Yesterday Spotify released its Q3 Earnings, and the results were sort of a mixed bag. Let’s start on the positive side with subscription growth. Spotify now has 83M subscribers worldwide, compared to 101M ad-supported listeners. North American subs are reported to be at 26M, so assume 22-23M for the US. These numbers continue to prove out Spotify’s strategy of inviting listeners in with free trials and then successfully converting them behind the paywall.
On the other side of the coin Spotify continues to burn through cash at a breakneck pace. During Q2 they lost $464M (USD), which was the second worst quarterly loss in the company’s history. While some of that red ink could be chalked up to investment in developing markets, they still had an operating loss of $106M (USD) for the quarter. That means whatever money they’re bringing in from subscriptions and ad revenue isn’t covering the cost of music royalties and running their business.
Right now Spotify has about $850M in cash on hand, plus another $885M in short term assets they could liquidate. That may seem like a good stockpile, but at their current burn rate there’s only enough cash to cover another 4-5 quarters of operations. Thus Spotify finds itself trapped in a Sword of Damocles moment. They need to keep offering free trials and discounted subscription plans to maintain their growth trajectory. But the losses incurred from this strategy will eventually eat through all of their cash. Then they’ll either have to borrow money or issue more stock, which will dilute the investment of their current shareholders. Obviously this is no way to run a business long term.