Spotify caps 2020 with 155m paid users but losses widen due to high operating costs

By Emmanuel Legrand 

Spotify has ended a "remarkable" year, in the words of co-founder and CEO Daniel Ek, with a record number of 155 million subscribers and 345 million monthly average users (MAUs), respectively up 24% and 27% year-on-year, but the music streaming service's losses have widened during the year. “Despite the global uncertainty of 2020, it was a remarkable year for Spotify," said Ek. "Following a strong Q2 and Q3, Q4 met or exceeded our guidance by nearly every metric.”

  "In 2020, we believe the pandemic had little impact on our subscriber growth and may have actually contributed positively to pulling forward new signups. From a revenue standpoint, advertising was negatively affected in the back half of Q1 and persisted throughout the rest of the year," said the company in a letter to shareholders.

  For the full year, net additions of paid users accelerated to a record 30 million, compared to 2019 net additions of 28 million. In Q4, Spotify added 10 million subscribers, with "all regions contributing to growth," led by Europe and North America.

Growth in Russia and India

  "Europe continues to benefit from our July launch in Russia and 12 surrounding markets," said the company. "Relative to our forecast, Latin America and Europe performed particularly well from a regional perspective, while Family Plan and Duo additions were strong from a product perspective.

  The streaming service reported net additions of users to a record 74 million compared net additions of 64 million in 2019. "In Q4, we added 25 million MAUs and benefited from faster growth in India, US, and Western Europe, with India serving as a notable source of upside vs. our forecast driven by successful marketing campaigns," said the company.

  Europe is the largest region with 35% of the service's MAUs, followed by North America (24%), Latin America (22%), and rest of the world (19%). Europe also leads in the share of paid subscribers (40%), followed by North America (29%), Latin America (21%), and rest of the world (11%).

   In the fourth quarter, total revenue reached €2.17 billion, up 17% year-on-year, with Premium revenue up 15% to €1.89bn, and ad-supported revenue up 29% to €281m. Operating Expenses totaled €644m in Q4, up 17% year-on-year.

Record revenues of €7.88bn

  For the full calendar year, revenues were up 16.5% to €7.88bn, compared to 2019. Operating losses reached -€293m, down from -€73m the previous year.

  With a 25% increase in revenue from 2018 to 2019 and a 10% increase from 2019 to 2020, Spotify continues to believe that its ad-supported business is "a strong and viable stand-alone product" with "considerable long-term opportunity for growth in Ad-Supported Users, revenue, and gross profit contribution," accordingto a filing made with the USA's Security and Exchanges Commission.

  The company said that despite improvement in "Other Cost of Revenue" efficiencies (e.g. payment fees, streaming delivery costs), "a favourable revenue mix shift towards podcasts, and a change in estimated music royalties were partially offset by higher non-music and other content costs."

Significant costs to license content

  This seems to suggest that it wasn't the cost of content that impacted profits but rather the overall cost structure of Spotify, which counts now 6,554 employees. In the filing with the SEC, Spotify disclosed that "cost of revenue" which usually represents the money paid to rights holders, reached €5.86bn in 2020, up from €6.78bn in 2019 (it was of €2.55bn in 2016). 

  In parallel, during the past years, expenses in Research and Development, Sales and Marketing, and Admin have skyrocketed from €750m in 2016 to €1.79bn in 2019 and €2.3bn in 2020. Overall, the company said in the SEC filing that since its inception in April 2006, Spotify has "incurred significant operating losses" and, as of December 31, 2020, had an accumulated deficit of €3.29bn.

  "We have incurred significant costs to license content and continue to pay royalties to record labels, publishers, and other copyright owners for such content," wrote the company. "If we cannot successfully earn revenue at a rate that exceeds the operational costs, including royalty expenses, associated with our Service, we will not be able to achieve or sustain profitability or generate positive cash flow on a sustained basis."

A key driver of recorded music growth

  As the largest global audio subscription streaming service, Spotify claims to be "a key driver of global recorded music revenue growth." Spotify said that since its inception in 2006 to the end of 2020, it has paid "more than €21bn in royalties to certain record labels, music publishers, and other rights holders." It added that in 2020, expenses for rights holders "grew by 17% compared to the prior year, making us one of the largest engines for revenue growth to artists and labels in the music industry."

  Spotify also disclosed that sound recording repertoire licensed from Universal Music Group, Sony Music Entertainment, Warner Music Group, and independent labels' agency Merlin accounted for approximately 78% of total music streams, as of 31 Dec. 2020.

  For 2021, the company forecasts total MAUs in the region of 407-427 million, with total Premium subscribers at 172-184 million. Revenue is expected to rise to €9.01-€9.41bn, with losses in the €200-300m range. "Given the strong Q4 performance, we believe we are well positioned for continued growth in 2021," said the company.

increased forecasting uncertainty

  "Looking ahead, we are optimistic about the underlying trends in the business into 2021 and beyond, however, we face increased forecasting uncertainty versus prior years due to the unknown duration of the pandemic and its ongoing effect on user, subscriber, and revenue growth," said Spotify. 

  “I’m very encouraged by the progress we’ve made on our path to becoming the world’s number one audio platform. I want to thank all the Spotify employees who stayed focused on our creators, fans, and partners around the world this year, and for executing at such a high level. While it’s still early days, it’s clear to us that our strategy is working, said Ek.