February 2025 was a big month for Spotify. Its fourth quarter earnings report proved that the audio streaming company had both business chops and creativity, with almost 700 million users and (finally) a year of profitability.
However, one number stood out: $10 billion. The tenfold jump from 2014 in annual royalty payments to record labels and music publishers will have assuaged some who think the music industry isn’t being fairly compensated. It’s a mammoth cost for any business, and that’s without original content and run-of-the-mill operating expenses.
We asked two company leaders what Spotify’s post-profitability second act looks like and the levers they’ll pull to drive engagement and revenue.
The “freemium” funnel
Spotify uses a freemium business model, a mix of ad-supported and premium options for its listeners; however, the gulf between the two from a revenue perspective is big, as CEO Daniel Ek recently addressed.
“Spotify has become somewhat of a poster child for having a freemium business model,” said Gustav Gyllenhammar, Spotify’s VP of markets and subscriptions. “Back in 2013 we had 6 million subscribers globally, and our free tier was significantly bigger…Once you’re out of college and move on [from a student plan], you feel like $9.99 is actually a good deal to continue.”
With 60% of users starting with free subscriptions, Spotify has been adding perks to this tier with the goal of converting users to premium subscribers, who make up the lion’s share of revenue. For example, it recently added a “Pick & Play” option, which gives free users more control over how they listen.
Spotify Product Director Issra Omer said executing the freemium model means building experiences that deepen engagement, while marketing and revenue teams provide insights on consumer behavior, advertiser demand, and growth opportunities.
“Personalization has been our superpower from the beginning,” Omer told Revenue Brew in an email. “This includes features like personalized playlists, discovery tools, and social sharing innovations which have kept users engaged.”
Building a “sticky platform”
Back in 2019, Spotify brought two established podcast studios in house and in the following years shelled out hundreds of millions for the likes of The Joe Rogan Experience and Call Her Daddy. (The former is no longer exclusive to the platform and the latter has moved on entirely.)
While the company’s strategy may have begun by reeling in big exclusive deals it has evolved to include creator partnerships. Gyllenhammar says as the company saw increased traction to Spotify Premium, it recognized an opportunity to build a creator partner program. “We actually saw that the power of the platform was much more into facilitating for creators to be able to make money,” he said.
For the people behind the pipeline.
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For a company looking to support the music industry, recording artists have a big role to play. Launched in 2016, Spotify Singles is yet another branch of the creative tree, where musical artists create platform-exclusive content.
The revenue Rubik’s Cube
Once subscribers are converted, retention is the next task, and innovation on that side comes at a cost. Last year, Spotify raised its premium prices in the US and in August raised them in major regions abroad. That strategy, at least for now, seems to be working.
“Spotify is no longer just a great product, it’s also a great business,” said Gyllenhammar. He mentioned a focus on cost structure and gross margins in particular, an area which has demonstrated notable improvement this year.
Marketing, or more specifically organic marketing, has been another area of success. Gyllenhammar highlighted Spotify Wrapped, a shareable look at users’ yearly listening trends, as a game changer which has increased subscriptions and retention. He said the media value derived from the campaign is in the “many tens of millions of dollars.”
“Most of our growth is coming from word of mouth, from existing users being the advocates of using Spotify for your music streaming and music consumption,” he said.
Beyond Wrapped, the company has also seen return on events and sponsorships, including its partnership with FC Barcelona, which sells the third most jerseys of any European football club.
Expert insight: streaming models
In his book Tarzan Economics, Will Page describes Spotify as building an effective model around consumer desire to access, rather than own, content.
Page, Spotify’s former chief economist and strategic advisor at Pivotal Economics, said that Wrapped is a flash point for the company’s experiential marketing strategy.
“We now share our experiences with Spotify and reflect together. The word of mouth that Wrapped has generated over the past decade is worth more than any multimillion dollar marketing budget could buy,” Page said in an email to Revenue Brew.
Beyond finding the right balance of business and product needs, Page said that from the beginning Spotify was methodical in its approach to copyright laws.
“I was there back in 2007 when Spotify was seeking licenses to launch in the UK, and it was clear they would not ‘jump the gun,’” Page said. “Many others did jump the gun and they can now be found on the hard shoulder of digital disruptors. There was a real hare-and-tortoise element to their story back then and we know who won that race now.”