Not quite, but close. Non-clustered indexes in the database file only support 500 (or was it 250?) leaf entries.
So there
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In English, this means that: genre/artist/album (non-clustered indexes), as opposed to FID (which is a clustered index) only support 500 (or was it 250?) leaf entries -- i.e. the entry for 'Jazz' only has space for 500 (or was it 250?) tracks.
You're right that it's a database limitation, but it's not strictly dependent on the size of the collection, more by the mix of stuff in it.
My bad. That particular piece of code was written at about 11:30pm on a Thursday.