Spotify: Revolutionizing Music, One Stream at a Time

Apr 25, 2025 8 min read

Thierry

“I am not an inventor. I just want to make things better”

– Daniel Ek, Founder of Spotify

arvy’s teaser: Spotify didn’t just fight piracy – it redefined an entire industry, made a profit and now dominates the streaming world. This asset-light giant has reached its sweet spot and is scaling smarter than ever.

Music.

It speaks to our soul the way words speak to our mind.

And because it touches every single person around the world, it was only a matter of time before business thinking entered the scene. Whether you’re an artist, a music producer, or part of the industry responsible for packaging creativity into a format that can be sold to the end consumer – the listener – this industry has been on quite a journey.

Two key themes have consistently stood out. First, the way we listen to music has always evolved alongside technological advancements (chart 1). With each leap in tech, we’ve witnessed dramatic shifts in how we experience music. Dear beloved Nokia 3310 generation – do you remember the short-lived era of “ringtones”? Wow… feeling old yet? 😊 As quickly as it arrived, it disappeared just the same (orange section).

Second, the question of music rights – an issue heavily influenced by the rise of piracy.

And this is where a Swedish company enters the picture.

It found its origin in 2006.

Spotify Technology.

Chart 1: A brief history of the music industry in America

Source: Chartr, RIAA

Revolutionizing the Global Music Industry

Spotify was founded by Daniel Ek and Martin Lorentzon with the idea of creating a free and legal music streaming service.

Little did they know this service would go on to revolutionize the global music industry – and face major, unforeseen challenges along the way. Their journey has been so compelling that Netflix turned it into a limited docuseries titled The Playlist – Spotify Untold. I can highly recommend it!

But what exactly was so revolutionary about their idea to “spot” and “identify” songs in a simple way?

It changed the way artists get paid.

Unlike physical or download sales, which pay a fixed price per song or album, Spotify calculates royalties based on how often an artist’s songs are streamed in relation to all streams on the platform. Around 70% of its revenue goes to rights holders – typically record labels – who then pay artists according to their contracts.

While some musicians have criticized this royalty model and its impact on album sales, others praise Spotify for providing a legal alternative to piracy and for compensating artists every time their music is played.

In fact, just last year (2024), Spotify paid a record-breaking $10 billion to artists (chart 2).

Take Taylor Swift, for example – Spotify’s top earner – who made an impressive $103 million in royalties from the platform.

And how does Spotify confront piracy?

Simple: by offering a seamless, affordable, and legal streaming experience that makes piracy inconvenient and unnecessary.

The two founders did not just make things – the music industry – better.

They also built on Spotify as a business and made it better.

This piqued our curiosity.

Chart 2: Royalty payments by Spotify in 2024 and over the past decade

Source: Spotify, annual report Q4 2024

Sweet Spot of the Business Growth Cycle

At arvy, we always focus on the business growth cycle that consists of six stages (chart 3): startup, hyper growth, self-funding, operating leverage, capital return and decline.

The most attractive – and lower-risk – opportunities are typically found in stages 4 (Operating Leverage) and 5 (Capital Return). That’s where you’ll find the high-quality compounders we aim to own. Naturally, this also means we avoid companies that are not yet profitable – like those in stages 1 (Startup) and 2 (Hyper Growth – as well as businesses in stage 6 (Decline), where profits are fading.

But what about stage 3 (Self-Funding), which we haven’t touched on yet?

This is the point where a business turns profitable.

It marks the beginning of what we consider the “sweet spot” of the growth cycle, extending through to stage 5. Once a company reaches breakeven, it begins to generate profits—and with that comes the ability to allocate capital more efficiently, optimize operations, and ultimately expand profit margins.

That’s exactly where Spotify finds itself today.

Spotify has grown its Monthly Active Users (MAUs) to an impressive 675 million, including 263 million premium (paid) subscribers. With this scale, Spotify now firmly holds its place as the largest music streaming platform in the world – more than twice the size of its closest competitors, Apple Music, YouTube Music or Amazon Music. Tencent Music as a pure China play Is excluded (500 million user).

At the same time, the company has significantly improved its operational efficiency through cost cuts and low investment needs. After years of negative profitability and flat free cash flow, Spotify reached a major milestone in 2024: its first full year of profitability, posting an 8.7% operating margin and generating a remarkable $2.5 billion in free cash flow.

This means we today have an oligopoly business model that is market leader and profitable with significant growth opportunities.

Now, it truly has our attention.

Chart 3: The six stages of the business growth cycle

Source: Brian Feroldi, designed and further developed by arvy

Asset Light, Subscription Based Business Model

Spotify is now available in more than 180 countries, but its primary revenue still comes from Europe (approximately 40%) and the US (around 26%).

In other words, it’s operating in nearly every corner of the world – yet there’s still plenty of room for growth. And because the platform is already built, every new user added contributes significantly to revenue.

This is the beauty of an asset-light, subscription-based business model.

Whether you have 1,000 customers or 10,000 customers each paying CHF 10 per month, the platform can easily support both – with almost no additional cost.

Let’s do a little Friday morning math.

If your platform costs CHF 100,000 annually to operate, those fixed costs account for 83% of your revenue with 1,000 clients (100k / 120k). But with 10,000 clients, that same cost makes up just 8.3% of revenue (100k / 1.2m).

You see – margins improve dramatically.

That’s exactly what’s happening at Spotify. Its operating margin, currently at 8.7%, is expected to grow to nearly 20% in the coming years.

How will they get there?

Through subscriber growth, new features – especially in the fast-growing podcast segment – and strategic price increases. From 2011 to 2023, Spotify didn’t raise prices, as the focus was on hyper growth (remember stage 2 of the business growth cycle), not profitability. But that has now shifted.

It’s finally time to reap the rewards of years of hard work.

Chart 4: Spotify since IPO, 2018