Spotify is playing a dangerous game…

Credit: Sipa US/Alamy
MOUNTAIN VIEW, CA - DECEMBER 03: Daniel Ek attends the 2018 Breakthrough Prize at NASA Ames Research Center on December 3, 2017 in Mountain View, California. (Photo - Yichuan Cao / Sipa USA)

MBW Reacts is a series of analytical commentaries from Music Business Worldwide written in response to major recent entertainment events or news stories. Only MBW+ subscribers have unlimited access to these articles. The below article originally appeared within the latest MBW+ Monthly Review email, issued exclusively to MBW+ subscribers.

“We’ve talked about 2024 as the year of monetization, and I think we’re really delivering on that ambition.”

On April 23, Daniel Ek presented good news for Spotify investors regarding his company’s Q1 2024 earnings: the company’s fattest-ever quarterly operating profit was achieved in the period.

This was a manifestation of Spotify’s “year of monetization”, aka a fixation on margin, rather than topline growth.

Spotify partly achieved this result by laying off 2,300 people last year. It also achieved it by slashing its marketing costs.

In Q1 2024, according to its financials, Spotify’s operating costs were reduced by EUR €86 million YoY. ‘Sales & Marketing’ costs specifically were down by €23 million YoY.

‘Sales & Marketing’ in this context includes the paid promotion of Spotify’s Premium tier – including the underwriting of free trials – plus joint marketing campaigns for artists with record labels.

Yet there was a problem in Spotify’s Q1 numbers: Monthly Active Users (MAUs) were up by +13 million QoQ, but missed Spotify’s own guidance by a clear 3 million.

Daniel Ek was candid about the negative impact his company’s cut in marketing spend over recent quarters had on MAUs.

“In hindsight, we probably pulled back [on marketing spend] too significantly throughout 2023,” said Ek, speaking to analysts. “As such, we’re already correcting this as we move into Q2.”

Ek was at pains, however, to ensure his investors knew this did not mean “going back to what we were doing before” – i.e. ratcheting up marketing spend to previous levels.

“We still continue to expect improving profitability over the course of this year and into the next,” continued Ek, reassuring investors that Spotify would be watching the pennies on its marketing spend. “Any new funds are being directed towards acquiring and reactivating high-value users who enhance our base with their deeper engagement and loyalty.”

Ek must now strike the right balance between two competing priorities: (i) Keeping his firm’s operating margin high enough to satisfy investors in the “year of monetization”, while (ii) Marketing Spotify aggressively enough to stave off investor concerns over flaccid MAU growth.

The fact of the matter is, as much as Ek wishes to target “loyal” users of his service, the experience of using Spotify for a music fan today is not materially different, in terms of catalog and general UI, from using YouTube Music.

Spotify’s great advantage in its global battle with YM and other services is its existing leadership position, plus its brand recognition/trust. Marketing is the fuel that keeps that plane in the air.

YouTube has expressly stated its ambition to overtake Spotify as the world’s “#1 contributor of revenue to the music industry” by 2025, via the “twin engines” of advertising and subscription.

If Spotify’s “year of monetization” involves cutbacks that harm its ability to poach – or keep – users away from YouTube Music, will Daniel Ek’s drive for profitability end up aiding the ambition of Lyor Cohen and co?

And what of TikTok Music? Now TikTok’s licensing agreement with Universal Music Group is wrapped up for another few years, will we see the launch of the ByteDance company’s subscription music platform in major markets like the US… complete with the UMG catalog?

How hard will Spotify have to work to attain – and maintain – Gen Z subscribers when TikTok comes knocking for their custom?

Speaking of Spotify’s “year of monetization” (aka: push to increase operating margins), it’s also likely the driving force behind the company’s controversial move to lessen the mechanical royalty rate paid to songwriters and publishers in the US.

Last month, Spotify announced that it was re-categorizing its Premium tier as a ‘bundle’ (i.e. a combination of music and audiobooks, the latter having launched on Premium tiers in late 2023) in the United States.

I’ll dig into the mathematics of that move another time – it’s a complicated picture.

But here’s what we know for sure: the National Music Publishers’ Association (NMPA) believes it’s “likely” to launch a lawsuit against Spotify as a result of SPOT’s latest attempt to push down its mechanical royalty rates.

Meanwhile, the lobbying efforts of music publishers against Spotify are likely to win support from goliaths of Wall Street, such as Blackstone and Apollo. Both of those companies have already heavily invested in music rights – and are currently embroiled in a fight to acquire the assets of Hipgnosis Songs Fund.

So, to recap: Daniel Ek’s “year of monetization” has, so far, pleased his company’s profit-fixated investor base. But it doesn’t come without dangers.

Not only does it risk gifting YouTube and TikTok a marketing vacuum to fill, while inviting an aggressive legal challenge from music publishers. It also risks further infuriating the creative community upon whose work Spotify has been built.Music Business Worldwide

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