"The final accountdown"

Spotify intheredAR2020Spotify has published their final accounts for 2020. It's a brutal reading. Spotify has been in the red, a business that is operating at a loss, from day one. But, now the colour of the ink used by accountants has turned into glaring red. The Spotify owners faced losses of biblical proportions. Operating loss amounted to €293m ($335 m). The pre-tax loss amounted to €709m ($810m), no less than five times the equivalent loss in 2019. Net loss amounted to €581m ($664) due to a huge income tax benefit of €128m ($146m). In any other business share price would drop like a stone, but this is cloud cuckoo land. The share price has more than doubled in 2020. The business model is built upon providing digital rights management-protected content from record labels and media companies. That makes Spotify vulnerable. The company is dependent on the revenues that subscribers pay and on the music companies from which it licences content. When revenues increase, so do costs. Spotify are caught between a rock and a hard place. The conversion strategy (by providing freemium, users will upgrade to premium) is an error in cognition. After more than 10 years the share of paying users is still below 50 percent. According to the annual report 2020 the company has about 155 million paying (premium) users (of a total of 345 million users), which makes 45 percent (the premium share was actually higher in 2019 and 2018, 46 percent). In any other business dismissal of top management, hard restructuring and merciless cost reduction would follow. Not in cloud cuckoo land. Instead, it's headless expansion ahead. Spotify’s sales and marketing expenditure surpassed a billon for the first time ever in 2020, €1 029m ($1 176m). And what is the right move from the co-founder and CEO Daniel Ek? He wants to buy Arsenal FC. A good opportunity to fulfil a boyhood dream and burn money like a Russian oligarch. The net worth of Daniel Ek is no less than 3.7 billion dollars. The show will go on. The investors are waiting for their return of investment. The enormous losses will continue until the investors loses their patience. Sooner or later they will understand it's time to put the brakes on the expansion. The strategy has always been growth over profit. In the real world it has to be profit over growth. Some believe in webeconomics (new and unproven economic theory). I don't. I believe in science and gravity. What goes up must come down. The standard annual report disclaimer "Our historical results for any prior period are not necessarily indicative of results expected in any future period" is out of place. Their historical results are a very good predictor of future results. The forecast for 2021? More losses are expected. It's the final accountdown. 

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