Business is not as bad as you think, Spotify executives emphasized Wednesday in the company’s first investor presentation since 2018.
While Wall Street had recently soured on the streaming platform, due to its high level of investment, company executives said they expect to grow revenue by moving into the audiobook business, and potentially moving into the education, news and sports spaces. Significantly, Spotify’s podcast business, which executives said has been dragging down gross margins, is expected to see its margins turn positive after 2022.
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“Some may also think that we’re a bad business, or at least a business with bad margins for the foreseeable future,” said Spotify CEO Daniel Ek. “And others may even think that the audio market just isn’t that significant.”
“I can confidently say that this model in its totality is doing way better than you think,” he said.
To that end, after months of vaguely referring to positive performance in its recent earnings reports, the company released its first revenue figure Wednesday for its $1 billion podcast expansion, with chief content and advertising business officer Dawn Ostroff noting podcasts brought in “close to” €200 million, or about $215 million by current conversion rates, in ad revenue. The company expects this to increase “materially” in 2022.
The hefty investment came with a €103 million negative impact on gross margin during 2021, which may have impacted investor sentiment. On Wednesday, CFO Paul Vogel urged investors to stay with it, saying even though margins will continue to be negatively impacted in 2022, he expects the podcast segment to become profitable in the next “one to two years.”
Spotify went public via a direct listing in 2018. Since then, the company — which debuted as a music streaming service — has made clear its ambitions to become the top audio company in the world through major investments across podcasts, live audio and audiobooks. As of its most recent quarter, Spotify had 182 million paid subscribers and €2.66 billion ($2.82 billion) in revenue — the majority of which was driven by its subscription business.
As costs climbed, the stock price dipped. Shares of Spotify have fallen 5.5 percent over the past three months and 51.5 percent over the past year.
Spotify still sees podcasting as a major opportunity for growth, with Vogel citing it as increasing both user and revenue growth. Currently only 14 percent of listening hours from podcasts are monetized by the company on a global basis.
Overall, users who listen to music and podcasts on the platform have higher lifetime value, an important metric that Spotify uses to guide its investment, advertising and acquisition decisions.
While Hollywood streaming services like Netflix are contending with a slowdown in growth as it competes with rivals like Disney+, Spotify executives noted the company has seen a reduction in its churn rates across its premium and ad-supported tiers, with rates dropping to 3.9 percent at the end of 2021, down from 5.5 percent in 2017. Though churn was slightly higher at 6.5 percent in developing markets — defined as Asia, Africa and the Middle East — the relatively low rates come despite recent subscription price increases in 13 markets, including the U.S. and the U.K.
“We didn’t see any material impact whatsoever on either user intake or churn, which gives us plenty of confidence that we have that muscle, should we want to use it,” Ek said while hedging that Spotify does not want to “sacrifice the trust of these consumers.”
In addition to the expected upturn in podcasting, Spotify wants to move into the audiobook business, which Ek said is expected to have healthy margins above 40 percent and to be “highly accretive” to the business. The category is growing by 2 percent year over year, according to executives.
Spotify entered into an agreement to purchase audiobook platform Findaway in late 2021 and is waiting on the deal to close as one of its big pushes into the space. Part of that growth will include expanding the platform’s Findaway Voices offering, in which independent authors and publishers are connected with voice actors.
The company is also looking to move into other sectors, but executives were more vague on those plans, mentioning growing into sports, education and news over the next 10 years. Specific plans for these potential categories, which were listed as “X,Y, Z” across various slides, were not disclosed.
“From everything I see, I believe that over the next decade, we will be a company that generates $100 billion in revenue annually and achieves a 40 percent gross margin and a 20 percent operating margin,” Ek said.
Spotify’s main music business continues to be the main driver of growth, with current gross margins of 28 percent and projected growth to 30 percent in the next three to five years. Executives see room for expansion into Asia, Africa and the Middle East, all of which are in early stages for the company.
Another opportunity is expected to come from exclusive live audio rooms hosted by artists for their top Spotify fans. This offering is currently being tested with a select group of artists and has shown “promising” results. The intent is for the artists to celebrate new releases and also earn revenue by selling merchandise or promoting concert tickets.
So far, Wall Street appears to be buying it. Shares of Spotify were up 7 percent Wednesday during the nearly four-hour presentation.