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Business News Digital
Spotify boss says his big ambitions in audio at large will deliver mega-revenues and better margins
By Chris Cooke | Published on Thursday 9 June 2022
Daniel Ek yesterday told investors that Spotify’s strategy of recent years to become an audio platform rather than just a music platform will ultimately result in a business that “can generate $100 billion in revenue annually” and “achieve a 40% gross margin and a 20% operating margin”. Yeah, maybe. Anything that would allow us to sell our single Spotify share at a higher price than we paid for it in 2018 would be nice.
The Spotify boss was speaking alongside a number of his senior colleagues as part of an event designed to convince investors that – despite recent controversies; years of stats that show growth in users and revenues but not really profit; and a share price that’s been in decline for much of the last year – the grand Spotify plan is still a mighty fine plan.
Spotify’s bid to become more than just a music platform has annoyed plenty of people in the music community, of course, especially when it has been spending big on signing up podcasters while concurrently trying to push down the royalties it pays songwriters and music publishers in the US. But some investors have also expressed concern about the diversification plan and its impact on the streaming firm’s short-term profitability.
Meanwhile, with a temporary COVID-caused surge in home entertainment consumption coming to an end, and an increasingly competitive digital content market place, Spotify has found itself included in a general narrative that the big subscription streaming companies are facing a challenging few years. A narrative fuelled by Netflix reporting a dip in subscriber numbers in the first quarter of the year.
And while just this week analysts at US bank Raymond James stressed that there are significant differences between the Netflix business model and the Spotify business model – insisting that lumping them together was an “overgeneralisation” – Spotify knows it has critics and concerned allies in the investment community.
With that in mind, Ek kickstarted his speech yesterday by acknowledging that – while most of the investors tuning in probably rate Spotify as a product – some of his audience likely think “that we’re a bad business or at least [we’re] a business with bad margins for the foreseeable future. And others may even think that the audio market is limited and perhaps not that significant”.
But those naysayers are wrong, Ek reckons. “I believe we have a great product and importantly, our business is doing really well”, he went on. “But what’s even more, we’re really investing in building a fantastic, multi-sided platform that has all the ingredients to become one of the truly unique creative platforms in the world. And based on what we see, we are accelerating our moves to seize that opportunity in the near term. And the value creation opportunity is very high”.
Ek then reviewed how the Spotify business has evolved in the four years since its listing on the New York Stock Exchange. The core foundations of the business haven’t changed, he said: those being that Spotify is a service that aims to be available on as many devices as possible, which offers a free tier that hooks users in, and which then retains those users by offering the very best personalised recommendation and curation tools.
However, the company’s commercial ambitions and objectives have evolved since 2018. For starters, while the sale of premium subscriptions remains by fair the biggest revenue generator for Spotify, Ek said that there has also been a focus on growing the company’s two other revenue streams – which are advertising sales and its so called marketplace products, ie the provision of services to creators. And it’s by growing all three of those revenue streams that Spotify will ultimately reach the 30-35% profit margin targets it previously set itself, Ek insisted.
But, of course, the biggest evolution at Spotify over the last four years is the increased importance of podcasting to the business – which has resulted in the company splashing the cash big time in a bid to become as big in podcasts as it is in music. And that big push into podcasting has, in the short term at least, had a negative impact on Spotify’s profitability.
In 2018, he went on, “our company was all about music. And when you isolate music, thanks to our marketplace products, its gross margin has been steadily climbing. And we are performing much better than you probably suspect – roughly 28.5% – which is significant progress in reaching our 30-35% long term goal. What’s been dragging it down is our move into podcasting”.
So why the podcasting move? Well, as has been repeatedly noted by those following Spotify’s evolution, while increased scale and slowly negotiating better terms with the music industry as licensing deals come up for renewal – plus new products like marketplace – would slowly make the music side of the company profitable, growth on that side of the business would nevertheless be constrained and potentially capped by the high cost of licensing recordings and songs. Hence the attraction of moving into other kinds of audio.
Ek reminded his investors that “we saw the potential to be much more than just a music company. By leveraging what we learned – and all of the technology we built – in music across other verticals, our ambitions became much bigger. And here’s where those investments have taken us: We are now the world’s largest audio streaming platform. But the prize we are going after is actually much greater and as a consequence, the total addressable market is gigantic”.
Thanks to its numerous investments in the podcasting space, Ek bragged, “we are now the number one platform that podcast listeners use the most in numerous markets around the world, including here the US. In just three years, we’ve not only become a leading platform for creators and listeners, but we’ve expanded the very format of podcasting itself”.
And while podcasting remains unprofitable for now, Ek admitted, “we believe it has a 40-50% gross margin potential”. And don’t be thinking that the evolution from music specifically to audio generally stops with podcasting. “What our successes in music and podcasting have clearly demonstrated is that we have built a powerful machine and solid infrastructure that enables us to go after new verticals”, he added. “And we are not waiting around”.
Next on the agenda is audiobooks. Ek noted: “So, several months ago, we announced the agreement to acquire Findaway, a global leader in audiobook distribution. And while we are still waiting for this deal to close, we believe that audiobooks, in their many different forms, will be a massive opportunity. Today, the global size of the book market is estimated to be around $140 billion dollars. That’s inclusive of printed books, e-books and audiobooks, with audiobooks having only about a 6-7% market share”.
“But when you look at the most penetrated audiobook markets”, he continued, “it’s actually closer to 50% of the market. So call that an annual opportunity of $70 billion dollars for us to expand and eventually compete for. And just as we’ve done in podcasting, expect us to play to win. [And] while it’s still early, we expect audiobooks to also have healthy margins, above 40% and be highly accretive to the business”.
And after audiobooks, what next? “We see the opportunity to continue to imagine and explore new verticals across our platform – within audio, but also beyond”, Ek confirmed. “And while we aren’t ready yet to share the verticals that will come next, I don’t think it’s hard to imagine how we will deploy this proven playbook against them, ultimately winning market share and innovating to expand the categories we go after”.
So, naysayers should note, “the opportunity out there is massive and I continue to believe it’s ours to win. From everything I see, I believe that over the next decade, we will be a company that can generate $100 billion in revenue annually, and that we can achieve a 40% gross margin and a 20% operating margin. And I know it seems challenging to put all this into a financial model, because frankly this type of company has never existed before, [but] that is exactly my point”.
“The businesses that never existed before are always the most valuable to have invested in over the long term”, he concluded. “And this is the Spotify machine: a unique, highly scalable machine that enables a unique platform”.
Fun times. And whatever you make of all that, you can be sure that those in the music community annoyed and/or concerned about Spotify’s obsession with podcasts in recent years are going to be equally annoyed and/or concerned as it becomes newly obsessed about other rival audio products.
