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The growing corporate boycott of Kanye “Ye” West after he made antisemitic remarks in several interviews has increased pressure on music streaming services to pull the rapper-turned-fashion mogul’s albums from their platforms.
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On Tuesday (Oct. 25), Spotify CEO Daniel Ek addressed the issue in an interview with Reuters, making clear that Ye’s comments were “awful” but his music did not violate the streamer’s anti-hate policies. Ek added it was up to Ye’s label, Universal Music’s Def Jam imprint, to pull his music if they felt compelled to.
“It’s really just his music, and his music doesn’t violate our policy,” Ek told Reuters, adding, “It’s up to his label, if they want to take action or not.” Ek said that Ye’s antisemitic comments would have been pulled from Spotify if he had made them on a podcast or recording, as per their hate speech policy, but that the rapper hadn’t made such comments.
Def Jam owns the copyright to Ye’s recordings from 2002 through 2016. The New York Times, which cites an unnamed source, reported that Ye’s label G.O.O.D. Music is no longer affiliated with Def Jam. The rapper’s contract with his long-time record company reportedly expired with his 2021 album DONDA.
“There is no place for antisemitism in our society,” Def Jam said in a statement to Reuters.
After Ye made repeated antisemitic comments in interviews and tweets, Hollywood’s major players began publicly calling for a boycott of the rapper. WME chief Ari Emanuel directly called on Ye’s corporate partners, particularly Spotify and Apple Music, to stop collaborating with him.
Since Emanuel’s plea, talent agency CAA dropped Ye as a client, MRC Entertainment shelved a completed documentary on the rapper and Balenciaga, GAP and Vogue cut all ties with him.
On Monday, Ye lost his biggest corporate back, the sportswear giant Adidas, who ended their highly lucrative partnership with the Yeezy brand.
This article originally appeared in THR.com.
Music streaming giant Spotify reported 195 million paid subscribers in the third quarter of 2022, up from 188 million paid or premium subscribers in the previous quarter and above expectations.
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The company had forecast it would hit 194 million premium subscribers this quarter.
Spotify also exceeded its monthly active user expectations, reaching 456 million monthly active users in the third quarter, above its forecast of 450 million. In the second quarter, monthly active users hit 433 million, up from 422 million in the previous quarter.
The company now says it has 4.7 million podcasts. At the end of June, Spotify had 4.4 million podcasts on the platform, up from 4.0 million at the end of March. New additions this quarter included the launch of Meghan Markle’s podcast, Archetypes.
Total revenue came in at €3.04 billion compared to a forecast of €3.0 billion.
Still, the continuing focus is on the company’s margins (which came in below expectations at 24.7 percent compared to the company’s estimate of 25.2 percent). The company said this was due in part to “slower than forecast advertising growth given the challenging macro environment,” as well as the expected renewal of a large publishing contract outside of the U.S. and currency fluctuations. Advertising was particularly impacted in Europe, according to the company. However, advertising only makes up a small segment of the company’s results.
While podcasting has been gaining traction and ad revenue, the $1 billion investment to get there has weighed down the company’s profitability. In June, the company said it expected podcast margins to turn positive after 2022 — this year marked the peak negative impact on the margins — with the segment becoming profitable in the next one to two years.
Speaking on the earnings call Tuesday, Spotify CEO Daniel Ek said the results are still in line with that pledge, as well as the theory that this is an investment year for the company.
“This is all playing out largely as we expected, despite the macro environment,” Ek said.
Asked whether Spotify would consider raising prices in the U.S., as Apple Music and other competitors have, Ek said “it is one of the things that we would like to do,” and that the company will be having conversations with its label partners on that.
In July, the company said it was preparing for an economic downturn — though it had not yet had much of an impact on its business — by slowing its pace of hiring by 25 percent.
“I do believe only the prepared survive, and we’re preparing as if things could get worse,” Ek said at the time.
On Tuesday, Spotify said it had not seen any “material impact” from the economic downturn, other than on its ad business.
However, moving forward, Ek said the company will be “more selective” with its “overall spending.” Future investments will be made only if they are accretive to the company’s margin over the investment period and if they strengthen the company’s value proposition to users. Ek also noted that there may be new opportunities in an economic downturn.
The company has also taken on other cost cutting measures. Earlier this month, Spotify canceled 10 original shows from its studios Parcast and Gimlet. This led to the layoff of 38 employees and pushback from their respective unions.
On Tuesday, Spotify did not address the cancellations directly, but said that the restructuring should lead to “improved productivity at select studios” and appear as a one-time charge in the fourth quarter.
At the same time, Spotify officially launched its audiobooks business in September, which it had been long promising as the next step in its business plan after its podcast push. The company chose an à la carte model at launch, in which users can check out individual books from a library of 300,000 titles. There are no ads yet for the audiobooks business, but the company has said it may explore that and other business models.
While management did not release numbers yet on the launch, executives said they had seen “good engagement” with the segment, even as the purchasing experience has been not been ideal for iOS users. Ahead of the earnings call, The New York Times reported that Apple had rejected the Spotify app three times.
The company has also been experimenting with selling tickets. In August, Spotify launched a ticket selling website for select artists. Paul Vogel, Spotify’s chief financial officer, has characterized it as a means of boosting average revenue per user on the platform, as well as increasing listening hours for those artists. The company would not disclose any numbers on that effort Tuesday.
This article originally appeared in THR.com.
In the third quarter of 2022, Spotify revenue improved to 3.04 billion euros ($2.98 billion at the Sept. 30 exchange rate), marking an increase of 12% at constant currency and 21.4% as reported, the company reported Tuesday (Oct. 25). Subscription revenue grew 13% (22% as reported) to 2.5 billion euros ($2.46 billion) while subscribers improved 13.4% to 195 million — 1 million ahead of guidance. Led by podcasting, the company’s ad-supported revenue grew just 3% at constant currency (19% as reported) to 385 million euros ($378 million).
Spotify’s gross margin of 24.7% — which is 50 basis points below guidance — was slightly better than the 24.6% registered in the second quarter, but it was still two percentage points lower than 26.7% in the prior-year period. The company attributed the decline to its spending on non-music content and product enhancements, increased publishing rates and an adjustment to prior-period accruals. Those negative effects served to offset a favorable revenue shift to podcasting and continued growth in Marketplace, Spotify’s hub for artist services.
Spotify shares fell 6.7% to $90.54 in after-hours trading.
Financial metrics
Revenue: 3.04 billion euros ($2.98 billion), +21.4% y/y, +13% at constant currencyGross margin percentage: 24.7%, down from 26.7% in Q3 2021 Operating loss: 228 million euros ($223.8 million), down from 75 million euros operating income in Q3 2021 Average revenue per user: 4.63 euros ($4.55)
Listener metrics
Subscribers: 195 million, +13.4% y/y Ad-supported monthly active users: 273 million, +24.1% y/y Monthly active users: 456 million, +19.7% y/y
This is a developing story.
Universal Music Group, Hipgnosis Songs Fund and other music stocks got a much-needed boost on Tuesday (Oct. 25) following news of Apple Music’s price hike, as investors bet it would trigger a wave of streaming subscription cost increases.
Universal Music Group’s stock closed 11.6% higher, Hipgnosis Songs Fund Ltd ended up 7.8% and Korean music companies SM Entertainment and HYBE finished the trading day 4.8% and 4.4% higher, respectfully, on Tuesday. On Monday, Apple announced that it was raising the standard U.S. and U.K. individual plan price to $10.99 from $9.99.
This 10% price hike — Apple’s first — comes amid high inflation and a darkening economic environment in many global markets. If Apple can raise prices at a time like this, that is a sign the music industry can charge more without turning off consumers, Wall Street analysts said.
“We see this as a further signal of the stickiness of music streaming subscriptions even in a weaker macro environment and believe the major markets will be able to absorb higher prices without leading to meaningfully higher churn,” Lisa Yang, Goldman Sachs’s head of European media & internet technology equity research, wrote in a note to investors on Tuesday.
“We believe that other major DSPs will likely follow suit with similar price increases in the near future, implying further potential upside to our music industry forecasts.”
Competitors Spotify and Amazon Music have already raised prices in some markets. Amazon Music raised the price of its unlimited individual plan for Prime members to $8.99 from $7.99 earlier this year.
Spotify, which will report earnings later Tuesday, raised the cost of its individual plans in the Nordics in 2021, although its standard plan for U.S. subscribers remains at $9.99.
“Despite positive management commentary around churn (with regards to recent price increases on certain plans/regions) as well as management’s views on pricing power over the long term, Spotify has highlighted the broader macro environment as a key consideration in terms of implementing price increases in the near term,” Yang wrote.
Apple’s price increase could also have positive impacts on the majors because companies like UMG and Warner Music Group typically get 65% of music-related revenues from streaming companies with a “high incremental margin,” Goldman estimates.
Music stocks have suffered in 2022 as the major U.S. market indices have fallen around 20% so far this year.
UMG’s share price of 21.10 EUR ($21.01 US) is down nearly 14% year to date, Hipngosis Songs Fund Ltd traded at 91.06 penny sterling ($1.03 US) and is down 28% so far this year. Meanwhile, Warner Music Group’s stock traded at $27.16 US, off almost 37% year to date.
This year, Spotify is making the streamer’s annual year-end Wrapped campaign more artist-friendly.
Called Your Wrapped Soundcheck, the new feature, available via Spotify for Artists, will allow artists to upload videos thanking their biggest fans for a great year on Spotify, list their latest merch and ensure tickets for their upcoming shows are available on the platform. These videos and offers will then be promoted to top fans as a part of their Wrapped experience.
By uploading short, video messages of 30 seconds or less to their Spotify for Artists profiles, artists can let fans know what their support meant to them over the past year, tease what they’re working on next and/or tell a story that defined their year. Artists are encouraged to list merch on Shopify (the e-commerce giant that partnered with Spotify last October), and provide information regarding their upcoming concert dates on one of Spotify’s partner sites, plus set up a Fan Support account to collect end-of-year tips or drive donations to a charitable cause.
Artists are encouraged to prepare their profiles ahead of this year’s Wrapped season. Your Wrapped Soundcheck’s website provides step-by-step instructions to help artists get ready for the big day.
The Ledger is a weekly newsletter about the economics of the music business sent to Billboard Pro subscribers. An abbreviated version of the newsletter is published online.
Music companies face a multitude of pressures as 2022 comes to an end: crippling inflation, a tight labor market, a chaotic environment for breaking new artists, interest rates that are dampening catalog valuations, and high costs of touring amidst a crush of artists on the road, among other challenges. The upcoming slate of corporate earnings provides an opportunity to hear about these opportunities and challenges from leaders of publicly traded music companies who rarely go on the record.
Spotify reports third-quarter earnings after the close of trading on Tuesday (Oct. 25). Universal Music Group and Deezer follow on Thursday (Oct. 27) after the close of trading in the Netherlands and France, respectively. Cumulus Media reports Friday morning (Oct. 28). SiriusXM reports earnings on the morning of Nov. 1. Tencent Music Entertainment announces earnings on Nov. 15. The other 14 publicly traded music companies in the Billboard Global Music Index have not yet announced when they will report.
Look for executives to comment about subscription prices and digital platforms’ ability — or reservation — to raise subscription prices. It’s been a recurring theme from digital and label executives throughout the years, in part because it’s been over a decade since streamers last did it in any meaningful way. “Music is a good value” seems like a popular position when streaming video on-demand services are engaged in cut-throat competition and undercutting one another’s prices to attract new customers and prevent current customers from departing. But the industry has arguably moved past that stage, with many now interested in other means to grow revenue. Still, expect music streaming companies to be reticent to hike prices while inflation is running at a 40-year high.
On Tuesday. Spotify could offer a bevy of information and insights about its progress toward its drive to improve margins, as laid out in its June 9 investor presentation: goals for 35% gross margins in music and 30-35% gross margins in podcasting within the next three to five years. Music margins will be helped by improvements in ad monetization in developing markets as well as price increases in mature markets.
More pressing will be Spotify’s opinions on macroeconomic forces that could affect its growth. The company’s advertising business was roiled by an advertising slowdown during the first year of the pandemic, and now many experts are predicting a recession in 2023 that could again dampen online advertising. On Alphabet’s July 26 earnings call, the company repeatedly used the word “uncertain” when talking about the economy, while reporting that YouTube ad sales grew at their slowest pace since the company started disclosing metrics in 2018. Meta’s second-quarter revenue, meanwhile, was 1% lower than a year earlier — its first decline in a decade. If the same market conditions affect Spotify, how will it react? Even though advertising accounted for only 12.6% of the company’s total revenues in the second quarter, it’s critical to the podcasting business that’s expected to deliver margin relief in the coming years.
If social media company Snap’s third-quarter results Thursday are any indication, a weak advertising market will be a recurring theme throughout October and November earnings reports. In a letter to shareholders, Snap warned its “advertising partners across many industries are decreasing their marketing budgets, especially in the face of operating environment headwinds, inflation-driven cost pressures and rising costs of capital.” At the same time, Snap announced a stock repurchase program of up to $500 million “to protect shareholder value from the impact of dilution.” Investors reacted quickly and decisively by sending Snap shares down as far as 32% to $7.33 on Friday — 87.9% below its 52-week high of $60.78.
Also, expect questions about Spotify’s long-awaited HiFi subscription tier. Last week, reports surfaced that Spotify could be prepping a “platinum” subscription plan that bundles high-fidelity audio with other products. The reports were based on an online survey that sought consumers’ opinions on various product bundles, not hard evidence of an upcoming product launch. But the fact that Spotify would sweeten the offer with reduced advertising in podcasts and other items could suggest it realized demand for a standalone HiFi tier is weaker than hoped — especially when Apple Music and Amazon Music are offering it at no additional cost. What CEO Daniel Ek will say is another matter, however, as Spotify is unlikely to discuss details about a product before an official announcement.
High-fidelity audio is pertinent to Spotify investors because it could help improve gross margins. The June 16 acquisition of audiobook distributor Findaway led to the Sept. 20 launch of an audiobook download store. As both retailer and distributor, Spotify can get 60% margin in audiobook purchases, more than double its current gross margin. Of course, the more important question is how many margin dollars audiobooks will ultimately deliver. With only a few weeks of audiobook sales under its belt, and no audiobook sales in the third quarter earnings, Spotify will have few tangible results for a progress report.
Universal Music Group reports earnings on Thursday (Oct. 27) after the end of the trading day in Amsterdam, where UMG shares are listed. UMG’s share of the U.S. recorded music market dropped slightly from 38.3% in the first half of 2022 to 37.1% at the end of the third quarter, which was lower than its 38.4% share in the prior-year period. UMG’s biggest competitor, Sony Music Entertainment, meanwhile, saw its share boosted from 26.3% to 26.7% thanks to the runaway success of Bad Bunny‘s Un Verano Sin Ti, the biggest album of 2022. UMG biggest releases were Kendrick Lamar’s Mr. Morale and the Big Steppers and The Weeknd’s Dawn FM (Republic). A handful of albums released in 2021 were also in the top 10 in total consumption: Morgan Wallen‘s Dangerous (Jan. 8, 2021), The Weeknd’s The Highlights (Feb. 5, 2021) Olivia Rodrigo’s Sour (May 21, 2021) and Drake‘s Certified Lover Boy (Sept. 21, 2021).
During UMG’s last earnings call, on July 27, CEO Lucian Grainge recounted a string of recent releases (Drake’s Honestly, Nevermind got off to a great start), partnerships (HYBE’s first release through its deal with UMG’s Ingrooves/Geffen), how it planned to get a return on investment on some recent acquisitions (Frank Zappa and Neil Diamond) and how the new Mercury Studios (which produced documentary films on The Rolling Stones and Shania Twain) had helped lift catalog streams.
More important to investors and industry professionals are concrete examples of UMG moving its business forward. Last quarter, Grainge announced UMG’s new licensing deal with Meta and revealed the company had become one of its top 10 revenue-generating digital platforms. He also announced the creation of the New Music Media Network, a service that connects brands and partners with proprietary data and exclusive media from UMG. Given the vital role advertising plays in today’s streaming-led music business and the platforms of tomorrow, a progress update on the New Music Media Network would be helpful.
Less important are comments made about Web3, NFTs and metaverse initiatives. Despite initial enthusiasm around NFTs, these businesses are a work-in-progress and represent an immaterial amount of revenue to a major music company. Conversation about these businesses merely shows that a company is looking ahead and taking the proper steps to capitalize — somehow — on them in the future. That requires hiring the right people, making investments, striking partnerships and trying new things to learn and gain experience. But as of now, Web3, NFTs and the metaverse are solidly in the experiment phase.
TikTok’s former U.S. head of content partnerships, Bryan Thoensen, has joined Spotify to oversee the company’s content strategy and partnerships with individual audio creators, known as the talk creator content and partnerships team.
Thoensen will report up to Max Cutler, who was promoted earlier this year to lead Spotify’s partnerships with creators and now holds the title of vp of talk creator content. In his new role at Spotify, Thoensen will also oversee the team’s business development and acquisitions as part of the audio giant’s larger exclusive podcast strategy.
“Bryan’s knowledge of the creator landscape will be critical as we build out our platform strategy with the goal of becoming a true platform beyond distribution, and reinforce our mission of building trust with creators,” Cutler wrote in a memo to staff.
Prior to joining Spotify, where the executive began meeting with the talk creator content and partnerships team in the past few weeks, Thoensen oversaw TikTok’s relationships with top public figures and managed relationships with brands like the NFL, NBA, Condé Nast and NBC. He was also formerly a svp for original entertainment at Fullscreen and a director of content for Hulu’s original programming following a roughly six-year career at WME.
Thoensen will remain based in Los Angeles.
This article was originally published by The Hollywood Reporter.
The Ledger is a weekly newsletter about the economics of the music business sent to Billboard Pro subscribers. An abbreviated version of the newsletter is published online.
The 2004 documentary Super Size Me took a humorous look at the health consequences of fast-food restaurants’ practice of up-selling customers to higher-priced, larger-portioned items – a super-sized cup of Coca-Cola rather than a large, for example. To the customer, up-selling looked like a good deal: the additional soda or food cost only a few cents more. For restaurants, the tactic padded margins because the difference in price dwarfed the cost of goods.
Super Size Me comes to mind when looking at music subscription services and their quest to improve their margins. Those services have the equivalent of a super-sized option: the family plan, which generally costs 50% more than an individual subscription and includes up to six subscribers on a single plan. But unlike up-selling in the fast-food business, super-sizing a music subscription service doesn’t pay off in the short term. The family plan may help retention, which can improve subscribers’ lifetime value – that, not average revenue per user, is the key metric in the subscription business – but it does nothing to boost margins.
For years, high-fidelity audio was presumed to be music’s version of super-sized food portions: an up-sell product that carried a higher price without a commensurate increase in costs to the platform. But high-fidelity audio now appears to be a standard option for most streaming platforms, another carrot to entice people to sign up rather than a means to segment consumers based on willingness to pay. That means music licensed from record labels and distributors doesn’t provide a path to better margins. In fact, there’s only a small amount of upside left to wring out of licensors: Spotify expects it can get its music margins to 30% and eventually to 35%, up from the 28.1% margin it reported for 2021.
The future of the music streaming business looks more like gas stations than fast food. Gas stations have turned into convenience stores that sell junk food, beverages and household staples. Gas itself is almost a loss leader. Stations make their margins on everything else – a $3 bottle of Coca-Cola, a $2 candy bar or a $6 package of Ibuprofen pills. According to an examination of the economics of gas stations at The Hustle, stations earn a 1.4% profit margin on fuel compared to 200% on soda machines and 100% on lottery tickets.
We’re seeing more examples of streaming services looking for margin relief outside of their core products. On Sept. 20, Spotify, which acquired audiobook distributor Findaway in June, launched a la carte audiobook sales, putting it directly in competition with Amazon-owned Audible. Audiobook downloads provide better margins than Spotify can get from music. As the retailer, Spotify keeps 50% of the audiobook purchase sale proceeds. Findaway’s distributor fee is 20% of the author’s royalties – which works out to 10% of sale proceeds after Spotify takes its 50% cut. In aggregate, Spotify gets a 60% margin in audiobook sales on its platform – double the typical margin in both music streaming and music downloads and more than double Spotify’s gross margin on music last year.
One notable hiccup to Spotify’s foray into audiobooks is the buying process. Spotify sells audiobooks only at its website, not within the Spotify app. That allows it to keep its cushy margins without giving a significant portion to either Apple or Google for in-app purchase fees. Not offering audiobook sales within the app creates an extra step in the buying process, and even a small amount of friction can become a drag on purchase activity. But Spotify could also be a boost to the format, says Tony van Veen, CEO of DIY Media Group, which owns BookBaby, a distributor for independent book authors. “If Spotify offers it and lowers the barrier, will there be more adoption? Yeah, I think so,” he says. Spotify CEO Daniel Ek believes audibooks could eventually achieve 50% of book sales in mature markets compared to their current 6-7% share.
Spotify has already made a big push into podcasts in a search for better margins. Podcasts have been a money-loser with a –57% gross margin but have potential at scale. At a June 8 investor presentation, Spotify CFO Paul Vogel said podcast margins could reach 40% to 50% in the future. Tightening the belt could help get there: news broke on Oct. 7 that Spotify laid off “at least” 38 employees and will shutter 11 podcasts created by Gimlet and Parcast, two content studios Spotify acquired in 2019 for a combined $286 million.
Also searching for better margins, French music streamer Deezer is planning a new product called Zen by Deezer. Expected to debut in France in the first quarter of 2023, the product offers “exclusive music relaxation, sounds, expert tips and guided exercises,” according to the company’s Oct. 4 investor presentation. It’s a sensible product extension given the explosion of apps for meditation, yoga, sleeping and mental health. In the wake of COVID-19, McKinsey put the size of the global wellness industry at a staggering $1.5 trillion.
When Zen by Deezer is running at scale, Deezer believes, its content costs will run about 10% of revenue. That’s compared to roughly 70% for a standard on-demand streaming service that licenses music from record labels, music publishers and performance rights organizations. The difference, the presentation explains, is “one-off content production,” rather than music licensed at standard rates. Whether created in-house or acquired on a one-time, royalty-free basis, Zen by Deezer won’t pay most of its subscription fees to license music.
Elsewhere, music is increasingly a means to hook customers before giving them another product. Abu Dhabi-based Anghami is looking to diversify through podcasts, branded content and live concerts. In June, it purchased Spotlight Events, a concerts company based in the Middle East-North Africa region. Tencent Music Entertainment, China’s largest music streamer, also made a concerted push into spoken-word audio when it acquired audiobook distributor Lazy Audio in 2021. TME also has a growing podcast business.
Using a gas station metaphor for Spotify only goes so far – or does it? Consumers’ reliance on their automobiles makes them dependent on gas stations for transportation. Until electric cars see widespread adoption, most people will be regular customers at gas stations’ convenience stores. Music isn’t quite as entrenched as the automobile, but there’s a growing belief that a music subscription is a basic utility – like internet, gas or water – that most people will carry continuously. That gives streaming services on ongoing billing relationship with hundreds of millions of customers and an opportunity to make better margins on something other than music.