2 Ways Spotify Can Boost Its Profits
Audio streaming giant Spotify (NYSE: SPOT), has drawn lots of criticism from investors because its expenses eat away at so much of its revenue. Since the majority of its cost of revenues is paid out in royalties to the major music labels, Spotify touts a measly 25% gross margins. However, the platform is changing, and so is Spotify's leverage in negotiations with the labels. Early on, Spotify needed users, and the labels owned the music. Now, the labels need distribution -- and Spotify owns the ears.
While the specific contract terms are complicated and unspecified, record labels, music publishers, and the music rights owners receive a royalty from Spotify for letting Spotify stream their content. It has been estimated that 52% of the revenue generated from each stream gets distributed to the specific rights holders.
This favorable payout ratio likely reflects how much Spotify needed the labels' content in its early days. Without the music, Spotify would have had no way of attracting users. But now, from the outside looking in, Spotify's dependence on the labels' content is shrinking for two reasons: diversified revenue streams and continued user growth.
Source Fool.com
