Accounting Explains How Spotify’s Business Model Can Succeed

From Billboard:

website that posts the financials of privately held companies has revived the debate about the sustainability about Spotify’s business model. This is a debate worth having, but a tweak to Spotify’s income statement may lead to a more informed discussion.

Look at PrivCo’s financials for Spotify and two things should stand out.

First, Spotify’s cost of sales looks too high. Spotify pays out about 70% of its revenue to rights holders, which should be well known by now. PrivCo has Spotify’s cost of sales at 97.7% in 2011.

Yes, Spotify could have paid out more for content costs in 2011. But at SXSW in March chief content officer Ken Parks said the company pays out “in the neighborhood of 65% to 70% back to rights holders.” That’s a lot lower than what PrivCo thinks Spotify is paying rights holders. And it’s hard to believe Spotify would sign deals that give away every dollar it earns.

Cost of sales is the heart of the debate about Spotify’s business model: PrivCo interprets this 97.7% gross margin to mean Spotify will always hand over nearly every incremental dollar to content owners. This is wrong.

Continue reading the rest of the story on Billboard