Part 6/8:
A significant concern is Spotify's commitment to the music industry and the structure of its cost base. With the majority of its expenses tied to royalties paid to record labels per stream, the company operates under a model that is less conducive to profitability. These costs rise with user engagement, limiting Spotify's ability to achieve operating leverage that many tech companies benefit from.
While Spotify has managed to renegotiate some deals and improve gross margins, the potential to further drive profit remains constrained. There is speculation about whether Spotify could diversify its offerings or find alternative revenue streams that might carry different margin profiles, but such is yet to materialize.