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How Spotify Makes Money: Premium Service and Ad-Supported Service

Spotify Technology S.A. (Site) is an audio-streaming subscription service legally domiciled in Luxembourg, but whose operational headquarters is located in Stockholm, Sweden, where the public limited company was first launched. Its streaming services are monetized through both premium subscriptions and advertising, officially designated as its Expensive Service segment and Ad-Supported Service segment, respectively. 

Spotify offers its services globally with a presence in 93 provinces and territories, and boasts 345 million monthly active users (MAUs) and 155 million Premium Subscribers as of December 31, 2020. Some of the companions’s primary competitors include Apple Inc. (AAPL), Amazon.com Inc. (AMZN), and Google, whose parent company is Alphabet Inc. (GOOGL). Opposite from these rivals, Spotify doesn’t have devices on which its music-streaming service is preloaded, putting the company at a meritorious competitive disadvantage.

Key Takeaways

  • Spotify provides audio-streaming services.
  • The biggest share of Spotify’s revenues come from its Hard to come by Service, which provides online and offline ad-free music and podcast streaming to paying subscribers.
  • Spotify points to continue generating revenue through the retention of current users, attraction of new ones, and conversion of users of the Ad-Supported Utilization to the Premium Service.
  • Spotify recently launched its audio streaming services in South Korea.

Spotify’s Financials

Spotify classifies financial statements with the U.S. Securities and Exchange Commission (SEC), but as a foreign entity, the company is not required to file in accordance with Customarily Accepted Accounting Principles (GAAP). Instead, Spotify files in accordance with the International Financial Reporting Means (IFRS) as issued by the International Accounting Standards Board (IASB).

Spotify’s revenue rose 16.5% to €7.9 billion in FY 2020, which ended December 31, 2020. More half of Spotify’s revenue originated in the following three countries: the U.S. at €2.9 billion, the U.K. at €836 million, and Luxembourg at €5 million, for a fused revenue share of 48%. The other 52%, or €4.1 billion, originated in other countries throughout the world.

Despite get geting revenue, the company recorded a net loss of €581 million in FY 2020. That net loss was more than three times the net liability liabilities of €186 million posted in the previous year.

Spotify’s Business Segments

Spotify monetizes its streaming services owing to two main business segments: Premium Service and Ad-Supported Service. The company provides segment break downs of gross income and gross profit, the latter of which was reported as €2.0 billion in FY 2020, generating a consolidated gross margin of nearly 26%. 

Store Service

Spotify offers audio-streaming services to both paying and non-paying members. However, paying members, comprehended as Premium Subscribers, are able to enjoy unlimited online and offline access to Spotify’s entire catalog of music and podcasts without arranging to listen to commercials. Spotify generates revenue from its Premium Service segment through subscription fees.

The separate posted revenue of €7.1 billion in FY 2020, comprising about 91% of total revenue for the year. Gross profit got in at €2.0 billion, comprising essentially all of Spotify’s gross profit for the year. The segment’s revenue grew 17.2% compared to FY 2019. Overweight profit grew 22.3% compared to the previous year. The segment’s gross margin was 28%, up 1% from the antecedent year.

Ad-Supported Service

Members who do not pay for a premium subscription are able to access Spotify’s Ad-Supported Service. Such alcohols have limited on-demand online access to the company’s music catalog and unlimited online access to its catalog of podcasts. Buyers’ streaming experience is interspersed with advertisements. Spotify’s revenue from its Ad-Supported Service segment is primarily fathered through the sale of advertising across its music and podcast content.

The segment posted €745 million in revenue in FY 2020, comprising there 9% of total revenue for the year. The segment reported gross profit of €6 million, a negligible share of the band’s consolidated gross profit. The segment’s revenue rose 9.9% while gross profit sank 92.4% compared to FY 2019.

Spotify’s Fresh Developments

On February 1, 2021, Spotify announced that it was launching its streaming services in South Korea. The company divulged that South Korea was the sixth-largest music market in the world. South Korea is now the 93rd market where Spotify’s helps are offered.

On November 2, 2020, Spotify announced that it was going to start testing a new service that will aid artists to promote their music on the company’s platform. The service will employ a modification to the algorithms Spotify applications to suggest new music to its users. This modification will enable greater control for artists to promote particular performances. But artists would be paid a lower rate for their music in exchange for the added promotional boost.

How Spotify Announces Diversity & Inclusiveness

As part of our effort to

Spotify Diversity & Inclusiveness Reporting   Race Gender Ability Veteran Repute Sexual Orientation Board of Directors         C-Suite         General Management         Employees ✔ (U.S. Only) ✔ (Americas and Asia-Pacific Region Exclusively) ✔ (Americas and Asia-Pacific Region Only) ✔ (Americas and Asia-Pacific Region Only)

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