The MBW Review offers our take on some of the music biz’s biggest recent goings-on. This time, we listen carefully to what Daniel Ek has to say about Spotify‘s performance in 2019. The MBW Review is supported by Instrumental.
This morning (February 5), Spotify announced that more than a quarter of a billion people are now using its platform globally each month – and that some 113m of them are paid-up subscribers.
Wall Street didn’t receive this news quite as happily as the record industry might have. SPOT’s share price is down over 4% today, due to the investment community failing to appreciate elements of the company’s 2019 performance – not least a €73m annual operating loss.
Despite this fiscal skepticism, Spotify boss Daniel Ek remains a picture of confidence.
Addressing investors earlier today, Ek said that in 2019, Spotify had “outlined a vision to expand beyond just music – and we made significant progress in our goal to become the world’s number one audio platform”.
Speaking on a Q4 earnings call, the Spotify CEO praised his company’s acquisitions of podcast companies over the past 12 months – including Gimlet, Anchor and Parcast – while referencing today’s news that SPOT has also snaffled Bill Simmons’ sports-focused The Ringer ‘cast. (With the latter, says Ek, Spotify believes it has “bought the next ESPN”.)
Here are three crucial things we learned from Ek and his company’s quarterly announcement today…
Spotify’s user growth was bigger in 2019 than it was in 2018 – and Daniel Ek reckons that’s a sure-fire indicator that the firm’s revenues are about to explode.
Spotify’s total MAUs at the close of 2019 stood at 271m – up by an impressive 64m on the same period of the prior year.
“For a platform of our size, this re-acceleration in MAU growth is a rare and a powerful signal for future revenue growth.”
Daniel Ek, Spotify
Ek said today: “History has shown us that while we’re usually right in predicting the outcome of our strategy, exact timing can be uncertain.
“So in 2018 for instance, we indicated that our focus was on driving MAU growth and we invested in product and innovation and launched an all-new free experience on our ad-Supported tier to give users a more engaging tailored experience. And while we saw positive leading indicators it really took until 2019 for the benefits of our investments [in MAU growth] to pay off in a big way.”
Added Ek: “For a platform of our size, this re-acceleration in MAU growth is a rare and a powerful signal for future revenue growth.”
In other words, when Spotify focused on MAU growth, according to Ek, it took a year to really bear fruit; so as far as revenue growth in 2020 stands… hold on to your hats.
Spotify’s annual revenue in 2019, by the way, landed at €6.76bn – up by €1.51bn on the prior year. In that prior year (2018), Spotify racked up €5.26bn annual revenues, up by €1.17bn YoY.
Ek further noted during his earnings call spiel that Spotify’s user retention rate was up in “each of our top 20 markets” in 2019, including North America, Europe and LATAM.
This re-acceleration of MAU growth, he said, even applied to “our most mature markets like the Nordics”.
“By some estimates now, we should be the largest US audio streaming service.”
Daniel Ek, Spotify
Being careful not to say Spotify had the most subscribers of any audio service in the United States (a crown which may or may not still be held by Apple Music), Ek commented today that “by some estimates now, we should be the largest US audio streaming service” in terms of total users.
In its fiscal guidance for this year, SPOT has forecast that, at the end of 2020, it will have between 328-348 million global MAUs and 143-153 million Premium subscribers.
It believes its annual revenue this year will land between €8.08-€8.48 billion.
2) Spotify’s label-paid sponsorships have “performed impressively” so far
A valuable and fair tool for record labels or tantamount to payola?
That was the debate roaring across the music industry when Spotify announced in October that it had started allowing record companies to buy pop-up recommendation ads on its platform – for $5k-plus a go.
We haven’t heard much more about these pop-ups since then, but Daniel Ek specifically gave them a shout-out in front of analysts and investors earlier.
Speaking on the SPOT Q4 earnings call, Ek said: “Sponsored recommendations, our first promotional service for artists and labels, have performed impressively and we’re encouraged by both the creator and user response.”
He cited the example of US rapper Trippie Redd, who releases his music via indie label 10K, which in turn is serviced by UMG’s Caroline. Trippie Redd’s latest mixtape, A Love Letter To You 4, hit No.1 on the Billboard 200 when it was released in November 2019.
“Sponsored recommendations, our first promotional service for artists and labels, have performed impressively and we’re encouraged by both the creator and user response.”
Daniel Ek, Spotify
According to Ek, Redd’s success with that mixtape (pictured inset) is an “example of the potential of this [paid for recommendation] tool in creating awareness and scale for an up-and-coming indie artist”.
Ek pointed out today that Caroline and Redd “leveraged sponsored recommendations and opened at No.1 [on the chart]”.
Added Ek: We’re still very early in this effort. And as adoption picks up among our partners, we expect the growth rate to pick up as well and become a meaningful source of gross profit expansion in the coming years.”
He continued: “For a music marketeer, having something like sponsored recommendation, it’s really a dream come true. And because of that we expect the demand to pick up over the year.”
The paid-for recommendation ads form part of what Spotify calls its ‘two-sided marketplace’, and for the first time, the firm has put a value on this element of its business – noting that the ‘two-sided marketplace’ (combined with ‘strategic licensing’) added over €30m to the firm’s gross profit in 2019.
“For a music marketeer, having something like sponsored recommendation, it’s really a dream come true.”
In addition to the paid-for pop-ups, Spotify’s ‘two-sided marketplace’ includes online recording studio Soundtrap, as well as SoundBetter – the pay-for-musicians marketplace Spotify acquired last year. (Ek said Spotify had seen “strong subscriber growth” for Soundtrap in 2019; SPOT’s investor letter today confirmed the platform had “doubled its paying subscriber base in Q4”.)
All of these ‘two-sided marketplace’ platforms are notable for the fact that they charge labels, artists and musicians in order to improve and/or create music that can then be uploaded to its platform. Will Spotify start charging record labels for other B2B tools in the coming 12 months? Watch this space.
“As we come into 2020, you will certainly see us invest more,” said Ek of the ‘two-sided marketplace’ today… “and launch new products and offerings.”
3) Over 40m Spotify users now listen to podcasts. Don’t expect record labels to love that news.
Spotify’s audience is getting bigger – and a bigger percentage of that audience is using the platform to access podcasts.
In its Q3 results (to end of September), Spotify said that nearly 14% of its then-248m global active users were listening to podcasts – approximately 35m users.
In other words, the number of people accessing podcasts on Spotify grew by around 8m, or 23%, from the end of Q3 2019 to the end of Q4 2019.
Speaking today, Daniel Ek noted that total podcast consumption hours on Spotify in Q4 2019 grew by nearly 200% year-on-year.
“[That 200% figure] is a global phenomenon,” he said. “It’s not just a US phenomenon.”
Ek then adopted a line of argument that might start to irritate record labels as the months fly by in 2020. He suggested that “podcast users are not only more engaged [with Spotify] overall, but because of that engagement they’re also listening to more music”.
“Podcast users are not only more engaged [with Spotify] overall, but because of that engagement they’re also listening to more music.”
This phenomenon – people spending less time listening to music, and more time listening to podcasts – is, according to a new Financial Times report, at the center of tensions labels and Spotify as you read this.
The labels, reports the newspaper, expect a minimum payment for every Spotify subscriber, regardless of how much music they consume; Spotify apparently questions that view – positing the notion that if a subscriber listens to nothing but podcasts on its service, the record labels shouldn’t get a slice of that cheese.
Sources close to the situation tell MBW that Spotify remains without long-term licensing deals in place with Warner Music Group and Universal Music Group – but that, in both cases, SPOT is edging closer to fresh agreements.
You’d have to expect discussions around minima payments for podcast-listening subscribers to be at the core of these negotiations.
