Spotify Doubles Revenues In 2012 While Losing Money, Highlighting Royalty Squeeze

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Spotify’s 2012 results are out today, with Reuters reporting that the private company had revenue of 435 million euros, and a 58.7 million euro net loss.

The revenue figure is impressive, more than doubling 2011′s 190 million euro tally. However, the company’s net loss widened in the year, even as it saw a dramatic expansion of its top line from 45.4 million euros to the aforementioned 58.7 million figure.

Spotify notes, in the document that Reuters attained, that as a company it “cannot exclude the need or desire to raise more funds in the future to fund future growth initiatives.” The company is essentially stating that it may again lean on outside capital to grow its operations and, presumably, find profits.

Spotify, its documentation revealed, pays around 70 percent of its revenue in royalty costs. So, for every dollar that flows into Spotify, 70 cents goes right back out the door to rights holders. I pay, like many of you, $10 to Spotify monthly for both desktop and mobile access to its tunes sans advertisements. From this perspective, I pay the music industry $7 per month to listen to its music, and $3 to Spotify to deliver it.

A music company with growing revenue, low cash reserves, and a niggling loss? That’s not just Spotify, it’s also Pandora, a rival to the Stockholm-based company music streaming company.

Pandora, for its most recent quarter, the first of its fiscal 2014 year, lists its “content acquisition costs” at $82.85 million. Its gross revenues for the period totaled $125.5 million. Pandora therefore pays out 66 percent of its revenue to cover the cost of the music that it spins out to its vast listener network.

Pandora and Spotify pay, therefore, around the same royalty rate. And it’s strangling them both. Spotify is unsure if it will need an additional shot of capital to make it to profits, and the public markets, and Pandora is shedding cash no matter how you measure it:

Total cash and cash equivalents:

  • FQ1 2013: $65.7 million
  • FQ1 2014: $55.4 million

Cash, cash equivalents and short-term investments:

  • FQ1 2013: $88.9 million
  • FQ1 2014: $75.4 million

Total cash equivalents and marketable securities [fair value]:

  • FQ1 2013: $66.3 million
  • FQ1 2014: $56.3 million

Pandora lost $28 million in the quarter, up from $20 million the year before, even as its revenue grew from $80.7 million to $125 million for the comparable first quarter in fiscal year 2013 and FY 2014.

If growing their revenue isn’t an effective tool for the firms to find short-term profits, as their expenses do not decrease as a percentage of revenue given their fixed royalty costs, can the two companies not run out of gas? In the short term, they are more than safe. Spotify can raise capital from the private sector, and Pandora, as a public firm, has ways to raise rash.

However, the longer term efficacy of their business model is perhaps somewhat unsettling; if profits can’t be found in greatly expanded revenues, from whence can they be sourced? The simple answer is that royalty rates may need to ease to allow the two firms to find positive margins on their businesses.

Last year, Reps. Chaffetz and Polis introduced the Internet Radio Fairness Act, which aimed to do this at least for Pandora. As The Hill reported at the time: “According to statistics provided by Chaffetz’s office, Internet radio services pay more than 55 percent of their revenue in royalty fees, while cable and satellite stations pay between 7 and 16 percent. “

However, as we have seen, that 55 percent number is quite low. For fun, if Spotify paid the 55 percent rate, would it be profitable? Using back of the envelope scribbling, the answer appears to be yes: 70 – 55 = 15. Fifteen percent of 435 million euros is 65.25 million euros, which is greater than its first-quarter loss of 58.7 million euros. So, the company would have booked a profit in the realm of 6.5 million euros.

If that rate were further decreased, Spotify and Pandora would in fact be comfortably profitable. However, even at the 55 percent rate, both companies’ chances of knocking out real net income appears far healthier.

There could be cost cuts at both firms, but as long as the 66 or 70 cents they take in leaves before they take into account other expenses — development, advertising, content delivery, and so forth — the squeeze will remain in place. The question then becomes whether the music industry will hug the two so hard that in the end each suffocates. Something has to give.

Top Image Credit: Serendipiddy

American Securities explores sale of General Chemical-sources

NEW YORK, July 31 (Reuters) – Private equity firm American Securities LLC is exploring a possible sale of specialty chemicals manufacturer General Chemical Corp that could fetch more than $1 billion,…

Airbnb Updates Mobile Apps To Give Hosts Tools For Listing And Managing Spaces From Their Phones

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Peer-to-peer marketplace company Airbnb has released new versions of its mobile apps that will give users better tools for managing their listings on the go. The app also has taken a big step forward by enabling users to list their space directly from their smartphones.

The new versions of the Android and iOS apps are in part a response to increasing mobile adoption by Airbnb users, but also an acknowledgement that getting them on mobile apps speeds up the process. Hosts who use the company’s mobile apps tend to be more responsive than those who are only on the website, because DUH, the mobile phone is always with them. That means they are quicker to respond to prospective guests and more likely to confirm a booking.

Airbnb mobile engineering lead Andrew Vilcsak said that hosts using the mobile apps respond three times faster than those who are only on the website. And so bookings happen potentially eight times faster from the apps. With that in mind, Airbnb wanted to make its apps even more useful and powerful, with more tools for managing their listings on the go.

With the latest update to the Airbnb iOS and Android apps, the company now lets hosts list their spaces directly from within the app. For first-time hosts, it will even provide them with a guide for how to do so.

The app was built to simplify the process of listing a space. For instance, it has location verification to ensure that the space you’re listing is where you say it is, as well as instant phone verification. To list a space, users must also upload photos, which is easy because they can upload them directly from their phones.

In addition to making it easier to list a space, hosts now have more tools for managing their listings as well. The app has an updated calendar feature that will allow hosts to show when their spaces are available. They can also fully update and manage their listings, including photos, descriptions and whatnot.

Yelp Beats Street Estimates In Q2 With Revenue Of $55M, EPS Loss Of $0.01

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Today Yelp beat expectations, reporting second-quarter revenue of $55 million, and a per-share loss of $0.01. Analysts had expected the company to lose $0.04 per share on revenue of $53.3 million.

That’s a beat, but not a massive victory. However, the company’s net revenue increase of 69 percent compared to the second quarter of 2012 has sent its stock up nearly 7 percent in after-hours trading. Investors like what they see.

The company’s vanity, if perhaps useful metrics, point up and to the right: Average monthly traffic for the company is up to 108 million unique visitors, representing growth of 38 percent year over year. Yelp now has 51,400 “active local businesses,” up 62 percent in the last year.

After adjustments, Yelp’s EBTIDA came in at $7.8 million.

The Great Mobile Shift continues apace, with Yelp showing 40 percent of its advertisements on mobile devices. However, while companies such as Facebook are seeing their mobile incomes rapidly increase, Yelp’s 40 percent number is only a 4 percent improvement on its first-quarter figure. Also, the company doesn’t break out its mobile revenue as some other companies do, merely its mobile advertising share, which could easily not correlate directly to income portion.

Yelp’s cash position is essentially unchanged in the past six months, growing by under $2 million to rest at the end of the quarter at $96 million in cash and equivalents.

All told, it was a solid quarter for Yelp, slightly beating expectations, keeping its cash in place, and growing its traffic. Still, if it wants to fundamentally change how the market values it, an acceleration will be required.

Top Image Credit: Jakrapong Kongmalai

Alberta floods cloud mortgage picture for Canadian banks: analyst

While the floods in Alberta are over, they will leave a cloud hanging over Canadian banks for the next three to 12 months, according to analysts at National Bank Financial.

In a note to clients Wednesday, analyst Peter Routledge raised the prospect that some or all of Canada’s big banks may follow the lead of Toronto-Dominion Bank, which revealed Tuesday it will incur $93-million (10¢ a share) in after-tax provisions on mortgages and home equity lines of credit (HELOCs) written on properties in Alberta’s flood zone.

The Toronto-based analyst raised several questions about the impact on Canadian banks of “confusion and uncertainty” surrounding government compensation for homeowners living on Alberta’s floodways or flood fringes.

“What to do with a mortgage secured by a damaged floodway-located house whose owner is likely to relocate?” the analyst pondered on behalf of the Big Six banks.

“Will the bank transfer the mortgage to the new house? Will the owner have adequate funds to rebuild and continue making mortgage payments long term? Is the owner making mortgage payments today?”

Mr. Routledge further pondered what could happen with CMHC-insured mortgages secured by a floodway property on which the homeowner has defaulted.

“Will the CMHC approve and pay the full claim… none of it or just a portion?” the analyst wondered, after acknowledging that the answers could remain unclear for up to a year.

In the note to clients, Mr. Routledge suggested TD management was “conservative” and that at least some of the other big banks would be likely to take “a less conservative (but potentially more accurate) level of provisioning.”

The analyst said he suspects the government of Alberta will adjudicate homeowner claims “more generously than TD’s current provision implies,” given the impetus of “putting voters back in their homes.”

Oil sands crisis strategy a work in progress

More than two months after bitumen mixed with water started seeping from its Primrose oil sands project, Canadian Natural Resources Ltd. mobilized Wednesday to deal with the real out-of-control gusher — misinformation.

After saying little publicly about the incident, involving seepages that started on May 20, Canadian Natural issued an early morning news release, held an analyst call and then interviews with the media to confirm the leaks have been contained and the spill is being cleaned up.

No one got hurt, the company said, but 16 birds, seven small mammals and 38 amphibians were killed and that two beavers, two birds and two muskrats are being cared for prior to being returned to their natural environment. So far, 6,300 barrels of bitumen emulsion have been collected, while seepage from four locations has declined to fewer than 20 barrels per day.

Meanwhile, the company cut its forecast for 2014 production from the project to 100,000-110,000 barrels per day, about 10,000 b/d lower than targeted.

President Steve Laut was apologetic about not being more communicative sooner about the event, explaining the company changed its approach when the situation became critical because some bitumen started seeping into a water body, and promised to do better in the future.

“Our belief … was that all the information was provided to the energy regulator and that information was posted as it came to light on the website,” he said in an interview.

“We realized that … there have been a lot of gaps in the information presented, and a lot of interpretation of the facts that have been presented, and some misinformation and misinterpretation of the facts, and so we realized that we had to get out there … and let the public know where we are on this.”

Truth is, the usually media-shy company was getting thrashed.

The incident made negative headlines around the world, following the same pattern as the Syncrude duck death drama five years ago, and other incidents milked by oil sands opponents to influence policy on greenhouse gas emissions.

Among those seizing the opportunity was Washington-based Danielle Droitsch, director of the Canada project at the Natural Resources Defense Council, who dispatched this news release on July 24:

There have been a lot of gaps in the information presented, and a lot of interpretation of the facts that have been presented

“As this tar sands oil well blowout spreads unabated, we see once again that environmental damage from this industry is appallingly widespread, breathtakingly common, poorly overseen and largely kept from the public. This type of drilling for tar sands is what the industry has planned for much of the future expansion. Not only does it release even more climate pollution than tar sands strip-mining, but it clearly is a threat to the surrounding landscape that industry doesn’t know how to handle. The tar sands oil well blowout makes it clear that projects such as the proposed Keystone XL pipeline that would drive expansion of this type of tar sands extraction should be rejected.”

Dean Bicknel/Postmedia News files

Dean Bicknel/Postmedia News filesSteve Laut, president of Canadian Natural Resources.

Greenpeace accused Canadian Natural of “fibbing” on the conference call about the reasons for the seepages. Canadian Natural said they were likely caused by mechanical failures of well bores near impacted locations. Greenpeace quotes Alberta’s Energy Regulator findings that the breaches were likely the result of high-pressure steam injection.

The facts suggest this: the bitumen was seeping out slowly rather than blowing out; the industry is very committed to minimizing its impact on the environment; Canadian regulations are widely regarded as the world’s gold standard; anyone who has been to the oil sands can see that in-situ development has a smaller environmental impact than strip mining; accidents happen and industry takes prevention very seriously (Canadian Natural has 120 employees and contractors on site to remedy the situation); and oil sands expansion is going ahead with or without Keystone XL.

Best practices in crisis communications call for companies to react quickly to an incident and be transparent about how it’s handled.

Assuming the seepage ranks as a crisis, this means Canadian Natural could have helped itself and the oil sands industry by talking about its response from Day 1.

Still, this feels like yesterday’s fix. Canada’s oil sands have been under assault for so long, and tried so many communication strategies with limited effectiveness, the right formula remains elusive.

When companies say little, they are accused of covering up; when they say lots, they fan the flames or are accused of lying, which, in fact, was Greenpeace’s response to Canadian Natural’s communication effort.

UPDATE 1-KKR to buy second clinical trials company this year

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