Investors have slowly awakened to the realization that video streaming, as exemplified by Netflix, is a high-cost venture with lots of competition and no guarantee of a cash payoff. The economics of music streaming, though, are even worse. Just look at Spotify.
It’s no secret that music companies take most of the money Spotify collects. But even what has long been seen as Spotify’s advantage over its video-streaming cousins—cash generation—isn’t what it seems. The music-streaming service has reported free cash flow totaling 1.2 billion euros ($1.37 billion) over the past five years, a bounty compared to Netflix, which has burned $6.5 billion in the same period as it poured money into programming.
What’s not widely understood is that the cash generated by Spotify over the past few years has mostly come from collecting subscriber fees from listeners faster than it pays out money to the music companies. While that’s a perfectly respectable way to operate, it shouldn’t be the only way a company generates cash. What happens if the music companies suddenly demand faster payment?
