming giant is planning on extending their partnership with the merchandising firm, Merchbar, in order to sell beauty products. It has also been suggested that the firm will offer listeners the chance to 'buy the look' of their favourite artists online. However, no direct revenue will be gained. The streaming giant is planning on using this partnership to attract new artists who would be interested in selling merchandise. This project is projected to create a new income stream from the 80 million free users of the service. One of the firm's main aims is to become the third biggest advertiser after Google and Facebook. This relationship with Merchbar aims to help fulfil that ambition by creating a system of recurring advertisers.

However, the future of the music industry is unclear. Vinyl sales hit a 25 year high this year with sales increasing by 53 per cent from 2015. Statistics produced by the British Phonographic Industry show that the vinyl industry has grown for the last nine years. Although it has been suggested that music downloads like those on iTunes will not exist in the next 10 years, LPs have grown due to their intergenerational popularity. Millennials have been attracted to new artists selling vinyls.

Even though Spotify has performed exceptionally well over the past few years, it is almost inevitable that new technology will replace the role it plays as a music provider, while the resurgence in trends like vinyl continuously present a challenge.

The firm has been riddled with controversy in recent years, for example its long-running dispute with Taylor Swift, who removed her entire music collection from the service in late 2014 after writing in the Wall Street Journal: "It's my opinion that music should not be free". Subsequently, the online giant's future is not set in stone and cannot be predicted.

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