I don't know how Spotify is doing financially, but hopefully they make money off free users as well as paid users (but I'd not be surprised if they end up a bit like Opera did -- making money from paid users and licensing/bundling deals -- and just using the commercial breaks/ads as stick to guide users towards the paid service).

Either way I'd much prefer being able to pay for lossless records that I get to keep -- I gave up on Spotify quite early as it ended up a little like youtube -- come back to a playlist after a few months and half the songs were gone. I know they're better now, but that experience just underlined the idea that paying for licensing content in a way that leaves you vulnerable to that content disappearing is a very bad deal for me as a listener/consumer.