Spotify is a free music streaming service, although there is also a paid, premium option available that eliminates advertising and allows you to listen to saved music offline. Since so many Spotify users don’t purchase the premium option, how can a record label possibly make money by putting music on its platform?
Spotify keeps a record of every time that a song is played. They then pay out a small amount to the record label for each of those times. It is a very small amount, usually less than a penny per play. While this is less than you would get if you sold a song or album on iTunes, these amounts can add up if a song becomes popular. The record label takes a percentage of Spotify profits in the same way they would take a portion of physical record sales.
Also, if an artist gains some popularity through Spotify promotion, this can translate into concert ticket and merchandise sales, which the record label also takes a percentage of. For this reason, Spotify should not be ignored as a potential source of income for record labels.