spotify1Spotify is a service that has revolutionised how consumers listen to music. Instead of purchasing tracks and physically storing them, whether it be on their computers or portable music devices, Spotify opens a world where music is streamed to your desktop or device, removing the need for micro-transactions and updating of your music libraries.

If you are aware of Spotify, you will be familiar with how it works. Music can be delivered for free, with graphical advertisements within the player and audio advertisments, played every five tracks or so. For the more hardcore users, Spotify offers a premium service for a flat fee per month, removing all advertisements, enabling offline music use and higher sound quality.

The player, initially available for computer desktops, has now been ported to both the Apple iPhone and Android powered smartphones, helping the service to boast nearly 100,000 Premium subscribers. Whilst 100,000 users may sound like a success, this figure encompasses a lot less than 10% of the total Spotify subscribers, something that Spotify boss Daniel Ek is well aware of.

At a recent Pop Idols event, hosted at Glasshouse, in London, Ek gave a talk on how well the Spotify service is doing, discussing how Spotify’s revenue grows around 50% per month and that estimates show 80% of Spotify users have ceased file sharing.

A report published today on the Guardian’s Technology Blog, writer Charles Arthur discussed just how much Spotify maybe making from advertising and it’s premium accounts, whilst taking into account just how much the music industry takes as a result.

Streaming

The Guardian article takes into account that the average Spotify user will stream 70 minutes of music a day, and that the files are streamed at 160 kilobits per second.

  • 160*60*70 = 672,000 kilobits per day. This would mean an average user would stream 84MB per day.

According is thought to have around 5 million users from the UK, Scandinavia, and central Europe.

  • 5,000,000*84 = 420,000 GB per day.

Of course not every user will use the service all the time so The Guardian made the assumption that probably one in five people will use the service to the extent discussed above.

Dividing the above figure by five would still mean that 84,000 GB worth of data is being streamed a day and using a figure of $0.05 per gigabyte would mean monthly bandwidth costs of:

  • $0.05*84,000*30 = £126,000 for streaming per month.

Because Spotify aren’t required to specify their costs, these are pure estimates and use industry figures as base.

Peer To Peer

The streaming costs from The Guardian article takes into account that all music data is streamed directly from Spotify servers, when in reality it is suggested that Spotify employ their own peer to peer network (infact Daniel Ek was CEO of uTorrent) to relieve pressure on bandwidth and their servers.

With this in mind, it is a safe to assume bandwidth costs could be significantly lower than what we have discussed here.

Music Licensing

The cost of streaming a music track is 0.085p in the UK, with 70 minutes of music being streamed, this is thought to equate to around 24 tracks a day. One million users will listen to 24 tracks a day, so:

  • 24,00,000 tracks*30*0.085p = £600,000 per month.

There also charges incurred for featuring the specific act or band. Arthur discussed these charges with another music streaming service We7 and was shocked when it was suggested Spotify could be charged upwards of £6,000,000 a month, to compensate the artists and labels whose music is streamed via Spotify.

Don’t forget Spotify has to pay the music labels per track they use, which Arthur estimates to multiply the streaming costs by a factor of at least ten. It is not known whether Spotify has an agreement with labels for this but it is known that some of the major labels have invested in Spotify shares so this may be waived, at least for a period of time.

Conclusion

The Guardian calculates hosting will cost Spotify £100,000 a month, producing the following rough totals:

  • (Possible) Streaming Costs = £126,000
  • Music Licensing Costs = £600,000
  • Hosting Costs = £100,000
  • Performer Costs = £6,000,000

    Total = £6,826,000

Spotify has around 100,000 people subscribed to Premium accounts and the number is growing. Each Premium subscriber pays £10 per month for their unrestricted service so we can assume they receive around £1,000,000 per month for these plans.

We could assume that Spotify actually makes a loss of  over £5,000,000 (€5.5 Million) per month but these are based on generalised costings and estimated usage figures. The article takes into account many fees that might have been previously agreed with the music labels so costs could be a little less when it comes to licensing the music.

Without the company publishing information on how it deals with the music industry I guess we can only estimate revenue using the industry figures available to us.

What is interesting though is that Spotify have captured the hearts of music lovers, changed the way they listen to their music but unless they amend their revenue model, you could find Spotify finding it difficult to survive in an industry that isn’t wanting to accomodate initiatives such as theirs.