Daniel Ek: 3 things we learned from Spotify’s boss on the company’s Q4 earnings call

Spotify
Daniel Ek, CEO and co-founder, Spotify

Spotify published a mixed bag of results in its Q4 2020 investor update last week (February 3).

Amongst the good news was that SPOT exceeded the top end of its guidance for premium subscriber growth in 2020, hitting 155 million paid subs in Q4 (Ended December 30).

That Premium subscriber growth translated into Premium revenue of €1.887 billion for Spotify in Q4, which was slightly up (+5%) on the €1.790 generated in the prior quarter (Q3 2020) and up 15% year-on-year.

However, as reported by MBW, SPOT’s operating loss in the calendar year of 2020 stood at €293m ($335m) – more than four times what it posted in the previous year.

Plus, Spotify’s pre-tax loss in 2020 (minus additional finance-related costs) was €709m ($810m), which was five times SPOT’s equivalent loss in 2019.

As noted by Bloomberg, analysts were underwhelmed by Spotify’s 2021 forecast.

Spotify Chairman & CEO Daniel Ek and Spotify CFO, Paul Vogel were quizzed on a call by analysts last Wednesday (February 3) and MBW listened in.

Here’s three things we learned from Ek’s answers..


1) SPOTify thinks it will add fewer net new subscribers in 2021 compared to last year – but Daniel Ek’s still confident that Spotify is a “multi-billion user opportunity” in the long-term…

During Daniel Ek’s prepared remarks ahead of taking questions from analysts, he stated that “2021 brings more uncertainty than any normal year”.

He added, however, that Spotify still has a “high degree of confidence in our ability to deliver against the guidance we’ve provided”.

SPOT’s guidance for 2021 included a year- end target for total Premium Subscribers of between 172m-184m, and total annual revenue of between €9.01-€9.41 billion.

Both struck a sour note with investors, with SPOT’s shares tumbling following the update, the subscriber growth marking a slowdown compared to 2020 and the revenue growth falling short of analyst expectations.

“We are facing a global pandemic and that pandemic has shifted all user behaviour in 2020.”

Asked about the company’s net subscriber addition forecast, Ek answered that he sees Spotify as “a multi-billion user opportunity”, in the long-term, and that he’s “as confident about that as I’ve ever been”.

Added Ek: “As I mentioned in my opening remarks, all that said, we are facing a global pandemic and that pandemic has shifted all user behaviour in 2020.

“There is more uncertainty throughout the year on what will happen to the subscriber growth, so again [what] we are forecasting means that we do the things that we’re only very, very certain that we will deliver upon.”


2) Spotify is ‘conducting experiments’ around social features…

Ek was asked when Spotify plans on adding social features to its platform – presumably the ability for fans to comment on tracks, for example – like what Chinese music streaming services such as Tencent Music offer.

The analyst asking Ek this question also noted that “apps like Clubhouse could have an interesting entry” here.

Clubhouse is of course based around voice and audio rather than visual posts, and the implementation of an audio-centric social feature on Spotify, which is currently pursuing a goal of becoming the world’s No.1 audio platform, would be an interesting development.

“We’re in the early innings of the innovation of the audio formats and creator to fan interactivity is definitely one of those things that we’re paying attention to and looking at.”

Ek explained that Spotify is “very interested in” the idea of adding social features to the service, and that the company “obviously pay[s] close attention to everything that’s happening in markets around the world and new developments in audio”.

Added Ek: “I’ve said this many times before. We’re in the early innings of the innovation of the audio formats and creator-to-fan interactivity is definitely one of those things that we’re paying attention to and looking at.

“We are conducting experiments on it already… I don’t have any sort of specific here to announce, but there are plenty more things to come in the coming months of this year as well when it comes to creator to fan engagements.”


3) Raising prices doesn’t mean user growth has peaked, it’s just one of “three legs to the stool” of how Spotify can grow…

In the final question on the analyst call, Ek was asked if Spotify’s growth strategy is moving from a focus on users, to “a balance of price and users”. Soes this shift suggest that the company’s user growth has peaked?

In other words: Is Spotify ‘testing’ price increases in certain markets because its user growth has reached its limit there?

Ek responded that “there are three legs to the stool” of how Spotify can achieve growth and confirmed that price rises will become part of its growth strategy going forward.

He explained: “One, we can improve our product proposition. Two, we can launch in new markets and three, we can raise prices.”

Until recently, added Ek, the company hasn’t really tried to “flex the third muscle,” i.e raise prices, “because we’ve been focused on improving our product proposition and launching in new markets”.

In Norway in July 2018, SPOT ‘tested’ 10% price increases for its standard Premium, student and Family Plans and they have remained 10% higher ever since.

In SPOT’s investor update, the company reports that it raised the price of the Family Plan in seven markets in October 2020,  including Australia, Belgium, Switzerland, Bolivia, Peru, Ecuador, and Colombia (alongside Duo in Colombia).

Early results of the increases are positive, says SPOT, having seen “no meaningful impacts to churn or customer intake in these markets.

Added Ek: “Take my home country Sweden as a great example. That is a clear case where we are tapping out of an addressable population.

“Hence raising prices in Sweden probably makes sense in order to grow, which then obviously, not only compensates Spotify but compensates all the amazing creators we have on our platform and allows us to strengthen the proposition to them as well.”

Ek added: “We’re trying to optimize for growth and there’s three ways to grow. We’re now adding the third part of the stool here as well, but I don’t think you should read into that, that growth has peaked. It is more that we’re now flexing our muscles and adding that third part, too.”

He continued: “We have experimented with [price rises] for quite some time. We started two years ago so it’s not something that we’ve done in a rush. We did it in Norway two years ago, we’ve done it since in in Argentina, Australia and in many, many other markets throughout the time.

“But this is the time maybe where you’re seeing it’s actually becoming a real part of the strategy. Mostly in fact because of all the positive response that we have been seeing of the value that we’re providing already to consumers.”Music Business Worldwide

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