The popular digital music service Spotify made an operating loss of 26.5 million pounds ($41.5 million) in 2010, despite growing revenue more than five-fold due to increased advertising and attracting more subscribers in Europe.

The service, which offers a limited number of songs to be streamed for free or a premium subscription service, made the loss due to the royalty rates it has to pay the music industry to offer the songs.

It made a loss of 16.6 million pounds in 2009.

The group posted full-year revenue of 63.2 million pounds, up from 11.3 million in 2009, driven by a leap in advertising and subscriber rates.

It said recently it had more than 2 million paying subscribers and was set for further expansion after launching earlier this year in the United States.

The company and the group have successfully renegotiated and renewed licensing agreements with all major European record label groups, it said in the results, filed at Companies House in London.

The group has ambitious growth plans and has signed license agreements with a number of U.S. record label groups for the U.S. market.

The music industry and analysts have been watching Spotify closely to see how it performs in the digital music sector, particularly in competition with Apple Inc's dominant iTunes, and whether it can give the industry more power in setting prices.

We see the development of Spotify as positive for the music industry as it could lead to genuine platform competition for iTunes, thereby increasing the value of the underlying content, UBS analyst Polo Tang said in a note to clients.

($1 = 0.638 British Pounds)

(Reporting by Kate Holton; Editing by David Holmes)