Originally Posted by Kali Yuga
"Economies of scale" only apply when your costs go down as your size increases.
But a company with 5 million paying subscribers will be in a better shape to negotiate a better royalties rate compare to a 1 million paying subscribers company. The royalties rate is negotiable.
In addition, there are some cost that stay the same (fixed instead of variable). So this will benefit a 5 mil subscribers vs a 1 mil company.
As for Spotify valuation,
Spotify has raised about $100m from a group of investors led by Goldman Sachs in a round that puts a $3bn valuation on the company
Yes, its valuation could go down but it could go up too. Let's assume that Spotify will get 20 million subscribers one day.
20 million x $120 a year = $2.4 billion from subscribers revenue.
It pays 70% in music royalties, which mean it has $720 mil to pay for expenses (bandwidth, servers, personnel, office and other overhead). Anything left over = profits.