How Spotify Can Tear Up the Music Biz

Spotify Ltd today is essentially a massive music collection and radio station mashed into one: users can listen to whatever they want, or let the virtual DJ in their pocket recommend tracks and artists.

It's a seductive combination that's attracted 100 million listeners, of whom 40 million were paying subscribers as of September. Yet despite nearly doubling sales last year, the high cost of licensing music from record labels and publishers means the Swedish company has yet to turn a profit. Last year, U.S. rival Pandora Media Inc. had a gross margin of about 47 percent, Apple Music 40 percent and Spotify about 25 percent, according to Bloomberg News. A whopping 84 percent of Spotify revenue went on licensing fees last year, not the easiest of sells to investors when it tries to go public next year: