While music streaming services like Spotify, Rhapsody and Pandora have loyal listener bases, their content costs are easily outpacing their revenue.
According to a chart from Statista.com, Internet radio service Pandora’s year-over-year revenue growth was outpaced by content acquisition cost growths in the second, third and fourth quarters of 2012. In a year-over-year comparison of Q2 in 2012 and 2011, for instance, Pandora’s content acquisition costs grew by about 130 percent while the company’s revenue grew by slightly less than 120 percent. Growths in costs will likely continue to exceed growth in revenue in 2013.
Spotify, a more traditional Internet streaming service, lost $26 million in 2009, $42 million in 2010 and $57 million in 2011, despite taking in sizable revenue for all three years. The high costs of music licensing makes it difficult for streaming music companies to achieve profitability.
Of course, Spotify and Pandora’s executives are completely aware of the fact that their companies are hemorrhaging cash. They justify losses with the growing popularity of their respective websites.
“The question of when we’ll be profitable actually feels irrelevant,” Daniel Ek, CEO of Spotify, told Swedish business journal Dagens Industri in an interview translated from Swedish to English. “Our focus is all on growth. That’s priority one, two, three four and five.”
Still, the companies’ losses are hard to ignore. For music streaming services like Spotify and Pandora to survive, they need to solve the profitability problem–and soon.