How Spotify makes Money — Business Model

Disclaimer: This and the articles that follow are an attempt at understanding the music tech industry from a Product perspective. We do not claim to be experts in the field. All we claim is to be students of music tech. We hope this series will help others understand music tech and hopefully appreciate the industry.

TL;DR: Spotify runs on a Freemium model, makes money from subscription and advertisements.

Spotify makes 91% of its revenue from subscriptions and the other 9% from advertisements. Of the revenue it generates, Spotify keeps 30% and splits the remaining amount between licensing, music deals and paying to the artists.

Reports of artists being dissatisfied with their earnings have made rounds quite a few times. There?s only so much that Spotify can do about it though.

Spotify has 3 plans on offer in the US.

  • The free version gives you unlimited ad-supported streaming, shuffle-only playback of songs on mobile, access to podcasts and videos. The web has access to on-demand access.
  • The premium version for $ 9.99 (4.99 for students). It adds offline listening, removes ads and on-demand mobile access(Access to individual songs instead of just radios).
  • The family version for $ 14.99 gives you 6 accounts (from a single country) effectively making it $ 2.5 per account. The restriction is that all family members should reside in the same address.

Premium (and Family) plan also adds support for extreme (320 kbps) quality soundtracks.

An interesting thing Spotify does is to create a habit in the users to use on-demand access on the web and disallow them this feature on mobile devices. This with the combination of advertisements on both platforms drives a user towards the premium subscription.

Plus, you can drive down the cost of the subscription by upto 75% by subscribing as a family. Even if you only use 2 accounts, this gives you a 25% cost reduction.

This just makes sense. They have understood the psychology of their users well, it seems.


I can understand the repulsion you feel just by looking at this word. I feel the same too. But it is a necessary evil. It currently accounts for roughly 10 cents per dollar that Spotify makes.

Plus, not all Spotify advertisements are cringeworthy. I am cool with a 30-second ad every 15 minutes. The information below is taken from here.

  1. Branded Moments: Remind users of your brand at the correct moment. Brands can choose a moment they associate with and users get a 30 min uninterrupted music playback session for playing your video.
  2. Sponsored Playlist: Users will listen to playlists with the brand logo as the cover picture and will show/listen to ads from only the brand for the duration of the playlist.
  3. Sponsored Sessions: Similar to moments but with an extra engagement option when the user clicks on the clickable display unit to activate the 30-minute listening session.
  4. Video Takeover Everywhere: The one I hate. A full focus video ad to deliver undivided attention to the consumer.
  5. Audio: An audio ad giving the brand a 100% Share of voice, accompanied by a clickable display unit.
  6. Homepage Takeover: A full-width banner on the home screen.
  7. Overlay: A full-page image ad when Spotify comes back to focus after being minimized.
  8. Leaderboard: Banner ads. A 30-second ad in the size of 720×90 pixels.
  9. Branded Playlist: Self-explanatory, A playlist with the brand?s name on it.
  10. Advertiser Page: A full-blown webpage that can contain videos, images, audio, links, and text.

The plethora of options at avail is actually a very good way of attracting small and huge brands to find a way to advertise on this platform.

Engagement of 148 mins per day means plenty of opportunities for Spotify to make money.

This is the first post in this series on Business models. Find the previous series here. Please share your feedback (Hopefully constructive) with me. Engage with me on my Twitter. Find me on LinkedIn.

Spotify is making it obvious for free users to convert.

Signing off!


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