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Model the business · NYSE: SPOT

Spotify: two services, one royalty bargain

Played from a borrowed roll. Somebody turns the handle and somebody else owns the roll: a street organ playing music that unwinds from another reel and winds straight back onto it, which is how a streaming service stands with the labels and publishers it pays.

Spotify’s gross margin rose from 25.6% to 32.0% in two years: where it came from, and what a holder keeps after paying staff in shares.

By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.

On this subject: the Spotify Technology S.A. case.Updated 25 October 2026

Latest filing 22 October 2026 · Information to 25 October 2026

Explore the model Build it step by step Download Excel
Revenue, FY2025AFiling
€17,186m
Premium €15,350m, Ad-Supported €1,836m.
Gross margin, FY2025ADerived
32.0%
From 25.6% in FY2023A.
Free cash flow less SBC, FY2025ADerived
€2,627m
Spotify’s Free Cash Flow less share pay.
Value per share, base caseModel
€318.99
What the forecast implies at 31 December 2025. Not a target.

How to read the figures

Every figure on this page is a cell in the Spotify operating model, and each carries one of four tags.

  • Filing what the company filed, with its tag
  • Derived arithmetic on filed figures, such as a proxy or a residual
  • Assumption a judgement of this page, never the company’s
  • Model what the model computes from the three

The business

Spotify streams music, podcasts and audiobooks to 751m monthly users, 290m of them paying. It runs two services and reports them as two segments: Premium, paid by subscription, which earned €15,350m of 2025’s €17,186m revenue, and Ad-Supported, free to the listener and paid for by advertisers, which earned €1,836m. The free service is also the funnel: in Spotify’s words, it drives a significant portion of new Premium Subscribers.

Spotify Technology S.A. is incorporated in Luxembourg, reports under IFRS in euros and files with the SEC as a foreign private issuer: a Form 20-F each year, with XBRL tags, and a Form 6-K each quarter, without them.

The question

Spotify’s gross margin rose from 25.6% in 2023 to 32.0% in 2025, and operating income went from a loss of €446m to €2,198m. The question is how much of that is the Premium tier and how much advertising, and what a holder keeps once share-based pay is counted as a cost and two items that follow the share price, payroll taxes on share awards and the Exchangeable Notes, are read back to the filings.

The royalty bargain

Most of what Spotify spends is paid to the owners of the recordings and songs it streams, and those payments sit in cost of revenue. Royalties are generally a share of revenue with a floor per user, and the rates vary by label, country and plan; none is disclosed. What the filings do show is the result: Premium’s gross margin rose from 28.8% to 33.7% over the two years, and Ad-Supported’s from 3.7% to 18.0%. That widening margin is the case’s subject, and the forecast can only move it as a whole, as a judgement.

FY2025, three kinds of number
MeasureFY2025Kind
Revenue€17,186mReported
Operating income€2,198mReported
Net income€2,212mReported
Free Cash Flow€2,874mCompany, non-IFRS
Operating income before social costs€2,323mDerived
Net income without the notes’ swings€2,335mDerived
Free cash flow less share-based compensation€2,627mDerived

Subscribers times ARPU, and a segment redrawn

Premium revenue is subscribers times what each pays. Spotify’s ARPU is €4.63 a month for 2025, built from quarterly revenue and average daily subscribers, which it does not publish. Multiplying the average of year-end subscribers by ARPU and twelve lands within €12m of Premium revenue in 2025, but €223m away in 2024. The Derived sheet shows that gap rather than hiding it, and the forecast grows revenue from the reported level so the gap never becomes a jump.

From 1 January 2026 Spotify moved activities it does not name from Ad-Supported to Premium. The 2026 filings recast 2024 and 2025 (about €41m of 2025 revenue moved) but not 2023. The model keeps the three filed years on the basis of the annual reports, so every growth rate compares like with like, and carries the recast beside them as a memo.

What follows the share price, and the tax line

Spotify pays payroll taxes on the value of the shares it awards staff: €71m in 2023, €291m in 2024 and €125m in 2025, and a net credit of €16m in the first nine months of 2026. Its Exchangeable Notes were carried at fair value until they were repaid in March 2026, so a rising share price showed up as finance costs (€239m of losses in 2024). Neither says much about the business. The model shows each year with and without them, and the forecast sets the payroll taxes at nil by convention, with one input where a reader can charge them.

2025’s tax charge was €12m on €2,224m of profit before tax, because €510m of deferred tax assets were recognised. Before that recognition the rate was 23.5%, close to Luxembourg’s statutory rate. Cash is another matter: Spotify paid €86m of tax in 2025, under 4% of its profit. The forecast books tax at 24% and pays it at 10% in 2026, reaching the book rate by 2028.

Reported, derived, assumed

The model keeps three kinds of number on three sheets. Reported holds only what Spotify filed, each row with its document and, for the 20-F figures, its XBRL tag; the 2026 figures from the untagged 6-Ks are read as reported. Derived holds arithmetic on Reported and nothing else: margins, the Premium proxy and its residual, operating income before social costs, Free Cash Flow rebuilt. Forecast holds the assumptions in three cases, every row a judgement of this page and none of it Spotify’s guidance.

The forecast’s shape, and what it is worth

In the base case 2026 is the nine filed months plus a fourth quarter in their trend, €19,488m of revenue. After it subscriber growth eases from 8% to 5%, ARPU rises 4% a year and the two margins move towards 37% and 23%, which takes revenue to €29,188m and the operating margin to 18.4% by 2030. The downside slows both engines and holds the margins near today’s; the upside keeps subscriber growth near 9% and widens both margins further.

Valued at 31 December 2025 with share-based pay and leases as costs, the notes as debt and a 9% discount rate, that forecast implies €318.99 a share, or €329.33 counting the long term stakes the value leaves out. It is a consequence of the inputs, not a target, a fair value or a recommendation, and it is never compared with the share price here; the sensitivity in Explore shows how far it moves.

The base case, filed to FY2025A and forecast to FY2030E
€0€10,000€20,000€30,000FiledForecast23A24A25A26E27E28E29E30E€m
  • Revenue
  • Free Cash Flow (the company’s measure)
  • Free cash flow less SBC (this page’s measure)
  • Forecast years: lighter bars, dashed lines
Read as a table
FY2023A (filed)FY2024A (filed)FY2025A (filed)FY2026EFY2027EFY2028EFY2029EFY2030E
Revenue€13,247m€15,673m€17,186m€19,488m€21,826m€24,266m€26,736m€29,188m
Free Cash Flow (the company’s measure)€678m€2,285m€2,874m€3,271m€3,602m€3,931m€4,551m€5,209m
Free cash flow less SBC (this page’s measure)€357m€2,018m€2,627m€2,959m€3,257m€3,555m€4,143m€4,771m

Change the case or an assumption in Explore; the filed years never move.

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Every sheet behind the page, with every input at the base case and the Sources sheet citing each filed figure, so what you change on the page you can change again in Excel.

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