Spotify buys AI firm Niland to power recommendations, stave off Apple Music advances

How are they still going? It's a great service don't get me wrong, but they've been making losses EVERY year and the balance sheet only gets further into the red every time. Do investors actually expect it to eventually break even then start making profit? Or is the end-game to simply become a big name and wait to be bought out by a bigger name.

adm1 said:

How are they still going? It's a great service don't get me wrong, but they've been making losses EVERY year and the balance sheet only gets further into the red every time. Do investors actually expect it to eventually break even then start making profit? Or is the end-game to simply become a big name and wait to be bought out by a bigger name.

Yes, investors expect they'll eventually start making a profit. If Spotify did an (conventional) IPO today, there would be considerable demand for its stock (and, I think, for good reason).

Companies often take a long time to start producing profits. Sometimes it's because their business model is fundamentally flawed or there are other problems with how they operate or what they're trying to do. Sometimes it's because it takes time for them to reach the scale that's needed.  Sometimes they choose not to make profits sooner - the business model is fine but they prefer to spend money trying to build the business rather than realize some as profits (so that, e.g., they will eventually be even bigger or more profitable).

In Spotify's case it's more the latter two reasons. Its model is mostly sound, there are even substantial (and uncommon) advantages in it. There should be little doubt that it will work. But Spotify has been spending what might otherwise be profit (or at least mean smaller loses) in order to build the business into something better long term. By most accounts, those efforts are generally working. I think Spotify will become profitable soon - maybe this year, maybe next year. I suspect it's reached the point where it can decide to become profitable whenever it wants to. One of the advantages of not being public is that there is perhaps less pressure to do that sooner, so it can continue to focus more on the long-term potential of the company. But this isn't the kind of situation we see or saw years ago with some tech companies, where people look at the business and struggle to figure out how they'll ever make money. With Spotify that path is pretty easy to understand.

Could competition disrupt Spotify's business enough to prevent it from becoming profitable? Sure. But that's part of the reason it's spending money now trying to grow into something entrenched enough to be able to avoid that.

It would be interesting to know more about what Spotify gained from this acquisition that they didn't already get from their acquisition of The Echo Nest a few years ago. It sounds pretty similar. It's possible that they did this to get the employees and keep their technology out of the hands of Apple.

I also think Spotify is likely to be profitable soon, partly do to the economies of scale created by their growing paid subscriber base, party due to the fact that they have lately been able to negotiate more favorable deals with big record labels, who want them to succeed partly because they are providing the labels with good revenue, partly because the labels own large stakes in Spotify, and partly because labels are afraid of Apple having too much control if it achieves a near-monopoly in this space.