Daniel Ek
Spotify added 7 million subscribers in the second quarter, roughly 1 million more than it forecasted, which bolstered revenue and profit margins, the streaming giant said on Tuesday.
Spotify reported 3.8 billion euros ($4.15 billion) in total revenue, a 20% increase from the year-ago quarter, with a record high gross margin of 29.2% that beat guidance. Its operating income was up for the second straight quarter to 266 million euros ($289.6 million), which the company said was thanks to a stronger 7% gross margin and lower marketing, personnel and other costs.
While Spotify’s 626 million total monthly active users (MAUs) came in lower than the 631 million MAUs the company expected in the second quarter this year, it grew premium subscribers by 1 million more than forecast, and as Spotify raises prices in the U.S. again, that helps the company keep its growth goals on track.
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“Overall, we are encouraged by the traction we are seeing from our monetization initiatives and remain focused on delivering the goals out lined at our 2022 investor day,” the company said in a statement.
Revenue from premium subscribers grew 21% year over year thanks to those subscriber gains and premium average revenue per user (ARPU) gains of 10% compared to last year. Revenue from ad-supported users rose 13%.
The price of Spotify’s premium individual plan in the U.S. rose $1 to $11.99 a month and the duo plan jumped a buck to $16.99 a month in July.
Spotify has been under pressure from major music companies and organizations to reverse changes it made in May to its bundled subscription services that added audiobooks to its premium tier. Spotify wants to pay songwriters a discounted bundle rate for premium streams, but groups like the MLC are suing Spotify claiming the streamer “improperly” classified its premium tiers as bundles.
Billboard estimates the move, which reclassified premium, duo and family subscription services as “bundled subscription services,” could cut songwriters’ and music publishers’ royalty payments by $150 million in the first year.
The lower personnel costs that helped boost operating income are in part due to staff cuts the company made last December.
Spotify chief executive officer Daniel Ek is expected to discuss the company’s strategy on bundling and provide greater details about his company’s quarterly earnings on a call Tuesday morning.
Topline Results for Q2:
Total revenue of 3.8 billion euros reflected revenue from premium subscribers growing by 21% and ad-supported revenue growing 13%.
Gross margin of 29.2% beat the company’s growth forecast due to improved music and podcast profitability, the company said.
Operating income also beat guidance at 266 million euros due to lower personnel and marketing costs.
Total monthly active users (MAUs) were 626 million in the second quarter, up 14% from a year ago.
Premium subscribers totaled 246 million and ad-supported MAUs totaled 393 million, up 12% and 15% from a year ago respectively.
Premium average revenue per user (ARPU) rose 10% from last year.
Spotify’s announcement this week that it was laying off 17% of its global workforce surprised a music business enjoying a renaissance. After all, Spotify ignited the subscription-streaming boom that saved the industry. And while the companies that depend on the online advertising business go through booms and busts — think of Meta cutting 21,000 jobs since 2022 — music business jobs have been relatively safe.
Spotify’s decision to eliminate about 1,500 full-time staffers shouldn’t have come as a surprise, though. As CEO Daniel Ek put it in a letter announcing the layoffs, “Today, we still have too many people dedicated to supporting work and even doing work around the work rather than contributing to opportunities with real impact.”
Over a decade and a half, Spotify pioneered a new model for music subscriptions by prioritizing growth over profit. While on-demand video streaming services such as Netflix frequently raised prices, Spotify left most of its prices unchanged until July. Digital music platforms have a notoriously tricky path to profitability, but Spotify’s share price soared thanks to a pandemic-era boost to streaming companies as well as high expectations for its nascent podcasting business. By February 2021, as Spotify poured money into acquisitions and pricey podcasting content, the stock was trading at $364.59 per share, valuing the company at roughly $71 billion.
By 2022, however, Spotify’s investors had run out of patience. The stock was trading at $110 on June 8 when Ek and CFO Paul Vogel shared their ambitious plan at the company’s Investor Day presentation: $100 billion in annual revenue, 40% gross margins and 20% operating margins. To get there, Spotify would continue to scale its podcasting business and lean on its audio content acquisitions — The Ringer, Parcast, Megaphone and Anchor — to help the format reach larger audiences. Now, Spotify also wants to do for audiobooks what it did with podcasts: piggyback on its massive base of music listeners, develop innovative products and build a bigger market.
Podcasts and audiobooks, as well as services sold to artists and record labels like merchandise listings and Discovery Mode, are important to reaching the targets of 40% gross margin and 20% operating margin. Given the nature of licensing deals with record labels and music publishers, music margins have little room to improve. Whereas video streamers like Netflix pay fixed costs for much of their content, Spotify pays a percentage of revenue to record labels and music publishers. That means as revenue increases, so do its content costs. And that’s not likely to change. “Our strategy is not predicated on trying to extract margin by negotiating better terms with the content partners we have,” Ek said at the 2022 Investor Day.
Over a year later, however, Billboard’s analysis of Spotify’s financial statements shows the company is still nowhere near its target margins. Since the first quarter of 2020, its gross profit margin has fallen between 24.1% and 28.4% while its operating profit margin has ranged from –8.8% to 3% and was below zero in 11 of 15 quarters.
Merely adding subscribers isn’t enough. (The company reported 226 million at the end of Q3 2023.) Reaching its targets requires Spotify to cut costs while investing in new growth opportunities such as podcasts and audiobooks. Ek said as much when explaining Vogel’s upcoming departure on Thursday. “I’ve talked a lot with Paul about the need to balance these two objectives carefully,” he said in a statement. “Over time, we’ve come to the conclusion that Spotify is entering a new phase and needs a CFO with a different mix of experiences.”
Spotify’s cost-cutting started in 2022 with a pause on new hires, layoffs in October and the cancellation of six live audio shows in December. This year, it laid off 6% of its global staff in January and in June merged two podcast production houses, Gimlet and Parcast, and further cut its podcast workforce by 2%. In August, it shut down Spotify Live, a short-lived live streaming app. Then on Monday, Spotify announced it would lay off 17% of its workforce. It also canceled two in-house podcasts, Heavyweight and Stolen.
As the graphs show, recent trends in Spotify’s financials made it clear larger cuts were necessary to meet the company’s ambitious targets. Personnel costs as a percentage of revenue rose from 13.8% in 2021 to 16.2% in 2022. Research and development expenses — which include some salaries — jumped from 9.4% of revenue in 2021 to 11.8% in 2022.
As Ek explained in the memo to employees, Spotify grew in 2021 and 2022 to take advantage of lower-cost capital. Today’s environment is different, however, and Ek believes Spotify’s “cost structure for where we need to be is still too big.” Indeed, Spotify’s head count steadily increased as it acquired companies, developed new formats and created product innovations that both resonated (Spotify Wrapped) and flopped (Spotify Live) with users. The number of full-time employees increased nearly 50% from 2020 to 2022.
This growth came without added efficiency, however. The revenue generated per employee peaked at 1.54 million euros ($1.66 million) in 2019 and declined to 1.4 million euros ($1.51 million) in 2022 — the lowest since 2017. The July price increase will help Spotify bring in more revenue without additional staff or resources, though the effectiveness of those increases won’t be known until Spotify releases full-year results in late January.
What’s more, Spotify’s gross profit per employee fell to a five-year low in 2022. Gross profit is what’s left after cost of sales — primarily royalties to labels and publishers — is deducted from revenue. It goes toward personnel costs, sales and marketing expenses, and general and administrative costs. But as Spotify added employees in recent years, gross profit per employee fell to 350,000 euros ($377,000) in 2022 from 391,600 euros ($421,000) in 2021.
An obvious way for Spotify to reach its target margins was to make larger cuts to its workforce and, as Ek phrased it, “become relentlessly resourceful.” Cutting 17% of its personnel costs would have resulted in savings of 323 million euros ($349 million) in 2022, based on total personnel costs of 1.9 billion euros ($2.05 billion). That savings would have halved Spotify’s 2022 operating loss of 659 million euros ($711 million).
Ultimately, the multi-billion-dollar question is simple: Can Spotify continue adding subscribers as fast as it has in previous years and develop its spoken word products into the higher-margin businesses it needs with far fewer employees? That’s the high-stakes situation the new CFO will walk into in 2024 and that will determine the company’s future from here on out.
For some music companies, 2022 was the payoff for weathering the darkest days of the COVID-19 pandemic. When business returned that year — sometimes in record-setting fashion — these companies rewarded their executives handsomely, according to Billboard’s 2022 Executive Money Makers breakdown of stock ownership and compensation. But shareholders, as well as two investment advisory groups, contend the compensation for top executives at Live Nation and Universal Music Group (UMG) is excessive.
Live Nation, the world’s largest concert promotion and ticketing company, rebounded from revenue of $1.9 billion and $6.3 billion in 2020 and 2021, respectively, to a record $16.7 billion in 2022. That performance helped make its top two executives, president/CEO Michael Rapino and president/CFO Joe Berchtold, the best paid music executives of 2022. In total, Rapino received a pay package worth $139 million, while Berchtold earned $52.4 million. Rapino’s new employment contract includes an award of performance shares targeted at 1.1 million shares and roughly 334,000 shares of restricted stock that will fully pay off if the company hits aggressive growth targets and the stock price doubles in five years.
Live Nation explained in its 2023 proxy statement that its compensation program took into account management’s “strong leadership decisions” in 2020 and 2021 that put the company on a path to record revenue in 2022. Compared with 2019 — the last full year unaffected by the COVID-19 pandemic — concert attendance was up 24%, ticketing revenue grew 45%, sponsorships and advertising revenue improved 64%, and ancillary per-fan spending was up at least 20% across all major venue types. Importantly, Live Nation reached 127% of its target adjusted operating income, to which executives’ cash bonuses were tied.
The bulk of Rapino’s and Berchtold’s compensation came from stock awards — $116.7 million for Rapino and $37.1 million for Berchtold — on top of relatively modest base salaries. Both received a $6 million signing bonus for reupping their employment contracts in 2022. (Story continues after charts.)
Lucian Grainge, the top-paid music executive in 2021, came in third in 2022 with total compensation of 47.3 million euros ($49.7 million). Unlike the other executives on this year’s list, he wasn’t given large stock awards or stock options. Instead, Grainge, who has been CEO of UMG since 2010, was given a performance bonus of 28.8 million euros ($30.3 million) in addition to a salary of 15.4 million euros ($16.2 million) — by far the largest of any music executive.
This year, shareholders have shown little appetite for some entertainment executives’ pay packages — most notably Netflix — and Live Nation’s compensation raised flags at two influential shareholder advisory groups, Institutional Shareholder Services and Glass Lewis, which both recommended that Live Nation shareholders vote “no” in an advisory “say on pay” vote during the company’s annual meeting on June 9. Shareholders did just that, voting against executives’ pay packages by a 53-to-47 margin.
Failed “say on pay” votes are rare amongst United States corporations. Through Aug. 17, just 2.1% of Russell 3000 companies and 2.3% of S&P 500 companies have received less than 50% votes on executive compensation, according to executive compensation consultancy Semler Brossy. (Live Nation is in both indexes.) About 93% of companies received at least 70% shareholder approval.
ISS was concerned that the stock grants given to Rapino and Berchtold were “multiple times larger” than total CEO pay in peer group companies and were not adequately linked to achieving sustained higher stock prices. Additionally, ISS thought Live Nation did not adequately explain the rationale behind the grants.
To determine what Rapino, Berchtold and other executives should earn, Live Nation’s compensation committee referenced high-earning executives from Netflix, Universal Music Group, SiriusXM, Spotify, Endeavor Group Holdings, Fox Corporation, Warner Bros. Discovery, Inc. and Paramount Global. Netflix co-CEOs Reed Hastings and Ted Sarandos were paid $51.1 million and $50.3 million, respectively, in 2022. Warner Bros. Discovery CEO David Zaslov made $39.3 million in 2022 — including a $21.8 million cash bonus — a year after his pay totaled $246.6 million, including $202.9 million in stock option awards that will vest over his six-year employment contract. Endeavor CEO Ari Emanuel and executive chairman Patrick Whitesell received pay packages worth $308.2 million and $123.1 million, respectively, in 2021 thanks to equity awards tied to the company’s IPO that year (the received more modest pay of $19 million and $12.2 million in 2022).
Some companies in the peer group didn’t fare well in “say on pay” votes in 2023, though. Netflix, got only 29% shareholder approval in this year’s say-on-pay advisory vote after Hastings’ and Sarandos’ compensations both increased from higher stock option awards while the company’s stock price, riding high as COVID-19 lockdowns drove investors to streaming stocks, fell 51% in 2022. Warner Bros. Discovery’s 2022 compensation squeaked by with 51% shareholder approval.
Minutes from UMG’s 2023 annual general meeting in May suggest many of its shareholders also didn’t approve of Grainge’s compensation. UMG’s 2022 compensation was approved by just 59% of shareholders, and the company’s four largest shareholders own 58.1% of outstanding shares, meaning virtually no minority shareholders voted in favor.
UMG shareholders’ votes could be meaningfully different next year. Anna Jones, chairman of the music company’s remuneration committee, said during the annual meeting that in 2024, shareholders will vote on a pay package related to Grainge’s new employment agreement that takes minority shareholders’ concerns from the 2022 annual meeting into consideration. Grainge’s contract lowers his cash compensation, and more than half of his total compensation will come from stock and performance-based stock options.
Other companies in Live Nation’s peer group received near unanimous shareholder approval. SiriusXM’s 2022 executive compensation received 98.5% approval at the company’s annual meeting. Paramount Global’s executive compensation was approved by 96.4% of its shareholders. Endeavor didn’t have a “say on pay” vote in 2023, but a year ago, it’s sizable 2021 compensation packages were approved by 99% of voting shareholders.
As the radio industry came back from pandemic-era doldrums, two iHeartMedia executives — Bob Pittman, CEO, and Richard Bressler, president, CFO and COO — were among the top 10 best-paid executives in the music industry. It was new employment contracts, not iHeartMedia’s financial performance, that put them into the top 10, however. Both executives received performance stock awards — $6.5 million for Pittman and $6 million for Bressler — for signing new four-year employment contracts in 2022. Those shares will be earned over a five-year period based on the performance of the stock’s shareholder return. Neither Pittman nor Bressler received a payout from the annual incentive plan, however: iHeartMedia missed the financial targets that would have paid them millions of dollars apiece. Still, with salaries and other stock awards, Pittman and Bressler received pay packages valued at $16.3 million and $15.5 million, respectively.
Spotify co-founders Daniel Ek and Martin Lorentzon once again topped the list of largest stockholdings in public music companies. Ek’s 15.9% stake is worth nearly $4.8 billion while Lorentzon’s 11.2% stake has a market value of nearly $3.4 billion. Both Ek and Lorentzon have benefitted from Spotify’s share price more than doubling so far in 2023. In September 2022, the inaugural Money Makers list had Ek’s stake at $3.6 billion and Lorentzon’s shares at $2.3 billion.
The billionaire club also includes No. 3 HYBE chairman Bang Si-hyuk, whose 31.8% of outstanding shares are worth $2.54 billion, and No. 4 CTS Eventim CEO Klaus-Peter Schulenberg, whose 38.8% stake — held indirectly through his KPS Foundation non-profit — is worth $2.25 billion. They, too, have benefitted from higher share prices in 2023. Last year, Bang’s stake was worth $1.7 billion and Schulenberg’s shares were valued at $2.1 billion.
These top four shareholders and three others in the top 10 have one important thing in common — they are company founders. At No. 5, Park Jin-young, founder of K-pop company JYP Entertainment, owns a $559 million stake in the label and agency he launched in 1997. Another K-pop mogul, No. 8 Hyunsuk Yang, chairman of YG Entertainment, owns shares worth $199 million in the company he founded in 1996. And No. 9 Denis Ladegaillerie, CEO of 18-year-old French music company Believe, has a 12.5% stake worth $112.7 million.
Live Nation’s Rapino again landed in the top 10 for amassing a stockholding over a lengthy career, during which he has helped significantly increase his company’s value. Rapino, the only CEO Live Nation has ever known, took the helm in 2005 just months before the company was spun off from Clear Channel Entertainment with a market capitalization of $692 million. Since then, Live Nation’s market capitalization has grown at over 20% compound annual growth rate to $19.1 billion. Rapino’s 3.46 million shares represent a 1.5% stake worth $291 million.
Selling a company that one founded is another way onto the list. Scooter Braun, CEO of HYBE America, has a 0.9% stake in HYBE worth $69.8 million. That’s good for No. 10 on the list of executive stock ownership. Braun, HYBE’s second-largest individual shareholder behind chairman Bang, sold his company, Ithaca Holdings — including SB Projects and Big Machine Label Group — to HYBE in 2021 for $1.1 billion.
These rankings are based on publicly available financial statements and filings — such as proxy statements, annual reports and Form 4 filings that reveal employees’ recent stock transactions — that publicly traded companies are required by law to file for transparency to investors. So, the list includes executives from Live Nation but not its largest competitor, the privately held AEG Live.
Some major music companies are excluded because they are not standalone entities. Conglomerates that break out the financial performance of their music companies — e.g., Sony Corp. (owner of Sony Music Entertainment) and Bertelsmann (owner of BMG) — don’t disclose compensation details for heads of record labels and music publishers. Important digital platforms such as Apple Music and Amazon Music are relatively small parts of much larger corporations.
The Money Makers executive compensation table includes only the named executive officers: the CEO, the CFO and the next most highly paid executives. While securities laws vary by country, they generally require public companies to named executive officers’ salary, bonuses, stock awards and stock option grants and the value of benefits such as private airplane access and security.
And while Billboard tracked the compensation of every named executive for publicly traded music companies, the top 10 reflects two facts: The largest companies tend to have the largest pay packages and companies within the United States tend to pay better than companies in other countries.
The list of stock ownership is also taken from public disclosures. The amounts include common stock owned directly or indirectly by the executive. The list does not include former executives — such as former Warner Music Group CEO Stephen Cooper — who are no longer employed at the company and no longer required to disclose stock transactions.
Neko Health, a medical technology company co-founded by Daniel Ek, said on Wednesday (July 5) it has raised 60 million euros ($65 million) from a group of outside investors led by European tech venture capitalist Klaus Hommels‘ Lakestar. Founded in 2018 by Ek and Hjalmar Nilsonne, this is the first time the Swedish health-tech company […]
Spotify founder/CEO Daniel Ek is meeting with members of the United States Congress and the Biden administration this week in Washington, D.C., to urge them to pass legislation that would rein in the “stranglehold” companies like Apple have over the competition on their app stores. The executive revealed in a Wednesday (April 19) post on Spotify’s For the Record blog after teasing in a tweet on Sunday that he was headed to the U.S. capital.
The Open App Markets Act — which was introduced in August 2021 and which Ek has previously lobbied for — would bar Apple, Google and other app stores with more than 50 million users from forcing app developers to use their payment systems as a condition of distribution. It would also block app store owners from punishing app developers if they extend deals to customers or offer their app for lower prices elsewhere.
While the bill was advanced by a Senate committee last year, no further action was taken. With this trip, Ek is looking to train a renewed spotlight on the bill, which he hopes will be resurrected for a wider vote by the new Congress.
Apple has lobbied against the bill, arguing that it could lead to consumers loading apps onto their smartphones from places outside of its centralized app store, introducing potential privacy risks.
Apple did not respond to a request for comment for this story.
Ek has argued that Apple and others act as anti-competitive gatekeepers because the terms required for inclusion in their app stores prevent Spotify and others from telling consumers about new products or deal offers.
“Apple prohibits competition by not allowing developers to discuss new products, features, and deals with their own users,” Ek wrote in an editorial posted to Spotify’s blog on Wednesday (April 19). “For instance, Apple promotes deals for Apple Music to Spotify customers, but denies us the same privilege.”
Read Ek’s full editorial on Spotify’s For The Record blog here.
Spotify CEO Daniel Ek has been envisioning this day — the launch of several new features and key changes, presented at the company’s Stream On event in Los Angeles on Wednesday (March 8) — for quite some time. The first iterations of Stream On 2023 existed “about two years ago,” Ek tells Billboard. “We ramped it up seriously, like, 18 months ago, and then 12 months ago, it was like, ‘Wow, okay, we need to bundle this thing, that thing — put it all together now.’”
The result was a series of innovations rolled out simultaneously: a new vertical-swiped homepage with an interactive feed for Spotify’s mobile app; the expansion of video-based tools like Canvas, Spotify Clips and Previews, that rely on looped visuals and exclusive content from artists; greater access to its Discovery Mode program, which trades algorithmic exposure for lower royalty rates; and “countdown pages,” a long-awaited pre-save feature for upcoming albums. Some of these features have been long in the works, and have already drawn comparisons to visual-based platforms like TikTok and Instagram, but the 90-minute upfront (which also included presentations by Spotify co-president/chief product officer/chief technology officer Gustav Söderström, global head of editorial Sulinna Ong and global head of artist partnerships Joe Hadley, among others) was aimed at optimizing the listener experience and amplifying artistic voices on the platform. As Ek directly told creators watching the global livestream: “Spotify is open for business.”
Shortly after the Stream On event, Ek sat down for a rare Q&A about the ambitious rollout, heightened tech competition, acknowledging Geo Z listener habits and not being caught up in the “time on app” craze. (Ed. Note: this interview was been edited for clarity.)
During your Stream On presentation, you spoke about how this is the most dramatic period of innovation for Spotify in a decade. Why now? Why this moment?
I mean, there are so many aspects of this that probably won’t get the spotlight. As an example, and Gustav mentioned this on stage, we’ve kind of rebuilt. We’re known for our Discovery platform, and for how good we are at machine-learning and AI and recommending new stuff. But we’ve actually, underneath the surface, redone that entire system, and meantime, our designers have obviously been tinkering around with the best way of promoting content the best way for discovering content.
And, in the meantime, our artist teams have been expanding our Canvas programs — I think we’re up to 70% of covers on Spotify now having some sort of Canvas. More and more artists were taking advantage of the platform, with lyrics and Canvas and all these things already, and we saw that the more rich storytelling we could do on the platform the better it would be. And then, couple that with this algorithm- and machine-learning you need underneath all of that to be able to do this and have a magical experience, all three of them started coming together. And that was when I said, probably 18 months ago, “Okay, we need to pull all of this together as one — because this will be a massive thing, and we can’t do this as separate parts.”
I think that there are two types of companies when when you’re developing products: One tries to get it all together, and [make] it beautiful. Generally at Spotify, we are more kind of agile — we release things quite early, we test a lot of things, a lot of things don’t work, some things work and we double down on them. But we felt this was such an important step that we needed to kind of like bring it all together and release it as one thing, because otherwise, people wouldn’t understand it, and it wouldn’t get the right reception from consumers, but also — frankly — from creators as well.
You spoke about how “individuality and creativity” are being prioritized by this new interface. How much of that is being driven by the way Gen Z listeners want to engage with music over passive listening — is that a big part of what you’re rolling out?
Absolutely. You’re 100%, right, it’s about looking towards younger consumers for inspiration. And I’m a firm believer in the [William Gibson] quote, “The future is already here — it’s just not very evenly distributed.”
I’ve got two young kids, and quite often, you can just look at your own kids and see what they’re doing, see a glimpse of the future. So that’s definitely been part of it, but I do think that oftentimes, when you look at these types of things, there’s a universal truth in what’s happening here. So yes, younger [listeners] are more interested in visual discovery, and all those things that they’re used to because of all the other apps and platforms and other stuff. But the reality is, if you think about it, in the music industry, when we went from having a radio to MTV, it was a hell of a lot better, and it allowed totally different artists to get a new way of communicating. And that probably meant some artists actually weren’t going to be as successful as MTV took off, but there were other artists that were excellent storytellers visually, too. Michael Jackson’s “Thriller,” how the storytelling came alive — the sort of backstory that came in this music video — that was one way, right?
The truth is, as someone who grew up with MTV — funny side note, I actually learned how to speak English through MTV — I kind of feel like we’ve been relegated to, just press play and listen to the background. But as more and more music became playlists, there are all these artists that I don’t know anything about. I don’t know what they look like, and [have] no idea who they are, how they express their individuality and creativity. And so what we’re announcing today is really a chance for them to tell part of the story of what they want the world to see, as part of who they are, and get a chance to build connection. And when we’ve tested this concept with artists, the response is exactly that. That’s not just among younger [people], but even slightly older people too. When you discover someone, having this sort of richness, being able to see the person, to be able to see their vision come to life, builds that connection.
When you look at how much of this presentation today emphasized video expansion — from Previews to Spotify Clips to extending video with podcasts — how much are these innovations driven by feeling in your gut where things are headed, and how much is driven by competition on other platforms and social media?
A bit of both. I think everyone who says that they’re not inspired by anything that’s going on around them, it’s complete bullshit, to be honest. So I mean, I’ve played around with everything — I play around with the Voice apps, where you can Auto-tune yourself to sound really good. We take inspiration from all of that, of course. But we try to also look at more than just copying features for features’ sake — we try to look for, “What are the needs?”
If you want to find out what Spotify is going to do, it’s actually very simple. All you’ve got to do is look for a big consumer need and a big creator need, and when there’s a win-win between the two of them, that’s when we will do something. It’s really as simple as that. And so that’s the bar for me: is this something that consumers want, first and foremost, because if you don’t want it? It doesn’t matter that the creator wants it — it’s not going to be a great thing. And vice versa: if the consumer wants something, but the creator hates doing it, it’s not going to be sustainable long-term. So you’ve got to try to find out what that middle [ground] is. And a lot of times, I wish I could say that there’s this kind of defining moment, where you sit together in a room and figure it out. It’s not how innovation works, in my opinion. It’s organic.
You mentioned podcasting — we started uploading lots of videos there. Canvas has worked out really well. So it was this natural evolution where we started seeing that visual expression together. One of my fears honestly was like, does that mean we’ll be more like the other platforms? But both because of the types of creators that we have, and also the fact that we don’t expect you to sit two hours in front of that endless screen and watch stuff — we expect you to find something you really like, press play, put it in your pocket, and use that visual way of going from point A to point B faster. We’ve done the algorithms, we’ve done the UX, to do exactly that, opposed to some of these other social platforms that want you to stick around and watch the entire time.
I wanted to ask about something that Gustav said during the presentation that I found really interesting: “Our goal is not to steal time — it’s to help users save time.” There’s so much emphasis across every platform right now of “time spent on app” — getting users from a few seconds with an app open to a few minutes — whereas Spotify wants users to find something they like and then keep it moving.
Yeah, it’s exactly right. I call the concept “nutritious versus delicious.” I feel like everyone’s trying to go towards shorter, shorter, shorter-form content, more bite-sized. And then we have this counter-movement with podcasts, where someone’s willing to listen to two hours of someone going super deep on a very slim topic as well. We obviously want to allow creators to create whatever way they want to do, but out of the two extremes, we’re definitely more in the latter camp. We want creators to really form a connection with their audience rather than just trying to get a viral clip going, and next morning, it could be 50 other people who are successful [instead].
In terms of Discovery Mode, and giving artists a better chance of finding that first play and gaining a new listener — is there any concern of that tool like that losing some efficiency once you open it up to a much wider population of artists, where at some point it becomes to discern what’s worthwhile and what’s noise? Does that tension exist for you?
I mean, there’s absolutely that kind of tension. However, I think this is the beautiful thing — with these algorithms and personalization, we’re not all the same. So the kind of artists you like and the kind of artists I like might be very different. And some of these artists will get exposed to people more like me, and then other artists similar to you will get that exposure. There’s room for all of these things to play together, whereas in the past, you had a commercial radio station that had like 50 or 60 songs on rotation. We can actually cover a lot more than ever before in terms of giving artists exposure, and I think that’s also visible in our numbers.
I talked about onstage the notion that even the 50,000th most-streamed artist, which is kind of far down the list, is still making probably $50,000 across not just Spotify, but across all the other recorded music sources. And if you add touring, if you add all the other stuff, that’s probably a full time musician. It’s a very different music industry today. So I see the tension — and obviously, you’re right, on the long tail of things, it means some people won’t get that attention. But I think on the quality side, we will be good, and we will constantly improve, just like we’ve always had to, to give you better and better recommendations.
You are building Spotify for the long haul, and today was about continuing that building process. I was curious about how you strike the balance between growth and over-extension — finding the right opportunities that make sense for Spotify, without becoming too unwieldy?
I mean, look, it’s not easy, and I wish there was like a silver-lining way to answer it, but I think it comes back to what I talked about. We have three main constituents at Spotify, and two of them are dominant, and the third one, I have to pay attention to. The three main constituents are creators and consumers — they’re the ones that are front and center in everything that we do — and then the third is Spotify itself, my employees, shareholders, all that other stuff. So as I’m working on something, or we’re considering something, it really honestly is as simple as I mentioned: Do I believe that there’s a win-win-win, that gets us there all the faster?
I will probably do stuff that’s great for consumers and great for creators, and not great for Spotify. We’ve done a lot of those things, but I can’t do that endlessly — we’ve got to run a business as well. So it’s about trying to have those three things, the list that every decision goes through. It’s a very simple thing. Is this a win-win for creators and consumers, and will this work out for Spotify? If the answer is yes, then we will do it.
Spotify CEO Daniel Ek stressed his company’s focus “on tightening our spend and becoming more efficient” in the company’s fourth quarter earnings call on Tuesday (January 31) — the first such call since Spotify announced it was laying off 6% of its global workforce.
In a statement following the layoff announcement, Ek wrote that “in a challenging economic environment, efficiency takes on greater importance.” And the idea of “efficiency” was hammered home again and again on the latest earnings call — the word was sprinkled liberally throughout the remarks of both Ek and CFO Paul Vogel. “The next era of Spotify is one where we’re adding speed plus efficiency,” Ek said, not one “just focused on speed or growth at all costs.”
But he also emphasized that “this doesn’t mean that we’re changing our strategy” overall. “We will continue to work to build the platform of the future,” Ek vowed, “and that will take investment in new opportunities that we outlined, like podcasts and audiobooks.”
While Ek acknowledged that Spotify “probably got a little carried away [in 2022] and over-invested relative to the uncertainty we saw in the market,” he said that, given the choice, he “would do it again.” According to Ek, not only did that investment help grow Spotify’s user count — the company added premium subscribers at a higher-than-expected rate — but it helped differentiate Spotify from its competitors.
Responding to a question about how Spotify was working to compete with TikTok, Ek said “we’re in a better position competitively than we’ve been for many many years.” By adding podcasts and audiobooks to Spotify’s music offering, he added, the platform has created “a much more resilient consumer experience.”
While Ek had said Spotify was exploring raising U.S. subscription prices during an earnings call last year, he said “I don’t have anything specific to announce at this point” on Tuesday. But he noted that the platform raised prices in “more than 40 markets around the world” last year and that “our priority is to grow revenue as fast as we possibly can.”
When asked about potential price increases a second time, Ek responded that “we’re thinking how we can grow our business the best possible way.” “Sometimes that is keeping the price low to grow the number of users on the platform,” he continued. “Sometimes it is increasing the revenue per user. Sometimes it’s increasing our margin per user… the important part is that this is something that creates win wins with our label partners too.”
Investors asked Spotify for additional information about two 2022 initiatives, its moves into audiobooks and selling concert tickets, but company executives were scant on specifics. “It’s early days on audiobooks,” Ek said. “We’re seeing some encouraging signs. We’re definitely seeing people take up the offering.” He added that “audiobooks have a massive opportunity and there are very few consumers currently participating in the ecosystem,” echoing his comments from Spotify’s 2022 Investor Day.
When it came to Spotify’s nascent live events business, Ek underscored that his company isn’t aiming to “go compete with the [existing live music] ecosystem.” Instead, he said, Spotify hopes to “enable the ecosystem.” “Users are asking us, ‘help me find more great things to go watch,’” Ek explained. That translated to a “tremendous uptick in the number of people visiting the concerts tab on Spotify in 2022.”
“If we can be a partner to creators and help them sell more of their tickets,” Ek added, “that’s a meaningful increase to many artists’ livelihood, which is great and something we’re focused on.”
Six months ago, in an email to staff, Spotify CEO Daniel Ek said that the company would “be a bit more prudent” in its hiring over the next few quarters. That came a week after Spotify’s June 8, 2022, investor day presentation on its plans to improve its margins.
The key would be podcasts, executives said, along with a new foray into audiobooks. Within three to five years, podcasts could bring in gross margins of 30-35%, which could later rise to 40-50% — far more than the company can earn from recorded music.
The company’s podcast business hasn’t come cheap, though. Spotify – which on Monday (Jan. 23) announced plays to lay off 6% of its workforce, as well as the voluntary departure of chief content officer Dawn Ostroff – spent hundreds of millions of dollars acquiring podcast start-up and programing. Ostroff spent big to get exclusive rights to The Joe Rogan Experience, as well as projects from Barack and Michelle Obama’s Higher Ground Productions; Kim Kardashian; and Prince Harry, Duke of Sussex, and Meghan Markle.
From a programming perspective, the podcasts worked. Spotify is now the most popular podcast platform in the U.S., as well as many other markets, and the exclusive programming helps attract advertisers. The company also introduced new podcast advertising formats that helped it grow its podcasting business to $200 million annually.
The podcasts didn’t solve Spotify’s financial issues, though. The company has always grown fast by any measure, including audience, subscribers, and revenue. But since it paid out a significant share of its revenue to labels and publishers, Spotify never had the profit margins of former Wall Street darlings like Facebook and Netflix. Podcasts were supposed to solve this, but they cost so much up front that they caused a $103 million drag on gross profit, CFO Paul Vogel said during the June presentation.
Last year was difficult for stocks in general, especially those of many technology companies, but Spotify has suffered more than most. Riding high on lockdown-time gains, its share price peaked at $364.59 on Feb. 19, 2021. By a year later, it had fallen 58% to $152.27, and then on Nov. 4, 2022 bottomed out at $69.29 — 81% below its all-time high closing price. Had it made more progress on improving margins, Spotify’s share price probably would have weathered the storm a bit better.
Now, the market will find out if the adage “to cut is to cure” applies to the music streaming business. The layoffs Spotify announced Monday will involve around 600 employees. Not among them is chief content officer Dawn Ostroff, who chose to depart the company. Alex Norström, currently chief freemium business officer, will be responsible for product and will share co-president title with Gustav Söderström, currently chief research & development officer.
Citi analyst Jason Bazinet believes the layoffs are about “trying to stem the losses in podcasting.” Investors aren’t convinced Spotify has a viable business model, he says. “The revenues have done well but there’s not a lot of cash flow. A lot gets paid back to the labels.”
The market’s response to the news was positive, but muted. Spotify shares closed on Monday at $99.94, up 2.1%, after spiking to $104.00 that morning.
Overall, podcasting doesn’t seem to be working as well, or as quickly, as Spotify had hoped. While Spotify beat expectations for subscribers and monthly active users in the third quarter, its gross margin and operating loss were below earlier guidance.
The podcast business is an obvious place for Spotify to start cutting. The company began paring expenses in October by eliminating some original podcasts and cutting “at least” 37 positions at its Parcast and Gimlet studios.
“I think it’s the right strategy,” says Bazinet. “It’s going to be difficult to shift the balance of power with record labels.”
Now, the goal is to make Spotify more efficient, according to CEO Daniel Ek’s open letter released on Monday. “In hindsight, I was too ambitious in investing ahead of our revenue growth,” Ek wrote – meaning investing in personnel, not companies. The layoffs, as well as an organizational restructuring, will both control costs and quicken decision-making, he explained. Ek isn’t alone in highlighting efficiency lately. Facebook CEO Mark Zuckerberg has taken a hard line on underperforming employees. New Twitter CEO Elon Musk expects whatever workers remain at the company to be “extremely hardcore.”
Spotify’s numbers suggest that the company may have room for improvement. Bazinet points out that in 2016 Spotify’s roughly 2,100 employees generated an average of 1.41 million euros per person while in 2021 its 6,600 employees’ per-head revenue was 1.46 million euros. That implies that Spotify failed to achieve the kind of operating leverage that would create additional value as it added employees.
As for Ostroff, her departure could mark the end of the first chapter of Spotify’s podcast business. Neither Spotify nor investors seem to have much appetite for writing big checks these days. And exclusive content seems to have an inherently limited life span. Obama’s Higher Ground Productions left for Amazon. Brené Brown’s two exclusive podcasts, Unlocking Us and Dare to Lead, have come to an end.
Ostroff certainly made her mark on the company, though. The Joe Rogan Experience has battled through controversies to become the platform’s most popular podcast, heard by a quarter of Spotify users; and 19% of all podcast listeners in the U.S. listen to TJRE, according to a recent Morgan Stanley survey. Kardashian’s true crime podcast got off to a great start in October by beating TJRE and Markle’s Archetypes. Spotify’s foray into spoken-word audio may have been costly, but it was effective.
Now, Spotify enters a new phase of cost conscientiousness. With the layoffs and reorganization, it has given investors a tangible commitment to deliver on the aggressive goals it laid out in June. That heightens expectations, though. If Spotify can’t maintain its growth with a slightly smaller headcount, it will be hard for it to deliver better margins – and the market is unlikely to be forgiving.
Just two weeks after Spotify CEO Daniel Ek ripped Apple for “bullying” app owners in a Nov. 30 tweet thread, the executive doubled down on his comments during an interview that aired Thursday (Dec. 15) on the streamer’s For The Record podcast. During the appearance, Ek said Apple’s controls over payments and data on its app store create an anticompetitive environment that is “harmful for the economy and consumers.”
“They continue to give themselves unfair advantages really at every turn and setting themselves up as both the referee and player in this game,” stifling competition and hurting competitors and consumers, Ek said.
A vocal critic of the iPhone maker over the years, Ek has ramped up calls against Apple’s policies in recent months. The U.S. Senate has just weeks left in its current term to pass a bill that would rein in the control Apple and Alphabet Inc.’s Google exert over their apps marketplaces.
Introduced last year by Democratic Senators Amy Klobuchar and Richard Blumenthal along with Republican Senator Marsha Blackburn, the Open App Markets Act would block app store owners from requiring app developers to use its payments platform. The bill would also ban app stores from pushing their own products over competitors’ products and permit app developers to communicate more freely with customers and open the door to apps being downloadable from more platforms.
Speaking on the podcast, Senator Blackburn said the bill is gaining support daily.
“The reason we need this is to open up the marketplace to allow more competition, to allow developers to be able to take their product directly to the consumer,” which would lower some costs for developers at a time of high inflation in the U.S., Blackburn said.
App stores run by Apple and Google have traditionally taken a cut of in-app purchases. Prior to 2016, Spotify charged users 30% more if customers upgraded to a premium subscription inside Apple’s App Store to offset Apple’s 30% fee. To save on fees, Spotify has not allowed in-app purchasing on its Apple app since 2016.
Ek threw the weight of his company behind Blackburn’s bill on the podcast, saying that Spotify believes there needs to be regulation in this space to make clear that developers or companies can interact with consumers.
“There is an enormous concentration of power where one company here [is] dictating the rules for how millions of companies should be able to conduct business,” Ek said on the podcast.
This is not the first time Ek has taken on Apple’s App Store in the regulatory arena. In 2019, Spotify filed a complaint with the European Commission against Apple, alleging that rules governing its App Store “purposely limit choice and stifle innovation at the expense of the user experience — essentially acting as both a player and referee to deliberately disadvantage other app developers.”
Apple did not immediately respond to a request for comment.
Spotify CEO Daniel Ek on Wednesday (Nov. 30) blasted Apple for “stifling innovation and hurting consumers,” publicly renewing his company’s longstanding grievance that the tech giant abuses its dominant position over the market for smartphone apps.
In a series of tweets, the Spotify founder said Apple was “shameless in their bullying” of app developers and called on lawmakers in both the U.S. and the European Union to take “action” against a company that he said “doesn’t seem to care about the law or courts.”
“Over and over again @Apple gives itself every advantage while at the same time stifling innovation and hurting consumers,” Ek wrote. “Apple offers consumers the illusion of choice and give[s] developers the illusion of control.”
A spokeswoman for Apple did not immediately return a request for comment on Ek’s tweets.
Spotify has long been an outspoken critic of the rules Apple imposes on its app store — namely a 30% surcharge on most transactions made within the platform, and provisions that restrict how apps steer customers toward outside payment systems.
Apple says tight rules for app developers are needed to protect users from payment fraud and privacy violations. But critics say the company — which currently controls more than half the U.S. smartphone market with the iPhone and iOS operating system — is merely exploiting its dominant position to extract more money. Those complaints are even stronger from Spotify, since it also directly competes with Apple Music for subscribers.
Google, which accounts for the vast majority of the rest of the market for smartphone apps, is facing similar criticism and litigation.
The arguments against Apple’s app policies won a powerful ally last week when new Twitter owner Elon Musk raised the issue amid his own messy dispute with the tech giant. After claiming Apple had pulled its advertising and had threatened to pull Twitter from its app store, the polarizing billionaire asked his 120 million followers if they were aware that Apple “puts a secret 30% tax on everything you buy.”
In Wednesday’s thread, Ek directly quoted Musk’s tweet, as well as others who have voiced similar criticism. Citing “bipartisan support and global interest,” he said that “momentum” was building for some kind of action against Apple.
“So how much longer will we look away from this threat to the future of the internet?” Ek wrote. “How many more consumers will be denied choice? There’s been a lot of talk. Talk is helpful but we need action.”
Apple is already facing a high-profile lawsuit, filed by Fortnite creator Epic Games, that claims the app store policies violate federal antitrust laws. A trial court issued a split ruling on the case last year, and the battle is currently pending before a federal appeals court.
Though not directly involved in the Epic case, Spotify filed its own complaint against Apple in 2019 with the European Commission, the EU’s regulatory enforcement watchdog. Last year, EU regulators released preliminary findings that Apple had likely broken the law, saying the company “deprives users of cheaper music streaming choices and distorts competition.”
Even bigger changes could be coming via new legislation. In Washington, D.C., a bipartisan trio of senators are pushing a bill called the Open App Markets Act, which would impose strict new rules on both Apple and Google’s app stores. And lawmakers in the EU have already passed a new statute called the Digital Markets Act, which will place a raft of new restrictions on how app stores are run.
Though it will take time for the new EU law to fully go into effect, it was aimed directly at complaints like the one Ek voiced Wednesday against Apple. In an interview with Wired last month, one of the law’s architects said he expected “significant” consequences: “If you have an iPhone, you should be able to download apps not just from the App Store but from other app stores or from the internet.”