The fact that Taylor Swift has decided to pull her entire catalogue from Spotify may just be a minor bump on the road for the music streaming giant. But it may also be a can of worm that Spotify most likely would like to keep unopened.

Not all artists and labels have embraced Spotify from the start. Some have held out longer than others, but eventually most catalogues have been made available on the streaming service.

The labels have mostly lauded Spotify and they have reasoned that even if we don’t get paid as much as we did for selling cd’s we still get paid and streaming services seem to make piracy less interesting for large groups of consumers, so we will go with this for now.

Some labels have even invested in Spotify. Sort of ” if you can’t beat them, join them” reasoning.

But artists aren’t paid very much when their music is played on Spotify. Spotify’s own numbers, published for the first time almost a year ago, show that the artist get around 0,6 cents (US) when a song is streamed. That means that a song has to be streamed 166 times for the artist to get one US dollar.

In 2013 Macklemore & Ryan Lewis’ song Thrift Shop became the most streamed song on Spotify of the last five years, with over 160 million streams during that period. The revenue the artists received from Spotify for that achievement was 960 000 USD or an average of 192 000 USD per year.

Not the kind of money artists are used to and the question is if that makes them interested in pursuing their deals with Spotify or if they are likely to go looking for other alternatives.

However, artists who are uncomfortable with their earnings from Spotify and may make the same decision as Taylor Swift is not the only threat Spotify is facing.

Another threat is if the company’s revenue is going to reach an acceptable level over time? The current business model is based on a continued expansion. And it works as long as enough new customers are attracted every month. Then Spotify can use their monthly payments to pay for past royalty payments due. Royalty payment are made after users have streamed certain songs.

Spotifys practice with ad laced so called free accounts where music streaming is interrupted by advertising is based on the assumption that the ad revenues can pay the royalty costs accumulated by the free accounts volume of streaming. Or that in combination with getting users used to the service and make the yearn for the paid full subscription with the advantages it offers.

The ad financed free listening accounts for three quarters of Spotify’s user base. But it is highly unlikely given the average revenue from internet advertising today that these accounts are able to pay their own royalty costs.

This makes the paying subscribers even more important to Spotify. The company claims to have ten million paying accounts. With the average monthly payment of ten US dollars that would bring Spotify close to 1,2 billion USD in annual revenue. But in reality Spotify’s revenue is only half of that.

This can be explained by how Spotify counts the number of paying customers. So far Spotify has refrained from revealing how many of the paying customers that are paying full price.  But given the fact that the company’s revenue is way lower that it should be if all paying customers paid full price, it can only be explained by Spotify counting cell phone users who get a three or six month free Spotify subscription from their operator as paying subscribers. And such accounts are not likely to sell for ten dollars a month. According to people with good insight in the operator community operators typically pay one-two dollars per month for such users.

All this means that Spotify runs a risk of accumulating a royalty debt it won’t be able to pay. The fact that the company this far has been unable to show a profit is of cause another indicator that the business strategy may not work in the long run. And there is little hope that premimum subscribers are willing to pay more and the there is also little hope that those with free accounts are willing to start paying.

On top of that we now have Taylor Swift’s decision to pull her catalogue a move that may only be the tip of an iceberg with a growing number of performers following suit.

Over the past two-three years there has been numerous rumors that Spotify is planning an IPO. If that is the case investors will do best in being cautious and take a second look at the prospect and ask Spotify to clarify their business strategy.

An IPO would definitely make the founders and present owners of Spotify very wealthy, but the jury is still out on the question if new investors will make money in the long run.