Although Spotify has been posting solid revenue growth over the last three years, driven by its expanding user base in both its ad-supported and premium streaming tiers, the company has remained loss-making due to high royalty and operating costs. In this note, we take a brief look at how the company’s revenues and operating profits have varied over the last three years in our interactive dashboard analysis, based on our projections for 2018.
For more information on Spotify, see our interactive dashboards for Spotify’s valuation and potential break-even point.
Revenue Growth Overview
Spotify’s revenues are projected to grow from levels of close to € 2 billion in 2015 to about € 5.3 billion in 2018. Spotify has about twice as many paid subscribers as Apple Music, the second largest provider. We expect Spotify’s premium subscriber base to grow from levels of 28 million in 2015 to about 94 million in 2018, driving the mix of premium revenues in its overall revenue base. Ad-supported revenues are also expected to grow to about 109 million in 2018, from about 64 million in 2015, as smartphone penetration improves and as the company expands into new markets. Moreover, the number of content hours per user has been steadily rising since 2015, implying that more ads can be delivered to each user, driving revenues.
Spotify has been able to increase the gross profits of its Premium segment, by growing its premium subscriber base and margins. Moreover, economies of scale could also help the company keep its content costs in check, driving margins further. Its ad-supported tier is also seeing gross profit growth, as ARPU expands slowly. For instance, gross margins of the paid tier stood at about 15% in 2015 and we expect them to rise to 25% in 2018, while margins of the ad-supported tier are expected to rise to about 13% in 2018, from negative levels in 2015. However, the company is likely to remain loss-making at an operating level over 2018, as its SG&A and R&D expenses continue to increase.
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