Efficiency is Spotify’s new mantra, and the music streaming company says its focus on cost-cutting will mean better profit margins going forward.
“A new part of the Spotify modus operandi is our focus on efficiencies,” CEO Daniel Ek told investors on the company’s Q3 earnings call on Tuesday (October 24). “[CFO] Paul [Vogel] and myself and the rest of the management team [are] constantly looking at how we can make improvements, and we’re constantly finding new ways to bring more efficiencies out of the business.”
The company’s leadership team credits those efficiencies for the streaming service’s solid Q3 earnings numbers, which showed Sweden-headquartered Spotify swing to a surprise operational profit of €32 million (USD $34.8 million at the average exchange rate for Q3), the company’s first quarterly profit since Q1 2022. In the same quarter a year earlier, the company had clocked a €228-million operating loss.
In Ek’s view, Spotify has three “levers” by which to grow its business: improving and expanding its product offerings, reducing costs, and raising subscription prices. In its effort to regain profitability, Spotify has engaged in all three.
It’s in the midst of launching an audiobooks service, which – as of this month – is offering access to 150,000 audiobooks for up to 15 hours per month to Premium subscribers in the UK and Australia at no extra charge. The service is scheduled to launch in the US later this year.
Spotify announced a hiring freeze and layoffs at the start of the year that saw 500 job reductions, followed by another headcount reduction of 200 in June that was related to a restructuring of Spotify’s podcast division.
The company also gave up the ghost on its live streaming effort, Spotify Live, shutting the service down in April to focus more fully on podcasts.
Finally, in July of this year, Spotify did what many in the music business had been urging it to do for some time, and raised its price for the individual Premium subscription for the first time ever, taking it from $9.99 in the US to $10.99.
This three-pronged approach has paid off for the company, and its execs are confident that the profits will continue.
“Our… expectations are now that we will consistently be in the black moving forward,” CFO Paul Vogel declared on the earnings call.
Besides Spotify’s return to profitability, here are three other things we learned on the company’s Q3 earnings call.
1. Spotify’s price increase didn’t cause cancellations – and there will be more hikes
Spotify was the last holdout among major streaming services to resist raising its subscription price, much to the consternation of music companies.
The company’s strategy thus far has been to build up as large a customer base as possible, capturing market share and ensuring a large revenue stream. Keeping subscription rates low made sense in that context, but with inflation running hot in recent years, the businesses licensing music to Spotify were beginning to ask for more.
For Spotify, the major fear was a loss of paying customers, and therefore revenue, but the company’s leadership was pleased to find no adverse impact from the recent price hike – and even reported an acceleration in new subscriptions.
“We feel really good about how that went down,” Vogel said on the call. “The churn was right in line with expectations… Just as importantly, we outperformed on the gross intake side, which is one of the reasons why we outperformed on overall [subscriptions].”
“[Price hikes are] definitely part of the arsenal of tools we can deploy to keep growing the business and I think you should expect us to use that when we see the appropriate dynamics.”
Spotify added 6 million net paying subscribers during the quarter, bringing the total to 226 million, a 16% YoY increase. Total monthly active users (MAUs) grew by an even higher percentage, up 26% YoY to 574 million. Both paying subscribers and total MAUs exceeded Spotify’s guidance by around 2 million.
For Ek, raising prices successfully means maintaining the company’s “value to price ratio” for consumers. Simply put, an increased price should come with increased value to consumers. Expanding into podcasts and audiobooks, as well as adapting AI technology, are some of the ways that Spotify plans to maintain that ratio, Ek said on the earnings call.
“The primary way you should think about these initiatives [is that they] create greater engagement, and that greater engagement means we reduce churn, [and] greater engagement also means we produce more value for consumers and add [to the] value to price ratio, [which] is what allows us to raise prices like we did,” he said.
“And we’re constantly focused on improving that ratio all the time by just adding more and more and more value for consumers.”
Tellingly, Ek added that price hikes are “definitely part now of the arsenal of tools we can deploy to keep growing the business, and I think you should expect us to use that when we see the appropriate dynamics.”
2. Spotify’s AI will be a ‘win-win’ for creators and consumers (and will keep listeners engaged)
Like many other media and music businesses, Spotify is cautiously experimenting with AI technologies.
The company soft-launched an “AI DJ” tool earlier this year, which it marketed as a bespoke digital radio DJ that acts as “a personalized AI guide that knows you and your music taste so well that it can choose what to play for you.” The tool was expanded globally in August.
The following month, Spotify unveiled a new Voice Translation tool for podcasts that can translate shows into additional languages, in what sounds like the podcaster’s own voice.
The AI voice generator can “match the original speaker’s style, making for a more authentic listening experience that sounds more personal and natural than traditional dubbing,” Spotify says. For now, the tool is available in a limited selection of languages, including Spanish, French and German. The company plans to add more languages in the future.
“There is an enormous opportunity for us to apply generative AI to really create compelling audio advertising.”
For Spotify’s Ek, adapting AI technologies isn’t about jumping on a bandwagon – it’s about user retention.
“It is about increasing engagement with the service by creating even more compelling value,” Ek said on the earnings call. “And the primary way we think about that is… leveraging AI to create or augment already amazing content.”
Spotify’s AI DJ can “personalize things, it can contextualize things, it can provide this [personalized service] at a scale that would be impossible to do by humans,” Ek added.
The Voice Translation tool will be beneficial for consumers engaged “especially in non-English language content. They generally have a lot less content to consume. And for many other creators, this is an ability for them to be able to go with their content through many more geographies that they currently aren’t able to penetrate at all,” Ek said.
These AI initiatives “create greater engagement, and that greater engagement means we reduce churn, and [it] also means we produce more value for consumers and add [to the] value to price ratio, [which] is what allows us to raise prices like we did this past quarter with great success.”
Ek also suggested that AI could have a particularly impactful role for Spotify and other streaming services, as he expects AI-generated audio ads to become a reality before AI-generated video ads.
“The Spotify advertising format is not as easy to produce as text ads, and not as hard to produce as a video ad,” Ek said. “There is an enormous opportunity for us to apply generative AI to really create compelling audio advertising.”
3. Spotify’s audiobooks service already has fans, and will be a boost to the book industry
A key part of Spotify’s plan to raise its “value to price ratio” is to expand its offerings beyond music. Despite the difficulties it’s experienced with live audio (see layoffs mentioned above), the company is running full steam ahead with plans to become a one-stop shop for audiobooks.
“We’re encouraged with what we’re seeing and the most important thing is when you think about the consumers that are trying out the experience, they’re loving it and they’re finding it a really natural part of the Spotify experience and a great value add,” Ek said of Spotify’s first year in audiobooks, adding that “you’re definitely going to see us expand audiobooks.”
But will audiobooks be a drag on Spotify’s bottom line, as podcasts have been? The company’s executives don’t seem to think so, with Ek saying the audiobooks division “will be helpful to the 2024 results,” although right now “the primary focus is to bring it out in more markets”.
“The podcasting business is a much bigger global business because Spotify is a part of that business now, and we think we’re going to have the same benefit on the audiobook side, which will be great for authors and great for consumers.”
Asked how audiobooks will be monetized – given that paying subscribers get 15 free hours per month – Ek didn’t lay out a specific roadmap, but he did note that some audiobook listeners have already started paying for additional time above the 15 hours.
“There’s already today the ability for discrete payments, where consumers can upgrade and we’re already seeing consumers doing that in ways we probably wouldn’t have imagined,” Ek said, “where some consumers are heavily upgrading and being really heavy audiobooks listeners already [on] day one. But obviously, the base is very small. So it’s impossible for us to say where that leads us long term, but the ability [to monetize audiobooks] exists.”
Despite misgivings by some in the book publishing industry about Spotify’s move into audiobooks, Ek believes it will prove to be a boon to the book business.
“The podcasting business is a much bigger global business because Spotify is a part of that business now, and we think we’re going to have the same benefit on the audiobook side, which will be great for authors and great for consumers,” he said.Music Business Worldwide