Quote:
Originally Posted by Kali Yuga
Spotify has chosen to offer free use to lure users. If they restricted free use, the free users that they want to nudge into paying will drop them like a stone.
(Note, they didn't have to do it that way; Rhapsody offers a free 14-day trial, but no free-with-ads like Spotify, Pandora, Last.fm etc)
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Which is why Spotify is opting for GROWTH GROWTH GROWTH instead of PROFITS PROFITS PROFITS. They are thinking long-term instead of short-term profits.
The free streaming is the bait. It is costing them a lot of money but as long as 20-25% of the free users eventually switch to paid users, it is well worth the money that Spotify is losing right now.
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So your counterfactual is, "what if Rhapsody was five times larger than it is now?" Really? 
Their profit margin is roughly 0.8%, and they likely won't benefit from economies of scale. With 5 million users and no changes to royalties, they might eke out a $5 million profit on $600 million in revenues.
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How would you know Rhapsody with 5 millions subscribers would only be a tiny bit better off than 1 million subscribers?
Economy of Scale does work in the case of subscription music
1 million subscriber paying $120 a year = $120 mil a year revenue
70% royalties payment, mean
30% margin =
$36 mil a year leftover
5 million subscriber paying $120 a year = $600 mil a year
70% royalties payment, mean
30% margin =
$180 mil a year leftover
There is a reason why Spotify is valued at $3 billion. Economy of scale does work.