this post was submitted on 22 Jul 2023
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Streaming services have an enormous amount of fixed costs. It might cost them several billion dollars/year to operate the necessary infrastructure even with zero customers, but the marginal cost to serve a customer might be on the order of $2/month on that $10/month subscription.
It's why streaming and digital storefronts are such a sink/swim industry. Either a company gets over user number+sales threshold to override their fixed costs, upon which they become profitable and all further growth makes them exceedingly profitable. Or the company fails to do so or barely does so, and makes somewhere between giant losses to minimal profits.
From a quick search, Spotify's user count should have grown somewhere in the neighborhood of ten times over since 2015.
This is not a cost increase that is mandated or justified by inflation. It never is. It's a cost increase from a very, very, very simple fact: companies want profit, and Spotify's leadership has concluded that they will gain more profit by increasing prices than they will by not doing so.
To quote my insurance company when I asked why my rates went up, "well, everything is costs more. Other places are charging more too."
This seems like a similar situation.
Enormous fixed cost, yes. Billion not so much. The size of their entire catalog isn't even going to be that significant. Music is tiny even the flac stuff just isn't that big. The streams are so small they probably don't even need peering agreements with most services. I'd be surprised if they're burning more than 10 million a month in infrastructure. Now Netflix, YouTube, live video streaming services, totally different story. Those poor bastards end up maintaining servers inside other people's networks.
Fixed costs isn't the cost of having a single server with the storage. I'm thinking everything they need to have built up with the intent of having between N1 and N2 MAU, in order to make that viable.
It's the cost of developing the software stack, of hiring the lawyers and accountants that (1) acquire the music rights and (2) handle the music payouts, it's the lawyers that handle the different legal requirements across every major global economy, it's the servers located in all of those countries with as many sub-national locations as necessary, it's the IT staff that manage that server uptime, it's the software developers that maintain that system and improve upon it so rivals don't jump too far ahead... Etc.
Building a streaming platform that expects to have multiple billions of dollars in revenue across hundreds of millions of users is going to have enormous fixed costs that cannot be trivially scaled down if user counts are lower. If they plan around a much lower user count they can scale it down at that planning phase, but not after the fact (at least not easily).
Here's a good estimate on their hosting, streaming and licensing costs
https://www.theguardian.com/technology/blog/2009/oct/08/spotify-internet
They tack it down to about 6 million a month that is of course excluding lawyers and other salaries.
Interesting. That's dated October of 2009 and says Spotify had 5m users. Looks like they have ~200m users today. At a linear scaling it'd be twenty times larger, or £120m=$154m per month. That's $1.85b/year.
In reality it wouldn't scale linearly, but it also accounts for zero salaries, which was the major component of my comment.
Look I appreciate the downvotes and all, but didn't you just say that fixed costs don't go up and down with users?
(1) I didn't downvote you.
(2) I said something similar but critically different:
The intended size of the platform dictates the fixed costs.
And...
(3) The data you provided wasn't fixed costs. It was variable costs like server time, music rights, and bandwidth.