Spotify reported its fourth quarter earnings today. The headline numbers are strong: 751 million monthly active users, up 11%. 290 million premium subscribers, up 10%. Revenue of €4.5 billion. A record gross margin of 33.1%. Operating income of €701 million. Free cash flow of €834 million.
After seeing the company’s share price plunge from a high of around $785 last summer to just $415 yesterday - a decline of nearly 50% - investors were relieved to see what looked like good news. The stock jumped roughly 15% in early trading, back up to around $472.50 at the time of writing.
Spotify’s narrative worked well for investors. But here’s what the company didn’t say.
1. That profit wasn’t quite what it seemed
Spotify reported a quarterly profit of €701 million - comfortably ahead of its own forecast of €620 million by €81 million. Impressive, until you look at why.
€67 million of that €81 million - the vast majority of the apparent outperformance - came from something Spotify calls ‘Social Charges’. These are employer payroll taxes, paid in Sweden and certain other countries where Spotify operates, that are calculated partly on the value of employees’ share-based compensation.
As Spotify’s own disclosure explains, “since a portion of these taxes is tied to the intrinsic value of share-based compensation awards, movements in our stock price can lead to fluctuations in the taxes we accrue”. When the share price falls, these charges fall with it - and in Q4, they swung from a cost of €97 million in the prior year to a credit of €50 million, coming in €67 million below Spotify’s own forecast.
Why did they fall so far? Because Spotify’s share price has dropped by roughly a third over the past three months, driven largely by investor anxiety about AI’s threat to the company’s business model.
As the share price fell, so did the value of employees’ equity awards, and so did the payroll taxes Spotify owed on them. The vast majority of the profit outperformance came not from the underlying business, but from Spotify’s collapsing share price reducing its payroll tax bill. Take that windfall away and the profit was barely above what the company had predicted.
Put another way: the most widely reported number from today’s results was substantially inflated by the market’s loss of confidence in Spotify’s future, driven by investors dumping the stock, concerned that AI will eat Spotify’s business.
That’s worth thinking about. Investors sold their Spotify shares because they believe AI threatens its long-term viability. That sell-off reduced Spotify’s employer tax liability, which inflated the profit it was able to report to investors. That doesn’t remove the AI threat. In fact, there’s an argument that, in the short term at least, the threat of AI helps Spotify by allowing it to present better numbers to investors.
When asked by analysts on today’s earnings call what the market was missing, Chief Financial Officer Christian Luiga said that “AI has been something that has been hard to grasp for many people”.
Co-CEO Gustav Söderström, reaching for the kind of fortune-cookie wisdom that fills Silicon Valley keynotes, said that “the Chinese sign for macro wind is opportunity”. Investors who have watched a third of the value of their holdings evaporate in recent months may require more than Karate Kid wisdom.
And the music industry - genuinely concerned about AI’s impact on the livelihoods of creators - may be troubled by the glib flippancy of one half of the company’s new CEO double-act.
The other half of the double act, Alex Norström, meanwhile, laid out his vision of AI’s benefit to Spotify as a chain reaction: “AI leads to better personalisation, better personalisation leads to more engagement, more engagement leads to more retention, more retention leads to lifetime value, and boom, more lifetime value leads to more enterprise value”.
Boom indeed - though the investors who’ve been dumping their Spotify stock may be hearing a different kind of boom, one in which AI-generated music floods the platform, devalues the catalogue, and pulls the rug from under the entire model as Spotify implodes.
Unless anyone has a particularly prescient fortune cookie to hand, that’s an open question that only time - or a crystal ball - can answer. Maybe Gustav has one tucked away behind the fortune cookies.
2. Spotify made a huge tax saving
Spotify’s bottom line was further boosted by an unusual tax position. Rather than paying tax in Q4, the company received a net tax credit of €153 million - essentially, the tax line added to profits rather than subtracting from them. This appears to stem from Spotify recognising a large pool of tax credits built up from years of historical losses, which can now be offset against current profits.
For the full year, the picture is starker. Spotify earned €2.2 billion in profit before tax and paid €12 million in income tax. That’s an effective tax rate of 0.5%.
This isn’t unlawful. Writing off past losses against current profits is standard accounting, and Luiga noted on the call that the company expects to move “towards a normalised long-term tax rate” - so it won’t last. But the 2025 number is the one on the books.
Spotify generated €2.9 billion in free cash flow, sits on €9.5 billion in cash and investments, and paid less than a rounding error in tax.
In the same year, it paid $11 billion to music rightsholders and publicly lobbied against streaming levies on the basis that they would reduce the money available for artists because price increases would result in people cancelling their Spotify subscriptions. Instead, Spotify has suggested, as part of its new lobbying agenda, that any levy-style contribution should be drawn from existing consumer sales taxes like VAT.
The tax position will do little to quieten criticism of a company that has faced mounting scrutiny on multiple fronts - from the audiobook bundling reclassification that reduced mechanical royalty payments to songwriters, to founder and until recently CEO Daniel Ek’s personal investments in defence technology company Helsing, to Spotify’s advertising relationship with the US government’s ICE agency. A 0.5% effective tax rate on €2.2 billion in profit is not the look you want when you’re already under fire.
3. Spotify is growing - but each new user is worth less than the last
Underneath the user growth headline sits a structural problem that has now persisted for four consecutive quarters: Spotify is getting bigger, but the amount of money it makes per user is getting smaller.
The average monthly revenue Spotify earns per premium subscriber - known in the industry as ARPU - declined 3% year-on-year to €4.70. Even stripping out currency effects, it was up only 2%, with the benefit of price increases being eroded by the mix of where growth is actually coming from.
Spotify’s own language is that price increases were “partially offset by product/market mix” - which means growth is increasingly concentrated in cheaper plans and lower-paying markets.
The regional data makes this visible. Rest Of World (how Spotify classifies markets outside Europe, North America and LATAM) now accounts for 37% of all Spotify users, up from 22% four years earlier in Q4 2021. But that same region represents only 15% of paying subscribers. Europe, where subscribers have historically paid the most, has seen its share of the subscriber base decline from 40% in Q4 2021 to 36% today.
The growth in Spotify’s topline user numbers is real, but the problem is that it’s coming from places where people pay less - sometimes a lot less - and where a much smaller proportion convert from ad-supported to paid.
The free tier tells the same story from a different angle. The number of ad-supported users grew 12% to 476 million. In Q4 alone, the free tier added 30 million users - more than three times the 9 million new paying subscribers.
Norström framed the enhanced free tier as a way to fix engagement and drive eventual conversion to premium. But Spotify’s own forecast for Q1 calls for just 3 million new premium subscribers - a sharp slowdown from Q4’s 9 million. Some of that is seasonal. But it’s not the conversion acceleration you’d expect if the funnel were working as advertised.
So what does this mean for the people who actually make music?
“Per-stream” payouts are ultimately a function of how much money comes in divided by how many streams go out. If the money coming in per user is declining while listening stays the same or increases, per-stream rates come under pressure - no matter how many users Spotify adds.
The $11 billion Spotify paid to rightsholders in 2025 sounds like a record, and it is. But it’s up roughly 10% on the year - the same rate at which Spotify’s total revenue grew. The music industry’s share of the pie isn’t expanding. It’s holding steady, at best.
And on today’s call, Luiga made the trajectory explicit. Asked about margins for 2026, he said that “price increases are going to outpace the net content cost growth in 2026”. In plain language: Spotify expects its revenue to grow faster than what it pays to rightsholders. That’s the plan. And the CFO just said it out loud.
4. Spotify wants to keep more of the money
Gross margin - the share of revenue Spotify keeps after paying for content - tells a similar story. Overall gross margin hit a record 33.1%, but the number that matters more to the music industry is the premium-specific margin, which came in at 34.8% - up just a fraction on last year. Premium subscriptions are where the bulk of music royalty payments come from, so this margin is the most direct measure of how much Spotify keeps versus how much it pays rightsholders.
For context, this margin rose sharply in recent years, climbing from 29.2% in Q4 2021 to 34.7% by Q4 2024. The timing of the sharpest expansion coincided with Spotify’s decision to include audiobooks in the premium bundle - a controversial classification that had the effect of reducing its mechanical royalty obligations to music publishers in the US.
Spotify itself has never explicitly attributed its margin gains to the bundling change, but - in its lawsuit - collecting society The MLC said that the change left it out of pocket to the tune of around $150 million a year.
That expansion has now stalled. Spotify says video podcast costs ate into the gains from music revenue growing faster than music royalty payments. The overall margin improvement came mainly from the ad-supported side, not from premium.
To be clear about what this means: gross margin is the share of every euro that Spotify gets to keep after paying for content. When it goes up, Spotify is keeping more and paying out proportionally less. The margin gains Spotify squeezed out of the bundling reclassification have run their course.
If Spotify wants to keep expanding margins from here, it has three options: more price increases (which, as we’ll come to shortly, Spotify’s own policy lobbying arm argues will lead to cancellations and hurt artists), slowing the growth of royalty payments to the music industry, or finding entirely new revenue streams - audiobooks, physical books, AI-powered features, or something else entirely. We’ll have more to say about that last option in our next piece on these earnings.
There is, of course, another possibility - the one many in the music industry have been pinning their hopes on: a superfan offering or super-premium tier, where subscribers pay a higher monthly subscription free for as yet undefined extra benefits. Spotify has been promising a higher priced subscription product for years now.
But it was completely absent from today’s call and associated materials. No mention of the superfan opportunity in the deck. No mention of super premium. Nothing in the prepared remarks. Nothing in the analyst Q&A. Universal Music CEO Lucian Grainge, who has spent the best part of two years telling anyone who’ll listen that superfan monetisation is the next great frontier for the music industry, may want to check whether anyone at Spotify is actually listening to him any more - or just nodding politely.
As we reported in November, Daniel Ek had already dampened expectations for any super premium offering, making clear he saw it as a Spotify-led product innovation exercise rather than the label-driven “superfan” play that Grainge and others had been evangelising. Three months on, the silence has deepened. Analysts submitted questions about it for today’s call, but they weren’t selected.
5. Spotify still has an advertising problem
Spotify’s ad-supported business generated €518 million in Q4, down 4% on the same period last year. Adjust for currency movements and it was up 4% - but this is a business serving 476 million people. That works out at roughly 36 cents per user per month.
Music advertising saw more ads being served but at lower prices. Podcast ad revenue grew through sponsorship deals but was partially offset by Spotify pulling back on some of its own podcast ad inventory. The biggest source of growth was automated, programmatic ad buying - not the kind of direct brand deals that command premium pricing.
Norström said Spotify now has “record levels of advertisers on the platform” but acknowledged “we still have work to do”. Luiga said that stripping out the effects of podcast inventory changes, ad growth was running at about 7%, and that the company expects improvement in the second half of 2026.
For artists whose listeners are disproportionately on the free tier - which tends to mean newer, emerging and non-Western artists - the weakness of the ad business directly affects what they’re paid per stream. And Spotify’s inability to build a strong advertising operation limits its ability to tell labels “we’ll make it up on the free tier” when negotiating royalty rates.
6. Spotify will pay off $1.5 billion in debt using cash - not shares
One disclosure on today’s call deserves more attention than it received. Spotify has $1.5 billion in debt falling due next month - what’s known as convertible notes, meaning the holders had the option to convert the debt into Spotify shares instead of being repaid in cash.
When a company’s share price is high, noteholders typically convert, because the shares they’d receive are worth more than the cash repayment. When the share price is low, they take the cash. Luiga confirmed the notes will be settled in cash - which tells you something about where the market thinks Spotify’s share price is heading.
Spotify can comfortably afford this - it’s sitting on €9.5 billion. But it’s worth stepping back and looking at what Spotify does with its money. Last year, the company generated €2.9 billion in cash after all its costs. It spent $510 million buying back its own shares - a way of returning money to investors. It’s about to hand $1.5 billion to the financial institutions that hold its debt. The remainder - billions of euros - sits in the bank.
This is the same company that paid $11 billion to the music industry in 2025 and presented it as a record. It is a record. But Spotify chose how much to pay. It could have paid more. Instead, it is accumulating a cash reserve approaching €10 billion while its CFO tells investors, on the record, that the plan is to grow revenue faster than royalty payments.
7. Spotify’s price increases work just fine - which makes its lobbying harder to defend
Spotify is forecasting 759 million users, 293 million subscribers, €4.5 billion in revenue, and a profit of €660 million for Q1 2026. Revenue growth is expected to accelerate, driven partly by the US price increase to $12.99 flowing through the numbers. Spotify expects to earn 5-6% more per subscriber than it did a year ago.
On the question of whether the price increase is driving cancellations, Norström was direct: “There have been really no surprises at all. Churn is low and came in according to our expectations”. He described the $1 increase as “the same magnitude” as the one Spotify implemented in mid-2024. No drama. Business as usual.
Which makes last week’s Loud & Clear policy roadmap look, at best, disingenuous.
In that document, Spotify argued that any new streaming levies imposed by governments would force price increases, drive cancellations and therefore ultimately reduce the income flowing to artists. The chain of logic was explicit: higher costs mean higher prices, higher prices mean fewer subscribers, fewer subscribers mean less money for creators.
On today’s call, the same company told investors that its own price increase - a $1 rise in the US, the second in two years - has been absorbed with minimal impact, and that further increases remain on the table. Norström: “When we adjust price, we do it from a position of strength”.
These two positions cannot both be true at the same time. If price increases cause cancellations and hurt artists, then Spotify’s own price increases cause cancellations and hurt artists. If Spotify’s price increases are absorbed without meaningful damage, then the core argument against streaming levies - that passing costs on to consumers will harm the whole ecosystem - falls apart.
Both positions are useful to Spotify. One protects it from government-imposed costs. The other reassures investors that pricing power remains intact. They were made one week apart, to completely different audiences, and no one on today’s call held them side by side.
I tried. I submitted the question via the Slido tool that Spotify’s investor relations team uses to field questions from analysts and media. By the end of the call, my question was still “pending moderation” - despite several other new questions appearing in the queue after I asked mine.
The financial analyst community and the music policy community operate in entirely separate conversations. Spotify benefits from never having to make both arguments in the same room.
8. A lot of questions that could have been asked weren’t
The analyst Q&A ran for about 40 minutes. AI dominated - at least ten questions covered its impact on Spotify’s business model, AI-generated music and competition from AI-native platforms.
No analyst asked about the MLC’s bundling litigation - a live legal dispute with potential exposure of $290 million over whether Spotify’s audiobook bundling was a legitimate product decision or a mechanism to reduce what it pays music publishers and songwriters. The money Spotify has set aside for legal disputes roughly doubled over the year, from €25 million to €51 million. No one asked why.
No-one asked about how much artists are actually paid per play, or about how much of Spotify’s content spending goes to music versus podcasts versus audiobooks, or about whether the music industry’s share of Spotify’s revenue is growing or shrinking.
No analyst asked about the contradiction between Spotify’s lobbying position on price increases and what it tells investors about its own price increases.
These are the questions that matter to the music industry. They are not the questions the financial community is asking. The gap between those two sets of interests has never been wider - and the earnings call - and, arguably, Spotify’s entire business - is built for one audience, not the other.
9. 2026 is Spotify’s “Year Of Raising Ambition”
Spotify made €17.2 billion last year. It paid $11 billion to the music industry and €12 million in tax. Its CFO has told investors, on the record, that the plan for 2026 is to grow revenue faster than royalty payments.
Gustav Söderström, one of its two co-CEOs, responded to a third of the company’s market value evaporating with a glib fortune-cookie platitude about the Chinese calligraphy for opportunity. And no-one on the earnings call asked a single question about what any of this means for the people who make the music.
The other co-CEO Alex Norström has framed 2026 as Spotify’s “Year Of Raising Ambition,” with more detail promised at an investor day in New York on 21 May. The question is whose ambition, and at whose expense? And, increasingly, we have to ask whether Spotify’s ambitions are diverging even further from the ambitions of the music industry.
