Will be interesting to see how this plays out.
How? They are making approximately a 1 billion dollars a year (30 million subscribers * $10/month * 12 months/year * 30% cut). Their engineers are probably paid less too since they are not based in the US.
The only thing i can suspect that they are blowing that much money on is marketing but even that just seems ridiculous unless they are losing that much on the freemium users.
Can someone explain this to me?
IMO, what's really more problematic and complicated is their economic arrangement with the major labels, which, while ostensibly "70/30" is actually way more complicated than that. The article does a decent job of explaining it: http://www.theverge.com/2015/5/19/8621581/sony-music-spotify...
TL;DR: to induce a major label to sign, Spotify had to give them a sweetheart deal, including minimum per stream payments, minimum % of ad revenue, and free ad space.
The really tricky things to consider are: usage-based and per subscriber minimums. Hard to determine exactly, but it's highly possible that Spotify is much worse off than the 30/70 spotify/label split.
Also, note that there's a good chance the contract is already re-negotiated since that was published, and given Apple Music, likely not in Spotify's favor.
They own nothing and sharecropping with other peoples property never ends well. The labels can bleed them to within an inch of their life without any risk as there are other companies with additional revenue streams to support themselves that will offer better deals and take up the slack.
That said, Apple Music is only going to get better, and fast.