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Spotify reports first quarterly operating profit, buys a couple of podcast companies

By | Published on Thursday 7 February 2019

Spotify

Spotify published its financial results for the last three months of 2018 yesterday and – with beaming pride – announced that it is now profitable. Well, it was a quarter with some rarely seen positives at the bottom of the balance sheet.

“Results for Q4 2018 outperformed our expectations”, it wrote at the top of its report to shareholders, adding that “for the first time in company history, operating income, net income and free cash flow were all positive”.

There were various factors behind those positive figures, though Spotify bosses were keen to not get too carried away. They quickly told investors that they had updated forecasts for 2019, that they expected the firm’s gross profit margin to fall across the year, which would leave them with an overall loss going into 2020. Which may account for the dip in the company’s share price that followed the publication of yesterday’s results.

Though before getting all sombre and cautious, the Spotify team did allow themselves a brief moment of celebration, during which they threw half a billion dollars at a couple of podcast companies. Because, hey, why have just one podcasting company when you can have two? Following rumours last week that Spotify was about to buy podcast maker Gimlet Media, the streaming service announced deals to buy that company and podcast distribution platform Anchor.

Why the cash splash on all things podcasting? Well, reckons Spotify CEO Daniel Ek, after ten years in the music game, Spotify now wants to become the destination of choice for all your audio listening needs. And not just to occupy more of your time, but because there’s lots of money to be made from people’s ears that’s currently just sat on the big imaginary table.

“Video is about a trillion dollar market”, he says in a blog post. “And the music and radio industry is worth around a hundred billion dollars. I always come back to the same question: Are our eyes really worth ten times more than our ears? I firmly believe this is not the case. For example, people still spend over two hours a day listening to radio – and we want to bring that radio listening to Spotify, where we can deepen engagement and create value in new ways. With the world focused on trying to reduce screen time, it opens up a massive audio opportunity”.

Of course, Spotify previously tried dabbling in that trillion dollar video market, creating its own much hyped video content, none of which gained much momentum. Though one possible reason for that was the fact many people saw Spotify as an audio app, and weren’t keen on suddenly having to look at it. In which case, beefing up audio-only offerings beyond music does make sense.

While it took time for Spotify’s move into podcasts to get going, it is now the second biggest podcast listening platform in the world. Although it’s still a long, long way behind market leader Apple. However, Spotify has been more proactive in this space of late and has gained ground quickly. And the acquisitions of Gimlet and Anchor represent a big step in that regard.

Founded in 2014 by former ‘This American Life’ producer Alex Blumberg, Gimlet has launched a number of hit shows – one of which, radio drama ‘Homecoming’, was developed into a TV series for Amazon last year. It also has a branded content division, which works with companies to create their own shows.

Anchor, meanwhile, is a platform that gives anyone the tools and platform to create, distribute and monetise their own podcasts.

“Based on radio industry data, we believe it is a safe assumption that, over time, more than 20% of all Spotify listening will be non-music content”, says Ek. “This means the potential to grow much faster with more original programming – and to differentiate Spotify by playing to what makes us unique – all with the goal of becoming the world’s number one audio platform”.

“Just as we’ve done with music, our work in podcasting will focus intensively on the curation and customisation that users have come to expect from Spotify”, he goes on. “We will offer better discovery, data and monetisation to creators”.

Whether this means Spotify will start giving out per-play royalties to all the podcasters on its platform remains to be seen.

The key revenue stream for podcasts at the moment is advertising. If Spotify was to implement a system where premium subscribers could listen to shows distributed by Anchor without the ads, while creators were still remunerated, that might be a draw for listeners and podcasters alike, which would help Spotify to grow as a podcast destination of choice.

Quite how that would work isn’t clear though. Spotify’s music industry partners will also have strong opinions on monies in the streaming service’s big subscriptions pot being shared out with podcasters as well as the labels and publishers.

Another possible benefit for Spotify in growing its spoken word provision is on the ad-funded side, where the firm is actively trying to boost revenues, possibly with more branded content. It’s much more cost-effective to involve brands in spoken-word output than linking them to music, because the latter requires the involvement of any artists that feature as well as any labels, distributors, publishers or societies which have a stake in their recordings and songs.

Nonetheless, Ek insists that all this talk of getting users to listen to people talking “doesn’t make music any less important at Spotify”.

“Our core business is performing very well”, he says. “But as we expand deeper into audio, especially with original content, we will scale our entire business, creating leverage in the model through subscriptions and ads”. Hence the two acquisitions. “This is why we feel it is prudent to invest now to capture the opportunity ahead. We want Spotify to continue to be at the centre of the global audio economy”.

Another thing Spotify announced in its quarterly update yesterday is that it had 96 million paying subscribers among its 207 million monthly active users at that end of last year.

That’s up from 87 million three months previously. It’s important that Spotify’s paying-user base continues to grow at a decent pace because, as it currently stands, that brings in most of the income. And to be properly profitable long-term the company needs to reach a certain scale where the tricky streaming business model starts to become viable.

Also, the value of each subscriber varies greatly around the world, with monthly subscription fees different in different markets, which means that the required level of scale is all the higher the more emerging markets start to dominate in terms of overall subscriber numbers. But still, 96 million premium users, an operating profit and lots of podcasts. Woo!



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