Artificial IntelligenceCryptocurrencyMetaverseCybersecurityTech Forward

Spotify’s Financial Results Reinforce Just How Broken the Music Business Is

May 24, 2016, 4:07 PM UTC

Based on almost every metric that matters, Spotify is the most successful streaming music service in the world, with almost 90 million subscribers and close to $2 billion in annual revenues. Yet its recently-released financial results show that despite its massive success, it is still incapable of making a profit—and because of the way the music business works, it may never make one.

Although Spotify doesn’t have to submit financial reports to stock market regulators because it isn’t publicly traded, its Luxembourg-based parent company filed results with that country’s corporate registrar. The picture painted of Spotify’s business gives new meaning to the question, “Is the glass half full or is it half empty?”

On the upside, Spotify’s revenues accelerated in 2015, growing by about 80% to 1.95 billion Euros or about $2.1 billion U.S. dollars. That was almost twice the growth rate that the company saw in 2014. At a time when Apple Music and other competitors have been pouring resources into expanding their reach, Spotify seems to have increased its lead. Its user base climbed almost 50% to 89 million, up from 60 million in 2014.

On the glass-half-empty side of the equation, however, Spotify’s losses also expanded to $206 million, up from $184 million in 2014. Despite the larger losses, some observers cheered this news because the company’s red ink didn’t increase as quickly as its revenues did. But that silver lining disappears if you look more closely at the costs that really matter.

Spotify’s single biggest expense are the payments it has to make to record labels and music publishers, as they are for every other streaming music service, whether it’s Apple Music or Rdio or Deezer. In 2015, the amount that Spotify had to pay for royalties and distribution fees climbed by 85%, to about $1.8 billion. In other words, costs grew by more than revenues did.

Get Data Sheet, Fortune’s technology newsletter.

Everywhere you look in the online music industry, you see the same picture. Deezer postponed a planned public offering because its financial picture was so bleak. In some cases, contracts with record companies forced Deezer to pay more than it was making in revenue by streaming popular songs. Rdio filed for bankruptcy and was acquired by Pandora, a company whose investors are pressuring it to sell itself to the highest bidder. But who would want to buy it?

Even Spotify, which has been planning for a public share offering for some time, was forced to raise a $1 billion round of convertible debt financing earlier this year in order to fund its operations because equity investors weren’t prepared to put in more money at the valuation the company wanted.

That’s partly because the digital music business looks increasingly fragile, at least the way it is structured currently. Of every dollar that Spotify brings in the door in revenues, about 85 cents goes right back out the door again in the form of payments to the music industry. That number is climbing at a faster rate than the company’s revenues are, and still there are complaints that streaming music services don’t pay enough money to artists. Where does all of this ultimately lead?

In its filing with the Luxembourg regulator, Spotify said that it is hopeful that it will be able to turn a profit at some point soon. “We believe our model supports profitability at scale,” the company said. “We believe that we will generate substantial revenues as our reach expands and that, at scale, our margins will improve.” This is a brave statement, but how is it even remotely realistic? Are record labels going to suddenly cut more favorable deals than they have in the past?

Spotify is currently in negotiations to re-sign most of the deals it has with record industry, but there’s no indication that it will be able to do so at historical rates. In fact, even though they own a small stake in the company, some labels may want to charge more because Spotify has become so dominant.

Meanwhile, the streaming music business is so terrible financially that Spotify recently announced that it is moving even further into video with plans to expand its current music video feature into a full-fledged streaming video service with original programming. Not only is this a business that everyone from Netflix and Amazon to Apple and Google are going after, but it also has extremely high costs—higher even than the music business. Is that likely to save Spotify? It’s difficult to see how.