They seem suspiciously tight-lipped about how much money they take, then there's been a few articles detailing how the royalties earned by musicians/publishers per play are minuscule. And just listening to the service, the adverts that get played are by charities and government for the most part, there doesn't seem to be any big contracts there. Plus the free service is excellent so I can't imagine there conversion rate to Premium membership is very high. And even if it is, the small amounts they charge, compared to the vast amount of intellectual property they're making available, and the bandwidth needed to provide it, doesn't make it look like a good business for the industry to get involved in.

I agree that they are very tight-lipped about actual revenue streams, but I don't think that is their fault. I would guess that it is the record companies that want to keep such numbers secret. One of the guys who started Spotify previously did Tradedoubler, so they know something about on-line ads. While they haven't said much officially, they did comment that ad-sales were going quite well.

Regarding what musicians earn, the most interesting note is probably that the Swedish collection agency (STIM) said about half a year ago or more that Spotify is the number one digital earner for music in Sweden (passing iTunes for example).

As for the bandwidth, see the paper I linked in another comment for some interesting statistics on how much bandwidth is actually needed (tl;dr version, surprisingly little thanks to p2p and caches).

Hmm, interesting point about the bandwidth and about Sweden. But I'd like to know if Spotify cannibalized the iTunes sales, cause that's kind of the whole point about it being a free frenzy and not making significant money. Put it this way, they may have taken in more money than iTunes... but how much more music did they give away? (and even counting raw playing time, that doesn't capture the full effect of customers knowing they can access something whenever they want)

As far as I remember it (it was something a STIM representative said in an interview, can't find it just now), it was about how the revenues from Spotify had increased significantly.

Also, one should remember that, AFAIK, the initial idea was the free account type and Premium came later. It is all about competing with piracy, making something that is easier and more convenient for the user while still giving a revenue stream to the rightsholders.

I kinda thought they were always planning on Premium charges though, they just wanted to build some momentum first. My main problem with it is I can see 'the rights-holders' making a good new revenue stream, but only in the sense of people/companies that own massive publishing catalogs. The individual rights-holders, eg. the songwriters, I fear are being sold up the river.

I was in the original beta-trials of Spotify (started second half of 2007), and the info then seemed to indicate that the intended model was ad-financed. A lot of people apparently asked about paying to get rid of the ads.

As for smaller artists, compare it with the situation in commercial radio. A few radio-plays will not get you very much money, but the number of people that listened to your song is actually quite high.

Comparing it to radio is where the trouble starts. A potential customer cannot rely upon radio to access your music/product. At best they'll hear a few of the artist's tracks, if they're patient and lucky. Therefore the radio is in no way a substitute for owning the LP, it's more like an advert/complement than a competing service. But Spotify DOES let the potential customer access your product in full, removing the main incentive to buy your LP. Furthermore, you're not only competing with a free version of your own product, your competing with a vast catalog of other music, millions of records that can be accessed effortlessly. "Should I spend £10 on this one album, or should I spend £10 for a month of unlimited access to endless high-quality music?" The economic position this puts individual artists in is dire.

Also, another thing about the ads is sometimes they're hardly ads at all, they're just Spotify announcements. I can't believe they'd be wasting spots like that if they were really pulling in serious advertising money.