In what many would expect to be a great year for Spotify since its premium (paid) subscribers reached 155 million, the music streaming company has however announced that it tripled net losses in the fourth quarter of 2020. According to Spotify's latest annual financial results, this is because there was an increase in operating expenses.
These contrasting numbers for 2020 suggest that Spotify's customer acquisition, operating, and marketing costs are high and seem to increase the more users it acquires, instead of decreasing.
"We ended 2020 with strong Q4 performance as the business delivered substantial MAU growth, subscriber additions that exceeded our guidance, an improvement in ARPU trends, acceleration of users who engage with podcast content, better than expected Gross Margin, and Free Cash Flow of €74 million. Headwinds included the negative effects from FX movements, which were more severe than forecast and impacted revenue growth by 690 bps. Given the strong Q4 performance, we believe we are well positioned for continued growth in 2021."
The rise of music streaming
Although not often mentioned nowadays, Steve Jobs was arguably one of the most critical players in shaping the present music streaming industry. Although Apple would only introduce a music streaming service much later after Spotify and continues to lag Spotify in market share to this day, Jobs, with iTunes, laid the foundation for the modern-day music streaming industry.
However, Jobs would later be a late adopter as far switching Apple's iTunes from a digital music buy-to-download service to music streaming. The rest, as they say, is history, as Spotify now dominates the market with their two-pronged service that offers consumers a free-to-use and Ad supported music streaming service as well as an premium Ad-free service.
The only problem, as can be observed with the Swedish company's latest financial results, is that it appears to be difficult to make this business model profitable despite Spotify's dominance which now includes podcasts.
Spotify's impressive subscriber growth
At the end of 2020, the number of Spotify's Monthly Active Users (MAUs) was 345 million. This is a 27% increase compared to the year before.
The music streaming service specifically reported that its Premium Subscribers grew 24% Y/Y to 155 million in the fourth quarter of 2020. For all of 2020, net subscriber additions grew to a record 30 million compared to 2019 net additions of 28 million.
"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. 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."
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