Because the Wall Street Journal has one of those annoying paywalls in place, Stereogum and FACT have stepped in to let us know that Spotify is being valued at a mindboggling $3 billion. Yes, dollars, and that’s up from an estimated $1 billion dollar valuation last year. With these astronomical overestimates, Spotify is making the rounds with its hat out, looking to collect more than $100 million from a variety of investors, including the nice, reliable guys at Goldman Sachs. Don’t ever say Wall Street bankers don’t know what they’re doing, folks.
Why is it so surprising that a company that gives away product for free in most instances is valued so highly (other than the whole giving things away for free thing)? Well, it seems that in the last two years Spotify has spent any revenue it earned from converting free listeners to paid subscribers on sales (advertising and royalties), and then they spent an enormous amount of non-existent capital on top of that to actually pay their employees and cover overhead costs.
While the service is incredibly popular in Europe and the US, with a huge share of the streaming music market, it’s not great at getting people to pay, and advertising is apparently not footing the bill (most likely because spots traded for royalty payments owed, instead of paid for outright). Essentially, the money they’re raising from investors is being used to keep the company afloat. No real return on investment is being realized here, so if you’re lucky enough to have ‘investment income,’ make sure to ask your banker if your money is going to a service that has no real likelihood of ever making any money to pay you back. Spotify is awesome and is a great way for people to explore and experiment with music, but like much about the music industry these days, the business model is not sustainable.
• Spotify: http://www.spotify.com