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The Sound of Money: How Spotify Turned Audio Into Profit Power
Submitted by Jeffrey Neal Johnson. First Published: 2/4/2026.
Article Highlights
- Spotify is effectively decoupling from broader streaming struggles by using a variable-cost structure that protects margins and drives consistent operating income growth.
- The platform has solidified its role as a global utility by bundling music, podcasts, and audiobooks into a single subscription, enhancing user retention and pricing power.
- Strategic expansion into video podcasting and new distribution partnerships positions the company to capture additional advertising revenue without significant capital expenditure.
While major financial coverage has centered on the costly streaming wars waged by video giants such as Disney (NYSE: DIS), Netflix (NASDAQ: NFLX), and Amazon (NASDAQ: AMZN), a less-publicized — and arguably more consequential — success story is unfolding in the entertainment sector's audio segment. The battle for video eyeballs has become a war of attrition, driven by skyrocketing production budgets and subscribers who often cancel services once a hit show ends.
By contrast, Spotify Technology (NYSE: SPOT) has carved out a near-monopoly position in audio, evolving from a simple music app into a global utility for listening.
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Spotify's recent stock performance reflects this market transition. As of early February, shares were trading near $475, roughly an 18% year-to-date correction. But looking past short-term price swings shows a company that is fundamentally decoupling from the broader entertainment sector's struggles. While video competitors fight for razor-thin profits, Spotify reported operating income of €582 million (about $688 million) in the third quarter of 2025.
That divergence — weakening sentiment despite improving fundamentals — may present a buying opportunity for investors monitoring Spotify ahead of the next earnings release.
Why Spotify’s Margins Are Expanding While Others Struggle
The key difference lies in cost structure. Video streaming services operate on a high fixed-cost model: they spend heavily up front on original content with no guarantee of success, leaving them exposed to large sunk costs if a title fails.
Spotify largely runs a variable-cost model. It pays royalties only when a track is played, which shields the company from the hit-driven risks plaguing video platforms. If an album underperforms, Spotify hasn't sunk millions into production.
The benefits show up in the numbers. In Q3 2025, Spotify posted several notable milestones:
- Gross margin: Expanded to 31.6%, up 53 basis points year over year.
- Operating income: €582 million (about $688 million), an operating margin of 13.6%.
- Free cash flow: A Q3 record of €806 million (approximately $953 million).
Those gains reflect the company's "Year of Efficiency," during which management right-sized personnel and marketing costs. Spotify has also boosted profitability through initiatives beyond recent price increases. A notable example is Discovery Mode, a two-sided marketplace feature.
Under Discovery Mode, artists and labels accept a lower royalty rate in exchange for algorithmic promotion, creating a financial win-win:
- For artists: Increased streams and discoverability.
- For Spotify: Improved gross margins by paying slightly less on those promoted streams.
More Than Music: Spotify as a Utility
With about 713 million Monthly Active Users (MAUs), Spotify has become an essential audio platform — almost a default operating system for listening. That scale grants pricing power many video services lack.
Between 2024 and 2026, Spotify implemented price increases across more than 150 markets with minimal churn, demonstrating strong user stickiness. Listeners spend years curating playlists and training recommendation features (like the AI DJ), creating high switching costs that discourage moving to a rival service.
Spotify has also strengthened retention through bundling. A Premium subscription now bundles multiple formats:
- Music: Access to over 100 million tracks.
- Podcasts: Access to over 500,000 video and 6.5 million audio podcast shows.
- Audiobooks: 15 hours of listening time per month included in the base price.
By meeting several audio needs — entertainment, education, and storytelling — in one subscription, Spotify raises the bar for cancellations compared with single-purpose video services.
Spotify’s Next Chapter: Video Growth Without the Cost
Spotify is expanding into video to capture more watch time, but it's doing so without becoming a capital-intensive studio.
The company recently struck a partnership with Netflix, set to launch in early 2026, that will syndicate Spotify's top video podcasts on Netflix. That deal gives Spotify valuable video ad inventory and broader exposure while leveraging content it already controls, competing for video ad dollars with relatively low capital outlays.
Even with these positives, the stock has pulled back into the $470–$480 range, largely because management issued conservative guidance for Q4. Projected Q4 revenue of €4.5 billion (about $5.317 billion) sits slightly below Wall Street's €4.57 billion (approximately $5.4 billion) consensus, a gap driven mainly by currency headwinds rather than weakening user demand.
Many institutional analysts view the pullback as a technical entry point rather than evidence of deteriorating fundamentals. For example, Citi recently upgraded Spotify to a Buy with a $650 price target, implying upside of more than 30% from current levels.
The upcoming earnings report on Feb. 10, 2026 will be a key catalyst. If Spotify can sustain its 30%+ gross margin target despite currency noise, it would strengthen the case that the stock is undervalued relative to its growth trajectory.
Why Audio Resonates as a Defensive Growth Play
Spotify combines recurring subscription revenue with a business model that doesn't require movie-studio capital intensity. In a market where consumer discretionary names face macro uncertainties, Spotify's evolution into a high-margin audio utility adds a defensive layer to its growth story.
By decoupling from the costly, low-margin battles of video streaming, maintaining dominant market share, exercising pricing power, and pursuing new revenue streams in video and audiobooks, Spotify's fundamentals look durable. For investors willing to tolerate short-term volatility and currency headwinds, the current share price may offer a compelling chance to buy into a long-term compounder at a discount.
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