Exploring Spotify’s Financial ‘Miracle’: This Is How the Company Reported a Profit After 18 Years of Losses

• Act I: In February 2019, Spotify achieves its first quarterly profit in its history.
• Act II: By July 2024, Spotify records two consecutive quarters of profitability and is nearing its first profitable year.
• Act III: In February 2025, Spotify announces that 2024 was its first profitable year ever.

Six years after achieving its first quarterly profit ever, Spotify made $1.235 billion in net profit. 2024 was a groundbreaking year for the streaming company–one that could transform its future forever. The platform reported a full-year profit for the first time in its history. How’s that for an elixir for investors?

Many thought such an outstanding milestone was impossible. Throughout the years, Spotify has burned cash while building an empire of 675 million users. 40% of them are paying subscribers.

How did Spotify manage to convert persistent losses into profits? And, most importantly, who bore the cost of this transformation?

The Impossible Equation: Paying the Music Industry and Making Money

Spotify was launched with a seemingly unsolvable contradiction known as the 70-30 rule. Around 70% of its revenue was allocated to music royalties paid to record labels, artists, and publishers. The remaining 30% had to cover technology, marketing, product development, global offices, and salaries for more than 9,000 skilled employees.

This equation seemed to condemn Spotify to an ongoing deficit.

Competitors such as Apple Music and YouTube Music could operate with virtually no profits because they’re backed by their multi-billion-dollar parent companies. However, Spotify needed to find a way to attain profitability or face extinction. The journey has been long and fraught with controversy.

“[For the first 16 years,] all we were focused on was driving meaningful scale. We did not worry about profitability,” Spotify founder and CEO Daniel Ek said on a conference call with analysts.

Price Increase After a Decade of Stability

After maintaining its standard price of $9.99 for over a decade, Spotify finally raised its rates. This move broke a self-imposed taboo against double-digit pricing. Two rounds of increases in several markets raised the price of the Individual plan. This simple maneuver boosted the average revenue per user and shot the gross margin up to 32.2%, a new record.

Spotify discovered that users didn’t abandon the platform after this moderate price increase. Notably, nearly all digital entertainment providers (including Netflix, Disney+, and Apple TV+) were also raising their rates.

The phenomenon of price inelasticity allowed Spotify’s 263 million paid subscribers to generate more revenue without a proportional increase in costs.

Transition from Music Platform to Media Ecosystem

Spotify’s strategic diversification has been a masterstroke. It’s no longer just a music streaming app. It’s evolved into an audio and video ecosystem, which includes:

• 6.5 million podcasts
• 330,000 video podcasts
• 350,000 audiobooks

This multi-product expansion has a hidden financial advantage. When a user listens to a podcast or watches a video podcast, Spotify doesn’t pay royalties for that playback. With music, each stream generates payments to record labels. In contrast, podcasts and videos are mainly monetized through advertising or direct agreements with creators. As a result, the unit cost is much lower.

Keeping users within the app while reducing costs was a brilliant strategic move from Spotify. With more than 270 million users consuming video content, the platform has gradually lowered its average cost per hour of use. If a user spends an hour listening to their favorite podcast instead of music, Spotify saves significantly on payments to record labels.

Year Zero: The Era of Efficiency

In December 2023, Spotify announced it would cut around 17% of its workforce, meaning about 1,500 employees. Back then, few expected that this would be the decisive factor leading the company to profitability. In the end, it was the third round of layoffs within less than 12 months.

“Over the last two years, we’ve put significant emphasis on building Spotify into a truly great and sustainable business… [Spotify] invested significantly in team expansion, content enhancement, marketing, and new verticals. These investments generally worked… [However,] our cost structure for where we need to be is still too big,” Ek shared in a letter to employees.

This acknowledgment signaled the end of an era characterized by growth at any cost. It also marked the start of what the company internally referred to as “the year of monetization.” The focus shifted from endless expansion to maximizing the value of each user and every hour of content consumed.

This change was a direct response to pressure from Wall Street. After years of tolerating and even encouraging loss-making tech companies, investors had already shifted their mindset. Rising interest rates and a more demanding economic landscape forced companies to demonstrate their ability to generate profit rather than just pursue growth.

“By most metrics, we were more productive but less efficient. We need to be both… We still have a ways to go before we are both productive and efficient,” Ek said.

The shift toward austerity led to a tangible improvement in financial performance. Operating expenses dropped from 30% of revenue in 2023 to 24% in 2024. This adjustment meant that the 18% revenue increase wasn’t offset by new costs. The results were becoming evident.

With this move, Spotify had abandoned its ambition to become the “Netflix of audio,” at least in terms of producing costly exclusive content. Acquiring Gimlet, Parcast, and The Ringer, and signing million-dollar contracts with Joe Rogan and the Obamas didn’t yield the expected returns. Throughout 2023 and 2024, the streaming company scaled back or shut off several of these initiatives, opting for a more sustainable model.

A Blow to Emerging Artists: If You Don’t Reach 1,000 Streams, You Don’t Exist

In its quest for profitability, Spotify has implemented decisions that significantly change the landscape for creators. One of the most controversial moves is the policy that, since April 2024, any song that doesn’t get at least 1,000 annual streams will no longer generate royalties.

According to Spotify, this measure aims to redirect nearly $40 million toward artists with larger audiences. That amount was previously allocated in inefficient micropayments. A company spokesperson explained that it’s about optimizing revenue sharing and avoiding the distribution of funds in very small amounts.

Denis Ladegaillerie is the CEO of Believe, the parent company of digital music distributor TuneCore. He was particularly critical of the decision. “What signal as a music industry do you send to aspiring artists if you go in that direction?” Ladegaillerie told Music Business Worldwide.

Spotify’s move may seem reasonable from an efficiency standpoint. In the end, many small payments weren’t even processed due to minimum banking thresholds. However, it also sends a discouraging message to emerging artists. They won’t receive any rewards if they don’t achieve a certain level of popularity.

Moreover, some critics argue that this could be just the beginning. The platform might set future thresholds at 5,000 or 10,000 streams, further limiting artists’ opportunities. This approach prioritizes profitability at the expense of musical diversity.

Spotify is adopting other measures to “clean up” its catalog. This includes imposing restrictions on ambient and white noise sounds that generate many passive streams with little engagement. While combating fraudulent content is necessary, these policies also impact legitimate creators of ambient or meditative content.

The Inequality of Distribution: $10 Billion That Doesn’t Reach Everyone

The streaming economic model generates impressive numbers globally but reveals huge disparities in distribution. Spotify announced earlier this year that it will pay more than $10 billion to the music industry in 2024, bringing its total contribution to nearly $60 billion since its founding in 2006.

In a post on X, Ek defended that record, saying, “Spotify pays out more than any other music retailer—more than any other music streaming service. That’s a fact.”

But he also admitted an inconvenient truth: “Spotify doesn’t actually pay artists or songwriters directly. Just like all other streaming services, we pay rights holders, like record labels or publishers. Those rights holders are responsible for passing on streaming revenue to the artists based on the contracts they’ve signed.”

He added: “What we do know is that Spotify pays out roughly two-thirds of every single dollar we generate from music back to the rights holders. So, it’s always unfortunate and frankly disappointing to hear stories where the majority of those payments don’t make it through to an artist or songwriter.”

Variety published an article highlighting this gap between what Spotify pays and what artists receive. Beneath the impressive numbers, the reality is complex. According to Spotify’s “Loud & Clear” report, approximately 1,500 artists generated more than $1 million in royalties from Spotify alone in 2024. The number of creators generating royalties at each threshold—from $1,000 to $10 million annually—has tripled since 2017.

According to Variety, however, these numbers should be taken with caution. The money does not go directly into artists’ pockets. Record labels and distributors take a share, producers receive a cut, and managers also claim a portion. “Any notion that each of those 1,500 artists is pocketing $1 million a year (or more) from Spotify, let alone all streaming services, is wildly inaccurate,” Variety states.

Damon Krukowski, a former member of indie band Galaxie 500, recently published a post on his Substack questioning Spotify’s figures. He noted that they’re not audited and argued that Spotify isn’t a retailer, as it claims, to justify its commission. He pointed out that businesses such as bars, shops, and cinemas pay a higher percentage—50% instead of 30%—to rights holders.

The system is particularly unfair to songwriters. According to MIDIA Research data cited by Variety, of the roughly $0.004 generated per play on Spotify, 56% goes to the recording side (including the record label, distributor, and artist), 30% stays with Spotify, and only 14% goes to the publishing side (which includes the publisher, performing rights organization, and songwriter).

Of that 14%, the songwriter receives 68%, a fraction of the total. With most popular songs today credited to multiple songwriters, “the human brain can’t even comprehend the infinitesimal amount the creators of most songs earn per stream,” Variety notes.

The Elephant in the Room: Legal Minimums

One lesser-known aspect of Spotify’s economic model is how publishing rates—what songwriters and publishers are paid—are determined. While recording rates are negotiated directly between Spotify and record labels, the Copyright Royalty Board (CRB) sets publishing rates in the U.S. through a process the publishing industry considers outdated.

These rates have been gradually increasing. For 2023-2027, the CRB raised the rate paid to songwriters and music publishers by 23%, bringing it to 15.35% of a streaming service’s U.S. revenue. However, it remains far below what record labels receive for sound recordings.

“It is also important to note that this discrepancy was not instituted by Spotify or any streaming service,” Variety clarifies. However, Spotify has actively fought against larger increases. The company recently faced backlash—and even a lawsuit—for its music-audiobook bundle. Billboard estimates the move will reduce royalties paid to music companies by $150 million next year.

According to Variety, “That sleight of hand may have delighted shareholders, but was a major loss for music creators.”

Technology and Algorithms: The Flip Side

Spotify’s profitability is not solely driven by price changes. Advances in technological efficiency have allowed it to serve content to hundreds of millions of users with relatively low infrastructure costs.

Its investment in AI features, including Spotify DJ, launched in 2023, aims to boost engagement without increasing costs proportionally. Spotify states that in 2024, its AI-driven recommendation system greatly improved music discovery, creating over 3 billion personalized playlists monthly. These algorithmic efficiencies improve the user experience while optimizing content distribution and reducing operational costs—a win-win-win scenario.

After years of skepticism about Spotify’s profitability, Wall Street responded enthusiastically. Shares surged 11% after the February announcement and have continued to rise. Spotify’s market capitalization recently surpassed $124 billion—more than Universal Music Group and Warner Music Group combined.

The narrative has shifted from “Can it do it?” to “How much more can it grow?” Ek has defined 2024 as “the year of monetization” and promises that 2025 will be “the year of accelerated execution.”

Winners and Losers

After nearly two decades, Spotify has found the formula for profitability. This milestone marks a turning point not only for the company but for the entire music industry.

The winners are clear:

1. Shareholders, who have seen the company’s value soar.
2. Executives, whose strategies have paid off.
3. The European tech sector, which now boasts a profitable global champion.

Major labels have also thrived, earning record revenues annually while preserving their dominant position in the industry.

However, there are also clear losers:

1. Emerging artists, who struggle with Spotify’s play-threshold model.
2. Songwriters, who earn only tiny fractions per song.
3. Employees, many of whom have been laid off in the name of operational efficiency.

As Ek put it: “At the end of the day, artists are doing incredible things and fans around the world are deciding who succeeds. We’re proud to play a role in that.”

But the key question remains: Will Spotify’s role evolve into a more equitable system for all participants in the music ecosystem, or will the pressure to maintain profitability simply reinforce existing inequalities?

As Variety puts it, “But streaming’s payment system, devised back when it generated so little money that the difference between 13% and 15% was almost irrelevant, is in dire need of revision,” now that it has proven it can generate substantial profits.

Like many technological revolutions, the digital transformation of music has created an industry where music consumption is at an all-time high, and revenue is approaching pre-digital levels. Yet paradoxically, it has never been harder for the average artist to make a living solely from music.

Time will tell whether Spotify’s financial success leads to a more sustainable system for all or simply cements a model that benefits a privileged few. For now, its $1.138 billion net profit proves that the once-elusive equation has finally been solved.

Image | Fortune Live Media

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