December 1, 2022
Deep Dives

How Spotify Makes Money: The Truth

John Ladaga

Let’s just skip the whole “what is Spotify?” intro section where I pretend like you live on Mars and jump right into the part where I explain how Spotify’s business works shall we? If you really don’t know what Spotify is, just skip this post… As a consolation for showing up, here’s a recipe for my grandma’s fudge brownies, you’re welcome.

Now if you’re like me, one of Spotify’s 456+ million monthly active users (MAUs), and you’re wondering how your precious $9.99 a month get’s divvied up between Spotify, Record labels, and artists, let’s dive in to this weeks Business Model Breakdown 👇

You can skip ahead, I won’t judge you…

Two main ways Spotify makes money

  1. Premium Subscribers (ad-free)
  2. Ad-Supported MAUs (ads displayed to free users)

Let’s break down each in a little more detail…

Spotify’s Premium Subscriptions - The Breakdown

Hate ads? Want to download T Swift’s new album so you can jam out on the plane ride to the in-laws house this holiday season? If you’re in the States, you’re going to have to pull out that Chase Sapphire card and cough up $9.99 a month…

Here’s a breakdown of Spotify’s Premium Pricing Plans in the US 👇

Spotify's Premium Pricing Plans in the US

🧐 Interestingly, according to Spotify’s Q3 2022 reporting, Spotify’s Average Revenue Per User (ARPU) was only €4.63 or (roughly $4.75 USD). Screenshot from the Q3 report below

Spotify's ARPU graph

But…there’s not even a $4.75 plan offered, how can their average revenue be so low?”

  1. ARPU is PER USER - Not all users are paying for an individual $9.99/mo plan. For example, ARPU for a family plan is split between 6 family members, which would average out to an ARPU of $2.67 for each of these users
  2. Price Localization - more on price localization below

Price localization is a practice where companies change the price of a product or service depending on a customer’s location. Spotify is offered in 184 countries (fun fact: there are currently 195 recognized countries in the entire world)…and in countries like Liberia and Iraq where the median annual income is 40-50x lower than the US, paying $9.99/mo to binge The Tim Ferriss podcast show ad-free… just ain’t happening…

5 Other interesting findings about Spotify’s Premium Subscribers:

  1. Which country is Spotify the cheapest? According to data gathered in 2021, the cheapest individual subscription plan was in Iran (~$1.75/mo) and the most expensive was in Denmark ($15.40/mo).
  2. How many Premium Spotify Subscribers are there in 2022 around the world? There’s roughly 195 million as of Q3 2022 and the number of premium subscribers has grown 13% Year over Year to date.
  3. How much revenue did Spotify make from Premium Subscribers in Q3 2022? A staggering 2,651,000,000.00.
  4. What’s the geographic breakdown of the Premium Subscribers? As of Q3 2022
  5. Europe 👉 31%
  6. North America 👉 22%
  7. Latin America 👉 21%
  8. Rest of World 👉 26%
  9. How fast are Premium Subscribers growing? Premium Subscribers are up 13% Y/Y with 195 million users as of Q3 2022, up from 188 million in Q2 2022. Latin American markets are growing fastest.

Here’s a graph from the model I built on Sturppy, projecting Spotify’s Premium Subscriber growth through 2025

Spotify Projected Premium Subscriber Growth - Sturppy Projections

Spotify’s Ad-Supported MAUs - The Breakdown

Clarifying how Spotify calculates MAUs

Let’s talk about MAUs (Monthly Active Users) for a second… Calculating MAUs is 1 part science 1 part art, and that’s because companies calculate what they consider to be an “active user” differently from one another.

For example, Facebook defines an MAU as anyone who has logged in to Facebook across any device over the last 30 days. While Spotify uses a rolling window of 28 days and defines an active user as anyone who has listened to a single stream.

But…what are Ad-Supported MAUs?

You don’t have to pay for Spotify to stream your favorite artists... You can go to, type whatever you want into the search bar and start streaming…sort of. Spotify forces you to create an account with a valid email address even if you’re not paying. Creating accounts, even for free non-paying users benefits Spotify in 4 main ways 👇

4 benefits of having free users create accounts

  1. Valid emails are valuable - almost immediately after creating a free account you’ll start to receive emails from Spotify prompting you to upgrade to paid
  2. Personalization - with an account, Spotify’s algorithms can make better recommendations and tailor the experience to each user, thus increasing the value of Spotify to individual users
  3. Tracking MAUs - without accounts for free users, tracking MAUs gets…messy…
  4. Ad targeting - creating an account allows Spotify to tailor ads to individual users - e.g. it wouldn’t make sense for an American only restaurant to advertise to free users in the Philippines

How Spotify monetizes these free users

Ads ads ads…and…more ads…

It’s pretty simple, if you don’t pay for a Premium account, you get served ads…all. the. time.

4 main types of Spotify Ads you’ll come across:

  1. Audio ads - audio snippets placed before/after/and sometimes during a stream
  2. Video ads - 15 or 30 second clips
  3. Podcast ads - 2 types: audience network ads where you can advertise to a specific audience, and title-by-title, where you can place an ad on a specific one-off podcast
  4. Custom experiences - 5 types: display ads, sponsored playlists, overlays, homepage takeovers, and leaderboards

How much money does Spotify make from Ad-Supported MAUs?

Of Spotify’s 456 Million MAUs, 273 Million (~60%) come from non-paying Ad-Supported MAUs…

Here’s a breakdown of Spotify’s projected total MAUs through 2025 from my model on Sturppy

Spotify Projected Total MAUs - Sturppy Projections

What’s really interesting is that even though the Ad-Supported MAUs make up the majority of total users, they account for only a tiny fraction of the total revenue. In Q3 2022, Ad-Supported MAUs revenue totaled €385 Million (12.6% of total revenues).

Here’s a breakdown of Spotify’s revenue projections from my model broken down between Premium Subscribers and Ad-Supported MAUs revenue👇

Spotify Revenue Projections - Sturppy Projections

3 interesting findings about Ad-Supported MAUs:

  1. Are there unique qualifications for who can / cannot advertise on Spotify?
  2. The minimum amount you can spend on Spotify Ads is $250 USD
  3. You must comply with Spotify’s terms and policies and all ads are pre-screened..aka no nudity, hate speech, terrorism, etc. etc.
  4. Asides from the above, it’s a pretty open book to any individual in any country
  5. Which group of users Ad-Supported MAUs or Premium Subscribers is growing faster? Ad-Supported MAUs (users) outgrew Premium Subscribers 24% to 13% BUT Revenue from Premium Users outgrew Ad-Supported MAUs 22% to 19%
  6. What’s growing Ad-Supported MAU revenue growth? The music business grew in high single digits while the majority of revenue growth came from Podcasts (strong double digits) Here’s a snapshot from the Q3 2022 report

Spotify Ad-Supported Rev as % of Total Rev

Where does the money go (How artists eventually get paid from Spotify)

Now, the part most of you reading this probably care about most 🥁…how do artists get paid? Contrary to what you might believe, artists on Spotify DO NOT GET PAID BY SPOTIFY.

Don’t listen to the click-bait. Headlines about “the amount artists get paid per stream” or “the number of streams an artist needs to make a single dollar on Spotify” are inaccurate, or rather generalizations of the truth.

The truth is that it’s more complicated than you might think and in my opinion, it’s not fair to paint with such broad strokes…to fully understand how artists get paid, let’s break things down 👇

Where your subscription money goes when it leaves your bank account

Let’s use Premium Subscribers as the example here but you should know that Ad-Supported MAU revenues work in essentially the same way.

  • When you pay your $9.99 subscription each month it leaves your bank and goes to Spotify’s.
  • Then, Spotify set’s aside about 10% of that gross revenue to pay off things like taxes, credit card processing fees, billing fees, and sales commissions, leaving Spotify with $9 of net revenue. Spotify then keeps about 1/3rd of that $9 taking a $3 profit.
  • In order to divvy up the remaining $6, Spotify goes through a process of calculating what they call “streamshare”. Essentially they tally up the total number of streams each month and determine what proportion of the total streams were people listening to music controlled by a particular rightsholder.
  • Spotify pays those rightsholders based on their individual proportion of the streams, aka their streamshare. At this point, Spotify is done; once the rightsholders are paid, Spotify leaves the discussion.

Now this is where things get complicated…who are the rightsholders?

  • Typically, rightsholders are the record labels and and/or distributors (collection societies and publishers) for an artist, NOT the artists themselves.
  • Once the rightholders get paid, it’s on them to pay out their artists based on the individual contract an artist signed and the associated royalties that artist is eligible to receive.
  • Now there are some artists, like Macklemore, that famously do not have a record label deal and are independent or pseudo independent. With the case of indie artists, they are typically the primary rightsholders, meaning they skip this middle man step and get paid directly from Spotify.

To continue with our example, let’s simplify things and say that the total streamshare that Universal Music Group (the largest record label in the world), received for an artist on their label was the full 100% and they received $6.

  • That $6 get’s broken up into 2 main groups of royalties, recording/master royalties and publishing royalties.
  • Recording/master royalties are the rights you get when you turn a composition into a sound recording. Typically, master royalties make up the lions share, roughly 80% of the royalties, or $4.80 in our example.
  • On average an artist signed to a major record label only receives 10-20% of the master royalties per their contract…let’s call it 15% for our example…the artist get’s $0.72 for their share of the master royalties while the record label pockets $4.08.

The remaining 20% of royalties are Publishing royalties

  • You get publishing royalties when you own the copyright to the actual music composition. The two parties that often own this right are the song writer and the publisher. However, there can be many contributors to the composition, in which case they all share ownership of the composition.
  • For our example let’s assume that the artist has a publisher and wrote the song alone. In this situation, the artist and the publisher will typically split the royalty 50/50. From our example the publisher keeps $0.60, and the artist get’s paid out $0.60.

Let’s summarize who got what from that $9.99 example

  • $.99 went to taxes, credit card fees, sales commissions, etc.
  • $3 went to Spotify as profit
  • $4.08 went to the record label for their 85% stake in the master royalties (Universal Music)
  • $0.60 went to the publisher for their 50% stake in the publishing royalties (Universal Music)
  • $0.72 went to the artist for their 15% stake in the master royalties
  • $0.60 went to the artist (who wrote the song) for their 50% stake in the publishing royalties

Here’s a piechart of that $9.99 breakdown

Piechart breakdown of $9.99

And if pie charts aren’t your thing, here’s the flow and logic behind the scenes that I built into the live model on Sturppy.

Sturppy - $9.99 flow

TL;DR - Premium Subscribers pay Spotify, Spotify pays the righstholders, the rightsholders pay the artists based on individual contracts

How does Spotify acquire new users and continue to grow?

With nearly half a billion MAUs, it seems hard to imagine how or where Spotify is continuing to find new users each month. To understand this better let’s look at how Spotify has evolved since their IPO in 2018 👇

  • 2018, Spotify IPOs
  • MAUs: 180 million in Q2 2018
  • Core focus: music…at the time Spotify’s main focus was on two things: ubiquity, making Spotify accessible to more users across the world, and personalization: the use of algorithms to tailor the experience to individuals
  • 2019, Spotify expands into Podcasts and acquires Anchor a company that helps you create and publish Podcasts
  • MAUs: 232 million in Q2 2019
  • Core focus: Spotify’s not just for music anymore, you can listen to your favorite podcasts as you’re locked down during COVID
  • Fun fact: Each new podcast created on Anchor brings on average 2.5 new MAUs to Spotify
  • 2020, Spotify doubles down on Podcasts and introduces video podcasts
  • MAUs: 299 million in Q2 2020
  • Core focus: Spotify’s no longer just for listening, you can now watch Joe Rogan ramble…while you’re still in COVID lockdown…
  • 2021, Spotify begins creating their own “original” shows following in the footsteps of Netflix, HBO, and other video streaming platforms
  • MAUs: 365 million in Q2 2021
  • Core focus: of the top 100 podcasts on Spotify, 15 of them are Spotify originals
  • 2022, Spotify introduces audiobooks
  • MAUs: 457 million in Q2 2022
  • Core focus: audiobooks and increasing bottom-line revenues with better podcast advertising strategies

So where do they go from here?

  1. Ride the audio2.0 wave: Over the past 3-4 years, Spotify’s MAU growth has primarily come by expanding into new audio verticals like podcasting and most recently audiobooks. The markets for podcasts and audiobooks are massive, and they’re continuing to grow, so it’s safe to say we can expect Spotify to continue to ride that wave.
  2. Grow the 2-way marketplace: Spotify knows that content is king. If Spotify can attract more content creators and make it easier for creators to push out more audio content, they have the flywheel effect of attracting new listeners. The more listeners they attract, the more attractive advertising on Spotify becomes. In the future we can expect Spotify to continue to invest in acquiring companies and tools that make publishing easier. In recent months, Spotify has acquired companies like Chartable, Podsights, and Findaway to help with this mission.
  3. Live streaming and interactions: Now this is a bit of speculation here but why not double down on live streaming content and create more ways for content creators to interact with their audience?

How else does Spotify spend money?

Spotify breaks their expenses into 3 main categories - here’s how much they’ve spent over the last 9 months (Jan 2022 - Sep 2022)

  1. Research and Development - €972,000,000
  2. Sales and Marketing - €1,119,000,000
  3. General and administrative - €462,000,000

Total - €2,553,0000,000.00

This doesn’t account for the €6,436,000,000.00 they attributed to cost of revenue (fees, commissions, paying rightsholders)

Pretty broad categories right? We can make some guesstimations on what these categories consist of…things link payroll and benefits for their roughly 10,000 employees, office space, software, their own marketing and promotional activities, etc.

Here’s a breakdown of their expenses across the 3 categories along with projections based on how each category has grown over the past year:

Sturppy Expenses Breakdown - Sturppy Projections

Spotify financial projections (2023 and beyond)

NOTE: None of this is meant to be financial advice. I am not a financial advisor, nor should you use any of this information to inform purchasing or selling decisions. This information is purely meant for entertainment and education only. Be smart, do your own research. Here’s a link to Spotify’s official investor reporting if you want to do your own analysis.

So…is Spotify profitable? Short answer; ehh not really

  • Q1 2022: Operating loss of €6 million
  • Q2 2022: Operating loss of €194 million
  • Q3 2022: Operating loss of €228 million
  • Q4 2022: Guidance - Operating loss of €300 million

Based purely on using the last 3 quarters of 2022 trending data, their projections look…iffy…keep in mind this model is ONLY using the last 3 quarters of historical data and projecting those trends out into the future.

Over the first 3 quarters of 2021, Spotify spent €1.778 Billion across R&D, Sales & Marketing, and G&A expenses.

Over the first 3 quarters of 2022, Spotify spent €2.553 Billion across the same categories…that’s an increase of 30% for the same time period. Comparing the first 3 Q’s of 2021 to 2022 revenues, their revenue only grew 18.4%.

Spotify Rev vs. Expenses - Sturppy Projections
Spotify net income - Sturppy Projections

What can Spotify do to stop the bleeding?

Spotify has basically 3 options here:

  1. Increase top of line revenues - find a way of converting more ad-supported MAUs to Premium Subscribers
  2. Increase bottom line revenues - find a way to to increase their ARPU. For every paying user, they’re only bringing in about $4.75/mo.
  3. Decrease expenses - Cut spending. Though Spotify hasn’t officially announced any major layoffs in 2022, I wouldn’t be surprised if they slow hiring or make major layoffs to cut their over head expenses and focus on increasing free cashflow going into 2023.

Who might acquire Spotify? (speculation & prediction)

Spotify went public in 2018, and their stock price just touched all time lows on Nov, 4, 2022 trading at $69.28 a share…is it the right time to sell? Who might acquire Spotify?

My best guess, if Spotify were to be acquired, it’d be by Disney.

Here’s why I believe Disney might be a good home for Spotify

  • Disney’s streaming business has more subscribers than Netflix yet they are on pace to lose around $1.5 Billion in Q4 2022 alone…their streaming business is in trouble.
  • Disney’s long time super star CEO, Bob Iger was just announced as coming back for a 2-year stint. Bob’s known as being one of the greatest deal makers of all time. He led the acquisition of Marvel, Lucas Films, and Pixar, all of which were tremendous ROIs for Disney. Bob’s a deal maker, full stop.
  • Disney’s streaming business has to compete against Amazon, Netflix, Hulu, and so many others. They’re all spending billions on original content and it’s simply not sustainable.
  • Disney + Spotify would be a streaming juggernaut giving their combined 500 million + subscribers access to video and audio verticals.

Final thoughts

I hope you enjoyed this week’s business model break down powered by Sturppy. I co-founded Sturppy in 2021 to help founders build investor-ready financial models without the need to have experience or expertise in finance.

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