Spotify operating at a loss due to music licensing fees

Despite massive growth in both revenue and paying subscribers, streaming music service Spotify made an operating loss of $41.5 million in 2010, reports Reuters.

Spotify, which offers both a free ad-supported and premium subscriptions of its on-demand music service, allows users to share playlists with friends.

One reason for the operating loss could have to do with the cost associated with the music licensing fees Spotify pays to various music record labels for the songs available on its service. Those fees are easily one of the company’s largest expenses.

However, according to the report by Reuters, Spotify is negotiating new lower licensing fees with several U.S. music companies, which should have a positive impact on the company’s ability to make a profit in the future.

Over the past year, Spotify has experienced an even higher rate of growth. After launching the service in the U.S. and adding new integration with giant social network Facebook, Spotify now has over five million active monthly users. Over two million of Spotify’s total active users are paying subscribers.

Update: A Spotify spokesperson sent us the following statement:

“Since its launch in late 2008, Spotify has grown faster and become more popular than any other music subscription service of its kind, globally. Looking at financial results of individual markets in which Spotify operates is clearly not representative of the business as a whole. In 2010, we continued to grow our European user base, adding hundreds of thousands of paying subscribers, now representing a ratio of paid subscribers to active free users of over 15%, which is phenomenal for any “freemium” business. Product development remained a priority in 2010, with ongoing investment in innovation to offer our users the best music service possible and the biggest upgrade to Spotify since launch, including social features and the ability to combine local files with our own library of millions of tracks. We continued to invest in international growth, laying the foundations for new market launches, most recently launching in the US in July of this year.”