Music streamer Spotify (SPOT -2.02%) may hold a dominant position in the industry, with 572 million monthly active users (MAUs) around the world, but the company has been a chronic loser when it comes to turning a profit. Throughout its history, Spotify has booked a cumulative net loss of nearly $4.2 billion.

The second quarter of 2023 was more of the same. Spotify had no problem gaining subscribers or growing revenue. The number of premium subscribers grew 17% to 220 million, the number of ad-supported users jumped 34% to 343 million, and revenue surged 11% to $3.2 billion. But the company posted a net loss of $302 million, down from a loss of $125 million in the prior-year period, and free cash flow nearly vanished. The bottom line is getting worse as Spotify grows.

Higher prices should help but only so much

Spotify announced on Monday that it was raising prices on all its premium plans across a wide swath of countries, including the U.S. This represents the first price increase for the core premium plan in the U.S. since the service launched nearly a decade ago.

The premium plan will go from $9.99 to $10.99 per month, the student plan will go from $4.99 to $5.99 per month, the family plan with go from $15.99 to $16.99 per month, and the duo plan will go from $12.99 to $14.99 per month. Spotify's premium plan is now priced the same as comparable services from Alphabet's YouTube Music, Apple Music, and Amazon Music Unlimited.

While this price increase could cause some subscribers to switch to the ad-supported plan and slow the pace of new subscriber additions, Spotify has little choice but to boost the amount of revenue it generates per user. The music streaming business is a low-margin affair. Spotify's gross margin hovers around 25% thanks to the high costs of royalties. That leaves little left over for operating costs.

Spotify generated just 4.27 euros ($4.72) per premium user per month in Q2, so the price increases could boost this number considerably. The problem is that royalty payments are a function of multiple things, including revenue per user. As Spotify generates more revenue per user, royalty payments will go up as well. This means that Spotify's gross margin may not improve much, if at all.

There will be more gross profit, though, assuming the price increase doesn't trigger significant churn. That should help reduce Spotify's net losses going forward, although it doesn't seem likely that the price increase alone will push the bottom line into positive territory.

Spotify needs to cut costs

While Spotify has little control over the royalty payments it dishes out, the company does have control over its operating expenses. Given the company's expanding losses, those expenses have clearly gotten out of hand.

Part of the problem is that Spotify expanded rapidly during the pandemic. The company is now aiming to increase its operating expenses far more slowly, and additional layoffs could be in the cards. Spotify CEO Daniel Ek said during the earnings call that the company's headcount is expected to be lower in Q3 on a year-over-year basis. Whether that means that more layoffs are coming, or if the company will rely on attrition, remains to be seen.

While Spotify reduced its general and administrative expenses and kept sales and marketing expenses roughly flat in Q2, research and development (R&D) spending shot up by 34%. The company needs to keep pace with rivals, but it's currently spending at unstainable levels.

Spotify stock sank on Tuesday following the Q2 report. Investors clearly don't believe the premium price increase will change the story. While Spotify may be able to reduce its net losses later this year as the price increases kick in, the company has yet to prove that it can turn a real profit.

If Spotify can't make money with over half a billion users, it's hard to imagine the situation improving with additional scale.