A major question looms over Spotify and its streaming music competition: can anyone grow into a profitable business? For Spotify, the answer is not yet. In 2012, Spotify's revenue doubled, but it also failed to turn a profit as its losses grew due to increased licensing fees, The Wall Street Journal said in a report. The problem here is that all Spotify does is stream music. And in order to do that, it has to pay record labels and musicians licensing fees so it'll have something to stream. For now, the fees are growing along with everything else and profit remains out of reach.
In 2011, when the music service made its US debut after years of popularity in Europe, Spotify brought in about $252 million in revenue, according to the Journal. In 2012, revenue jumped to $576.5 million, the report said. Losses meanwhile have grown from $60 million in 2011 to $77 million in 2012, largely due to increased licensing fees, the
Spotify and its rivals face plenty of hurdles Journal said. Spotify reported these numbers in regulatory filings submitted to the Luxembourg company registry. While the company hasn't broken out how much it specifically spent on licensing fees last year, the Journal noted that Spotify has paid more than $500 million in royalties since launching the service back in 2006.
The company has previously said that about 70 percent of its revenue — which comes from ad sales and paying subscribers — goes toward paying licensing fees. As of July, Spotify has about 6 million paid subscribers, 1 million of whom have signed up since December. But there are another 18 million Spotify users who don't pay, opting instead to listen to up to 10 hours of free music filled with radio-style ads each month.
Clearly, Spotify needs to grow its paying customer base if it's going to turn into a viable business. It's also hoping that expansions into Mexico, Hong Kong, Malaysia, Singapore, and other new markets will help push the company into profitability. The company is also negotiating with record labels for price breaks on the licensing fees that are eating into its revenue. Spotify's issues, of course, aren't unique. Pandora and Rdio face similar hurdles as royalties industry-wide have hit the $1 billion mark. One sign of hope for the likes of Spotify is the fact that streaming music has caught on so much that it's bitten into music downloads. But this has also pushed Google and Apple into the streaming music ranks, giving Spotify even more competition in an already crowded space.