Exclusive: Europe's biggest tech hope Spotify starts talking about profit

By Mia Shanley
Reuters
Earphones are seen on a tablet screen with a Spotify logo on it, in Zenica
Earphones are seen on a tablet screen with a Spotify logo on it, in Zenica, Bosnia and Herzegovina, February 20, 2014. REUTERS/Dado Ruvic/File Photo

By Mia Shanley

HELSINKI (Reuters) - Music streaming service Spotify, one of Europe's most valuable tech start-ups, could start to become profitable as early as next year, said a board member who was also one of the company's first investors.

Spotify, the global leader of the music streaming industry even in the face of mounting competition from tech giant Apple Music - has posted steep losses since it was created a decade ago by Swedish founders Daniel Ek and Martin Lorentzon.

"Up until now, I think it's been growth, growth growth," Par-Jorgen Parson, a general partner at venture capital firm Northzone, told Reuters on the sidelines of tech start-up conference Slush in Helsinki.

"Maybe profitability will start to become a priority too." Asked if that profitability could come as early as next year, Parson said: "Absolutely, yes."

Spotify, which based on a funding round last year had a value of over $8 billion, reported an operating loss of 184.5 million euros ($195.5 million) in 2015, up from 165.1 million in 2014.

A valuation of $8 billion would be Europe's biggest tech listing since the market launch of German e-commerce investor Rocket Internet in 2014.

Spotify, present in 60 markets worldwide, charges users monthly fees for access to huge libraries of music to play on phones or computers, but profits largely depend on royalty licensing deals it strikes with powerful music labels every few years.

Northzone first invested in Spotify in 2008 and though it does not say how much it owns today, it remains the second-biggest shareholder after the founders. Other investors include Creandum, DST Global and Accel Partners.

Spotify, which has been cited as a possible acquisition target for a Silicon Valley giant like Facebook or Google's Alphabet , is widely seen as a prime candidate to go public on the Nasdaq in 2017.

"As an investor - and I've been in the company now for almost 10 years - we're looking forward to an IPO at some point in time," said the New York-based Parson, declining to be more specific about IPO plans.

A listing by Spotify, which employs about 2,000 people, would be a boon for Europe where tech firms tend to sell early, getting swallowed up by bigger fish in Silicon Valley or China.

Ek said earlier this year he has no plans to sell.

HIGH COSTS

Parson explained that the cost of growth for Spotify has been very high because, as it expands to new markets, it has to pick up the initial cost for music royalties for new users and it takes time before it can generate advertising or subscription revenues from each additional subscriber.

"But the moment that we start to optimize on profitability rather than growth, then these unit economics will kick in right away, and they are really solid, and have been for quite some time," said Parson, who penned a book called "Heavy Metal Management".

Some analysts have argued Spotify's business model is flawed and it is hostage to the record labels. But with 40 million paid users, the company could be near a tipping point and may have greater leverage in its negotiations with the music industry.

Apple said in September Apple Music, launched in 2015, has 17 million users and is available in over 100 countries. Amazon's music service, launched this year, was competing more with another independent player, Pandora Media , rather than Spotify's user base, Parson said.

The focus for 2017, he said, will be addressing the needs of artists, helping them plan tours or driving merchandise or ticket sales.

Spotify continues to expand. It just launched in Japan and has its eye on markets like China, Russia and South Korea, he said. Parson believes Spotify is in full control of its destiny.

"I don't see any scenario where the founders are letting go of the control," he said. "Daniel and Martin - I think they have found their calling in life."

(Reporting by Mia Shanley; Editing by Alistair Scrutton and Keith Weir)