Spotify Will Never Be Profitable Unless It Changes How It Pays Artists

Streaming music service Spotify, as well as other companies in the digital music space, might be in a pickle.

That's because the music streaming business is "inherently unprofitable," BusinessWeek reports.

Since Spotify was founded in 2006, the company has lost $200 million, according to a PrivCo report. While there are rumors of Spotify going public, some investors are worried because the company is not yet profitable.

Earlier today, Spotify announced that 10 million people throughout the world are paying for its $9.99 premium service. Last March, it had 6 million subscribers.

But Spotify's margins don't improve as the company grows. That's because instead of buying the rights to songs for a flat rate, Spotify spends a fixed portion of its total revenue on royalties. So when Spotify doubles its subscriber base, it's simultaneously doubling the amount it pays for royalties. Investors fear the company can't get ahead of its costs.

"Our analysis is that no current music subscription service-including marquee brands like Pandora, Spotify, and Rhapsody-can ever be profitable, even if they execute perfectly," Generator Research Director and Chief Analyst Andrew Sheehy wrote in a report.

Unlike Beats, which Apple is rumored to buy, Spotify is banking on getting more people to subscribe to its service.

Beats, on the other hand, has its hands in both the software (Beats Music) and hardware (Beats by Dre) side of the music business. That may be why Beats is reportedly profitable on revenues that were said to exceed $1 billion last year.