Spotify's business model is pretty simple: Offer a large (and sometimes fully unrestricted) free streaming service to users, and support that partially with ads. The hope is that enough users will want to pay the monthly subscription in order to do away with all of the advertisements, as well as to unlock features like Spotify mobile.
British media research firm Ender's Analysis looked at Spotify's two-tired business plan, and found that the company is kind of locked in limbo - at least in terms of profits.
According to their analysis, Spotify rakes in a gross profit of $76 million from subscriptions, but lost roughly the same amount in its free, ad-supported tier. "“Spotify is now finding that legitimate free services can lure fans away from piracy, but at the expense of investor capital,” said Ender's.
As of right now in the U.S., Spotify users have full access to the entire catalog - something that's not available to users in many parts of the world. U.S. users can get a basic subscription for $4.99 a month, which will get rid of the ads. They can fork over a little more ($9.99 a month) and gain access to Spotify Premium, which adds mobile support and offline support.
But the company is still growing, and the free version is very attractive to music lovers. It gets people in the door. You'd have to think that eventually, Spotify would disallow any user from having full, unrestricted access to the catalog for free -even with ads. That would be a huge incentive for users to at least purchase the $4.99 subscription.[Ender's Analysis via The New York Times]