Why it might not matter that Spotify is losing one million pounds a month

Spotify has two revenue streams: advertising on its free service, which pulled in £4.5m in 2009, and a premium ad-free service for £10 a month, which generated £6.5m. Only 250,000 of Spotify's seven million users pay. And its crippling costs weighed in at a reported £18.8m, mainly for music licenses.

But there are some silver linings here, faint as they may be. In 2008 Spotify made just £380,000 (revenue, not profit), meaning a revenue increase of more than £10.5m in just one year. Its user base has exploded from one million to seven million in the same 12-month period.

If its growth continues as rapidly as that, the revenues might just start adding up. But is Spotify coming anywhere close to market saturation? And would all those extra users (who inevitably expect bang-up-to-date tech from platforms they use) mean the development needed to support a more sophisticated Spotify back-end would cut away at any new revenues just as quickly?

Then again - perhaps looking at profits and losses is naive in this case. Spotify has to date raised (sharp intake of breath) €83.2m. Investors include Sean Parker, who helped create Napster, and Li Ka-Shing, the 16th richest person in the world and a Facebook investor. People like that generally don't get involved unless a business plan is pretty rigorous, unless a product is unbelievably hot, and unless they know precisely how they're going to get their money back.

So what if the point for Spotify is not to be profit-making at all? Or, at least, not in any massive way. What if the goal is to just get the monetary juices flowing, but ultimately grab so much of the digital music market that iTunes or Google or the like is forced to buy Spotify for a whopping amount of money? Well, in case you missed it, the rumours go that both have tried to do just that already. Apple has been on-off for a while, while Google reportedly offered $1bn (it wanted Spotify to be built-in on the Android).

We wouldn't necessarily want to be in founders Martin Lorentzon and Daniel 'We're losing £1m a month' Ek's shoes right now. Building a business model around a long-term goal of selling for billions is exactly what tripped up so many dotcoms, a thousand times over.

Hedging your bets on having X number of subscribers or X% of market share in a bid that a bigger player will buy you out is a high-risk strategy, to say the least - because, very simply, you never know when the next big thing is going to shoot up the ranks and steal all those all-important consumers from you. Do you hold out another year to gain more users and so up your price, or do you sell while the going's good for a few billion less? (Read our feature on companies who sold at the right time to see how precarious and blade-thin the timing on this can be.)

We suspect Spotify is in it for the long-game. €83.2m is enough cash to keep things ticking over for a while. Spotify's series C funding (which was when Sean Parker got involved) only happened in February 2010 - which means everyone who contributed to that cool €11.2m already well knew all the 2009 loss figures which are being splashed around the press today. And they cared not.

All of which should indicate to us humble observers that Spotify and its merry band of ludicrously high-profile backers know exactly what their long-term plan is, and that it might just be going perfectly on track. After all, £16m is a relatively small chunk out a $1bn acquisition price - and that offer should get much bigger if Apple and Google start properly fighting over Spotify.

We can but guess what's in store. But we genuinely cannot wait to see what happens with what is quite possibly the most exciting and disruptive company to come out of Sweden since Ikea.

Liked that? Read our feature on the freemium business model Spotify is using, and watch tech investor and entrepreneur Julie Meyer explain how to build a fast-growth tech company.

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