Why Spotify Can’t Scale Like Netflix

Spotify Technology SA wants to be the next Netflix Inc. Both are pioneers in getting people to pay for a digital entertainment buffet—Spotify’s chief financial officer even had the same job at Netflix. During an investment pitch earlier this month, Spotify executives name-checked their idol so frequently, it felt as if Netflix were the one going public.

However much Spotify resembles Netflix in spirit and business approach, the services diverge in a way that makes Spotify’s path to profit significantly trickier. The video streaming company’s programming expenses don’t rise as it lures more subscribers. But as Spotify gets bigger, its streaming music costs increase; it can’t grow its way to profitability. Spotify’s product—35 million songs—costs the company more as more people sign up. Its contracts with music companies are confidential, but generally the business pays the owners of song rights a fee for each paying user or a percentage of company revenue.