Abstract Spotify was created in 2006 as a service to provide a legal method for streaming music. It quickly established itself as a market leader early in the streaming era. Despite being the industry leader, it took eighteen years of operation for the firm to become profitable. Even with steady losses, Spotify was able to attract investors due to its growth in revenue and number of subscribers. Other firms, seeing possible profit opportunities, entered into the streaming market adding to Spotify’s profitability challenges. In its efforts to become profitable, the company lowered expenses by cutting staff and using a loophole to reduce payments to music rights holders. Further, the firm raised prices to increase revenues. A calculation of Spotify’s elasticity of demand in the U.S. reveals that its options for continuing price increases in the future are limited. Facing increased competition, a declining market share, along with limitations on pricing, Spotify will find it increasingly difficult to remain profitable as the streaming market becomes saturated and growth slows. Efforts to diversify into new areas as well as enter new markets are being attempted by the company, however, questions remain about the prospects of the long-term profitability and viability of Spotify.
Kelly et al. (Mon,) studied this question.