The short answer
Spotify runs what is often called a two-sided business model. On one side, it sells Premium subscriptions to people who want ad-free listening, offline downloads, and higher audio quality. On the other, it sells advertising to brands who want to reach the large audience on the free tier.
Subscriptions are by far the bigger earner. But here’s the catch: Spotify does not keep most of that money. It pays the majority of its revenue straight back to record labels, music publishers, and other rights holders as royalties. For most of its existence, that cost structure meant the company lost money even as it grew. Understanding Spotify’s finances means understanding that tension.
Premium subscriptions (the main engine)
A Premium subscription is Spotify’s core product. Subscribers get uninterrupted listening, the ability to download tracks for offline use, on-demand playback rather than shuffle-only mode, and higher audio quality. The service is available as an individual plan, a discounted student plan, a duo plan for two, and a family plan covering up to six accounts.
Premium revenue grows in two ways: more subscribers signing up, and price increases that raise the average amount each subscriber pays per month. Spotify has pushed through several price increases in key markets in recent years, and both factors have driven growth. By late 2024, Spotify reported more than 260 million Premium subscribers, with Premium making up roughly 87 percent of total revenue.
The metric Spotify uses to track subscription health is Average Revenue Per User (ARPU). It has risen modestly thanks to price increases, partly offset by a growing share of subscribers in lower-priced markets. Premium gross margins improved through 2024, but remain modest compared to pure software companies, because most of that gross revenue flows straight out as royalties.
Ad-supported free tier
Anyone who does not pay gets the free tier — the same music library, but with audio and display ads inserted between songs, limits on skipping, and no offline listening. Spotify monetizes this audience by selling advertising inventory to brands on a cost-per-impression or cost-per-click basis, much as digital publishers sell display ads.
The free tier serves two purposes. First, it earns direct advertising revenue — roughly 12 to 13 percent of total revenue. Second, and arguably more important, it acts as a conversion funnel. Spotify has reported that around 60 percent of its current Premium subscribers originally came through the free tier. Users try the service for free, tolerate the ads, and eventually upgrade to escape them.
For a long time, the free tier cost more to run than it brought in, because of the royalties owed on free-tier streams. That has improved as ad sales have scaled, but the ad side still generates much thinner margins than Premium. For more on how major companies structure their revenue, see our other profiles in Money & Business.
How Spotify pays artists and labels (and why margins are thin)
This is the part of the model that explains everything about Spotify’s finances. The company does not own most of the music on its platform. It licenses it from record labels, music publishers, and collecting societies under deals that require it to pay royalties on every stream.
Spotify uses what the industry calls a pro-rata, or market-share, model. Each month, Spotify pools all the money it earns from subscriptions and advertising. It then pays out roughly 65 to 70 percent of that pool to rights holders. Each rights holder’s share is proportional to their share of total streams that month. If an artist’s songs account for 2 percent of all streams, that artist’s rights holders receive 2 percent of the royalty pool.
The average per-stream payment works out to roughly $0.003 to $0.005, though this varies considerably. Streams from Premium subscribers pay more than streams from free-tier listeners, because the Premium pool is larger. Streams from high-income markets pay more than streams from markets with lower subscription prices.
Rights holders here means primarily the major record labels — Universal, Sony, and Warner — plus independent distributors and publishers. When a label receives royalties, it passes a portion on to the artist under whatever deal they have signed. Since late 2023, Spotify requires a track to reach at least 1,000 streams in a year before it earns royalties at all — a change Spotify says focuses spending on tracks with genuine audiences, and critics say concentrates money at the top.
In total, Spotify has paid tens of billions of dollars to the music industry over its lifetime, according to its own Loud & Clear transparency site. The scale is significant — but so is the margin squeeze, because that payout comes out before Spotify can report an operating profit.
Podcasts, audiobooks and new bets
Spotify has spent years and billions of dollars trying to diversify beyond music. The logic is straightforward: music royalties are expensive because labels have strong bargaining power. Podcasts and audiobooks could offer better margins if Spotify can build audiences and negotiate different deals.
Podcasts: Spotify acquired several podcast studios and hosting platforms starting around 2019, spending heavily. The strategy later shifted toward a marketplace model, winding down some costly exclusive deals and launching programs that pay creators based on engagement and ads. Video podcasts have grown quickly.
Audiobooks: In 2023, Spotify added audiobooks to the Premium subscription in major English-speaking markets, bundling a set number of listening hours into the standard price. The catalog has grown to hundreds of thousands of titles, and both listener numbers and hours have risen sharply.
Both bets are still maturing, but the company credits them with helping push overall gross margins higher. The goal is to reduce dependence on the major labels’ music licensing terms by building audiences for content where Spotify has more leverage. You can read more business-model analysis for other companies in this series.
Is Spotify actually profitable?
For most of its history, the answer was no — at least at the operating level. Spotify went public in 2018 and spent years posting operating losses even as revenue grew rapidly. The problem was structural: royalty payments grew in line with streams, and the company invested heavily in podcasts and technology. Its gross margin hovered around 25 to 27 percent for years, leaving little to cover marketing and overhead.
The turnaround came in 2024. Spotify raised prices, which lifted revenue without proportionally increasing royalty costs. It cut its workforce significantly. Podcast and audiobook margins improved as those businesses scaled. Gross margin climbed quarter by quarter, and Spotify posted its first-ever full year of operating profitability in 2024 — a meaningful reversal after years of losses.
The margins are still modest compared to platform businesses like app stores or social networks, where marginal costs are near zero. The question going forward is whether Spotify can widen margins further as it grows, or whether the structural cost of music licensing keeps a ceiling on profitability.
The bottom line
Spotify’s business model is simpler than it looks and harder than it sounds. Charge subscribers a monthly fee, show ads to users who will not pay, and license almost all the content from rights holders who take the majority of the revenue. The company’s job is to grow the subscriber base fast enough that the economics improve over time.
After more than a decade of losses, 2024 showed the model can work at scale. Whether Spotify can turn that first year of operating profit into reliable profitability depends on factors it does not fully control: licensing negotiations with major labels, competition from Apple Music and YouTube, and whether podcasts and audiobooks sustain their growth. The margin story is getting better. It is just not simple. For more deep dives like this, browse our Money & Business section.
