HOW times have changed. During the boom years, venture capitalists were lining up to give billions of dollars to internet start-ups. The theory was that if you threw enough cash at these fledgling firms, some of it would stick to the next Google or Facebook. Losses that ran into the millions of dollars were the norm.
That’s why Spotify is more than a little irked at all the recent nay saying, which followed news that it posted a £16.7m loss in 2009. Its fans argue that losses are to be expected at this stage in the game: Spotify is trying to revolutionise digital music sales – and that doesn’t come cheap.
Such bullishness doesn’t ring true. Venture capital is thin on the ground, and Spotify is in desperate need of extra cash – it finished 2009 with £14m in cash and assets, versus £21.46m of liabilities.
In the glory years, venture capitalists would have made hay by selling to an old-fashioned media conglomerate; the likes of Rupert Murdoch’s News Corp and Time Warner were desperate to buy digital businesses of every hue just to keep up with the times.
Not so any more. With just a few exceptions, most of these ventures have been a disaster. Earlier this month, News Corp president Charles Carey warned that losses at the social network it bought for $500m in 2005 were “neither acceptable nor sustainable”. And AOL?recently sold Bebo, the social network it bought for $850m in 2008 while it was still part of Time Warner, for less than $10m. Few media companies want to follow in their footsteps.
The fact remains that the amount Spotify must pay in royalties to labels and publishers (£18.82m in 2009) is growing faster than subscription revenues (£6.81m) and advertising sales (£4.51m). As the service adds more users, it will have to pay more royalties, pushing the break even point ever further into the future.