Licensing costs fuel losses at Spotify

Spotify saw a more than five-fold increase in revenues last year as it persuaded more people to pay for subscriptions. However, losses widened 60 per cent as the digital music service struggles with the licensing costs it has to pay the music industry.

Analysts said losses were likely to widen again this year following an expensive launch into the US in July.

“Spotify is not in a position at the moment to balance its books as it tries to establish its position in the US,” said Mark Mulligan, independent music analyst. “Spotify can’t afford to be in this landgrab phase in the US for much more than a year,” he warned.

“The growth numbers were very positive but you cannot ignore the losses. Over time they will require some realignment of the licensing costs,” said Mike McGuire, media analyst at Gartner.

Spotify recently said it had reached 2m paying subscribers, following the US launch, and it has also been plugged into the Facebook social networking service, increasing its visibility to users, so revenues are expected to show another large rise this year. However, the recent figures show that the cost of sales are likely to keep weighing heavily on the business.

Revenues at Spotify increased to £63.16m ($99m) in 2010, up from £11.32m the previous year. The bulk of this was from subscriptions, which brought in £45.07m last year, while advertising revenues were £18.06m.

However, the cost of sales for the company – much of which will be royalty payments to music rights holders – were £64.8m, more than total revenues. After administrative and other expenses the company made a pre-tax loss of £26.54m, compared to a loss of £16.61m loss in 2009.

Spotify’s software for desktop computers and smartphones allows users to instantly call up a song and play it via the internet. The service allows 10 hours of free listening a month, before requiring users to pay for a £10 a month premium service. Spotify introduced tighter restrictions around its free listening service in May to help cut back on some of the royalty costs it is facing.

The company is planning launches in other countries following its US debut.

“In 2010, we continued to grow our European user base, adding hundreds of thousands of paying subscribers, now representing a ratio of paid subscribers to active free users of over 15 per cent, which is phenomenal for any “freemium” business,” Spotify said.

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