Spotify Q2 2021. The Swedish audio streaming platform reported second quarter earnings yesterday, and for the most part, the company’s performance over the period was a bit of a mixed bag when measured against its guidance going into the day.
“Most of our major metrics — Subscriber growth, Revenue, Gross Margin, and Operating Income — performed better than expected this quarter,” the company stated in its press release. “The exception was MAUs, where we fell short of our guidance range.”
Here’s the top-line stuff:
- Total Monthly Active Users (MAU) on the platform grew 22% year-over-year to 365 in the quarter, softer than what was originally forecasted.
- Premium Subscribers grew 20% year-over-year to 15 million in the quarter, keeping in line with expectations.
- Of particular note, Advertising Revenue grew 23% year-over-year in the quarter, reaching the higher end of the company’s guidance.
Two things to note here:
- The company attributed the underachievement in MAUs in some part to “ongoing COVID headwinds” as well as, interestingly enough, “a temporary issue related to user intake on a third party platform.” The latter apparently refers to a problem with email verification during the sign-up process, and in the earnings call, Spotify execs estimate that 1-2 million potential new monthly active users were lost as a result.
- Meanwhile, the growth in advertising revenue was said to be driven substantially by its podcast business. More on that in a bit.
Spotify’s stock price slid in the wake of the mixed report yesterday. At this writing, it seems to be crawling back up, but as Barron’s points out, “after more than doubling in 2020, the stock is off by more than 20% this year.” That said, we’re not close stock-watchers over here — just citing it because I’m always curious to see what Wall Street thinks about all this.
There are, to my mind, three particularly interesting threads in the company’s earnings report this quarter.
The first, and most important, has to do with the significance of Spotify’s gains in podcast advertising. On paper, the leap appears to be tremendous: Podcast ad revenue on the platform was said to have grown by a whopping 627% year-over-year. This growth percentage was not mentioned in the press release, but it was noted in the earnings call, where CEO Daniel Ek added: “The continued out-performance is currently limited only by the availability of our inventory, which is something we’re actively solving for… The days of our ad business accounting for less than 10% of our total revenue are behind us, and going forward, I expect ads to be a substantial part of our revenue mix.”
So, 627% growth is a sexy stat, but it’s crucial to understand this is working off a small base number. A year ago, podcast advertising driven through the Spotify platform was still in its early, tentative, experimental stages — the company had just announced its Streaming Ad Insertion technology initiative a few months earlier, and it would be several more months before they would acquire Megaphone to accelerate the gambit.
What we’re actually looking at with the 627% number here, then, is probably the following historical marker: Q2 2021 seems to be the period when Spotify finally flipped on the podcast advertising switch, and now they appear to be in some position to manage the narrative of where the early days of that story will take them. The company’s overall advertising revenue gains should also be read against the anomalous context of this time last year: the opening stages of the global pandemic had struck a noticeable blow to Spotify’s ad business amid the chaos.
The second thing has to do with the significance of Spotify publicly identifying that advertising is expected to be an increasingly important segment of its revenue mix. This solidifies to analysts what the rest of us have been broadly familiar with for some time now: That Spotify aspires to be an all-consuming audio platform, along with everything that idea entails. “I think, really, the big thing you all as analysts should focus on is the shift of Spotify as a premium subscription music service to an audio platform,” said Ek in the earnings call. “And that audio platform means that the business model fundamentally of Spotify now is very different than what it had been in the past.” And what that business model will be moving forward now, at the very least, is a genuine diversifying mix: subscriptions and advertising, of course, but also, with recent news of Spotify maybe formally taking up the live events business and the possibilities of new business models to be unearthed from its live social audio push, new revenue lines from those emerging activities too.
Now, it’s not all upside here. Most pressingly, I think it’s still a genuine open question whether the platform’s acceleration of advertising revenue via podcasts — and therefore the increasing ubiquity of advertising spots in the flow of a user’s experience on the platform — will have a deleterious effect on a paid subscriber’s relationship to the service, given the fact that they probably pay a monthly or annual fee in order to specifically side-step ads, at least on the music side. Some of the answer will have to do with execution: As it stands, the way Spotify deploys ads in its music service strikes me as a strategic move to layer an “experience tax” on free users to push them deeper into the paid conversion funnel; i.e. You can listen to music on Spotify for free, but it’s not going to be pleasant, so pay up. With podcasting, Spotify has to pursue a different relationship with advertising, because the advertising experience is now something they have to deliver positively. Whether they’re able to balance those two advertising ideas within the same platform context will be the big question, but I’d be remiss if I didn’t say that there’s a real possibility that at least some portion of users will shake out to be zero-sum on the advertising question. If I’m paying $9.99 per month for Spotify Premium, why am I still getting ads, no matter how good those ads are? Spotify is evolving into multiple business lines under the same conglomerated experience; I’m not sure if the process of fitting everything together will end up being smooth.
Let’s scale it back down for the third and final thing. There’s something one analyst pointed out in the earnings call that stood out to me: “O&E content” — that is, Original & Exclusive, the stuff that Spotify owns, operates, and/or licenses — “is a small percentage of overall podcast on the platform, but it accounts for approximately 20% of total consumption.” And I think it’s safe to extrapolate from there that the disproportionately small percentage of podcasts on the platform embodied by Spotify properties also drives a disproportionately large percentage of new podcast revenue generated.
It’s important to remember that this is what it’s going to be for a while. This particular stage of Spotify’s strategy involves the company needing to tinker, refine, and validate its podcast thesis to all outside stakeholders — advertisers, investors, and so on — and the best way for them to do that is to mostly do all of those things on the stuff it owns, because that’s the less risky way of doing it as opposed to tinkering and experimenting on third-party publishers. Once the company feels confident enough with their infrastructure and approach, then they’ll scale it up for everybody else. The question is how long that will take, and what the split in the take between the platform and everybody else will be.
Anyway, that’s my spot read on Spotify’s quarter, and I wanna hit one last thing before moving on. Here’s yet another reminder that the most interesting and underexplored thing to me about Spotify’s podcast machinations is the significance of its global reach. On that note, here’s a quote in the earnings call from Spotify CFO Paul Vogel that stood out to me:
Sell-through rates [for advertising] were better than expected. CPMs are a little higher than expected as well. So we’re seeing the benefit of what we created in bringing the Megaphone inventory into the Spotify family, which has been great. And geographies – more geographies will help. As I said, the US is still predominant in terms of advertising. Europe is a pretty big second and everything else is pretty small after that. So I would say for the near-term, it’s really a US-Europe story. Over time, more of those geographies will contribute.”
Alright, that’s all I have on this. Let’s hit a few miscellaneous news notes and get out of here.
This is interesting: Podtrac has been seeing “a consistent downward trend in the year-over-year growth rate of downloads since the beginning of June,” based on the shows measured by the service, and it seems that, after digging into the numbers, they’re pegging it to the Apple Podcasts bug that’s been whacking show download numbers. “Adjusting for the 20% decrease in Apple Podcast downloads for the month of June, absolute downloads for June would have grown at 5% year-over-year, in line with the average monthly growth for January through May,” Podtrac wrote.
The NBA has struck a multi-year partnership with iHeartMedia to launch more than 20 new podcasts. Listen, longtime readers know I’m a huge basketball nut, and as much NBA pods I consume on a daily basis — lemme tell ya, it’s a lot — I’m eh on actual NBA propaganda. Give me the bloggers.
The New York Times has promoted Paula Szuchman to Director of Audio. She was previously the lead on Opinion Audio. I imagine… some people will have feelings about that.
From the Twitter feed of The Verge’s Ashley Carman: “Facebook previewed more of its audio products for podcast movement today. this is the short-form clips product, which will have captions and people can segment parts of the show, write captions, and share it to their feeds or directly to friends…” I continue to find myself not very interested in Facebook Audio at all, but you probably are, and so you should check out her thread.