Spotify’s share price hit an all time high today after the company revealed its latest earnings, delivering a third quarter of profit for the streaming giant, which reported an operating profit of €454 million for the third quarter of the year. The company is now projecting a full-year operating profit of €1.4 billion for 2024, according to the earnings release.
That has dramatically increased CEO Daniel Ek’s wealth - his stake of approximately 30 million shares (including recent warrants exercised in July) is now worth a fairly incredible $14.24 billion at today’s price, up from a mere $5.17 billion just a year ago when shares were trading at $171 a pop.
So, great news for Spotify, and even better news for Ek. Which might be why he felt able to drop a quiet bombshell during the call with analysts yesterday, as he dampened down hype around Spotify’s much-vaunted and hotly anticipated “supremium” offering. Lucian is NOT going to be happy.
Now, it’s never nice to feel that you’re letting the mighty Sir Lucian Grainge down, and invoking the disapproval of Papa Grainge would be enough to set a lesser man trembling in his boots.
Not Ek. When your company is worth more than twice what it was at the start of the year - and now sits at twice the market cap of Grainge’s Universal Music - it probably gives you that little extra mettle you need to let down Lucian - albeit fairly gently.
The blow came in response to a fairly innocent sounding question from Richard Greenfield, a hugely influential media and technology analyst at independent research firm LightShed Partners, who has a bit of a track record for asking pointed questions that get to the heart of things.
“While some of the labels have talked about this” - Spotify’s super premium offering, that is - “there doesn’t appear to be a consensus of what the record labels or artists want the product to be”, said Greenfield. “What does Spotify want the offering to be and how involved will the artist need to be to make this work?”
Ek’s lack of enthusiasm to talk about super premium yet again was stark. “Yeah, so overall, just as a reminder we have talked about this in the past quarters as well”, he started, “We are excited about this and just to set expectation, we are moving from the one-size-fits-all market that quite often happens in early development where you have fewer SKUs to then as you keep growing into more and more mature marketplaces, you add more SKUs to address more of the market”.
“That is sort of how you should think about the evolution of Spotify”, he added, “and this higher priced music tier of Spotify is certainly one that I think will have a lot of growth for the music industry and something that consumers will love too”.
SKUs! Growth! Mature marketplaces! It would be hard to make it sound less exciting. Ek continued, “I can’t really talk about specifics for it, but again, I can talk about the principle that’s driving this. The principles for us is always the same, which is how do we create something that consumers love but that also delivers value back to creators”.
It’s amazing the confidence a soaring share price can give you.
Gone is the kowtowing to Universal. Gone is being forced to demonetise whole swathes of creators because Universal didn’t feel it was getting a big enough slice of the pie: that bird has flown, and Universal got what it wanted, but that might not happen in the future.
Instead, the emphasis now is on what Spotify customers would like, and what delivers value for creators. Note the use of creators, rather than “partners” or “labels” or “rightsholders”.
So if Ek isn’t excited by super premium, what does get him up in the mornings?
Uh oh. Lucian, close your eyes.
Right up top, almost the first thing he said, there it is. “I am as energised as I’ve ever been about the current landscape of technology”, gushed Ek just minutes into his prepared remarks.
“What’s unfolding in AI with all of its knock on effects is both thrilling and humbling”, he continued. “Moments like this don’t come often. They are inflection points where you can either let the opportunity slip by or you can seize it and press forward with conviction. We’re choosing the latter, fully committed, heads down and building for a future full of possibility”.
That future full of possibility includes “transformative shifts in music discovery and new innovative ways to connect artists and fans like never before”, driven by “targeted investment that also expands Spotify into new areas, enhances the platform and deepens the value we bring to users”.
The message was clear: Spotify knows best, and Spotify knows what will move the needle.
In fact, said Ek later, “The reality is there are very few things that move things on the aggregate and there are more things that may move numbers on small individual cohorts”.
It’s worth remembering at this point that Grainge recently said that Universal’s own analysis was that 20% of premium streaming subscribers would be tempted by a super premium offering.
Two of the big needle movers, said Ek, have been “AI DJ and music videos” which “have been exceptions to that where it is truly moving averages. We see that people who are using music videos have significantly higher engagement and retention than ones who don’t”.
AI DJ is also bringing “amazing results”, continued Ek, “not just on quantitative metrics, but also on quality metrics, how people feel about Spotify, what they say they love about Spotify”.
This, said Ek “showcases the strength of Spotify: we are at our best when we can bring great innovation to our customers”.
Now, clearly, that’s not to say that there is not a super premium offering on the horizon, but it was clear from Ek that he sees that opportunity as one that is firmly owned by Spotify, not by the labels, and which will place product innovation at its core, driven by what Spotify subscribers actually want, and what they respond to.
In a landscape where - as Greenfield so clearly articulated - no one really agrees on what the “superfan” future, or super premium streaming experience, might look like, it is notable that Ek has made it clear that he thinks that it should be Spotify in the driving seat.
“If we see something that we think will drive meaningful engagement or retention uplifts”, he continued, “it is in the best interests of Spotify, obviously, to pursue that. And if that means there are shorter form tradeoffs where numbers on a margin perspective will go down for a little bit of while”, or a period where you’re given the cold shoulder by the big L maybe, then “we’re still always happy to make that tradeoff”.
The message to the music industry - and to Universal Music in particular, perhaps - couldn’t be clearer. With users increasingly coming from beyond the traditional US and European markets (Europe has dropped from 34% to 27% of users since 2020, while RoW has grown from 19% to 33%); with subscriber engagement being driven by Spotify’s own innovations in AI and video and its growing audiobooks business that’s driving “five hours more consumption per user”; with a fundamental transformation of its advertising business from brand-focused to performance-based advertising through its new Spotify Ad Exchange; and with the company’s critical shift to consistent profitability, Spotify appears to be systematically building independence from the traditional music industry structures and constraints.
Gone are the days when a frown from Lucian could send Spotify scrambling to adjust course. Instead, we have a profitable, innovative technology company that's worth twice what Universal is, and which clearly believes that the future of music streaming - super premium or otherwise - should be shaped by what users want, not what labels think they need.
If Lucian doesn't like it? Well, the numbers suggest that’s increasingly his problem, not Spotify’s.
