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Listeners who use Spotify’s free tier have access to more song lyrics as of Tuesday (July 30), TechCrunch reports. Spotify gave all users the ability to view real-time song lyrics in the fall of 2021. (It started testing the feature in 2019.) More recently, the platform started capping the number of song lyrics non-paying users […]
By raising prices and cutting costs, Spotify has transformed into the kind of profitable company investors always hoped it could become, and the streamer’s upbeat second-quarter earnings on Tuesday (July 23) led its share price to jump 9.1% to $321.87 this week.
After Spotify announced it grew revenues by 20%, improved its gross margin and beat guidance on new subscriber additions, a slew of analysts raised their price targets, including Goldman Sachs (from $320 to $425), JP Morgan (from $375 to $425), Rosenblatt (from $396 to $399), Pivotal Research (from $400 to $460), Barclays (from $350 to $360), Cowen (from $273 to $356) and B of A Securities (from $380 to $430).
Universal Music Group (UMG), the other music company that released earnings this week, had the opposite reaction from investors when its second-quarter subscription revenue fell far short of analysts’ expectations, leading its share price to drop 24.1% to 21.34 euros ($23.17). But it wasn’t all bad news: Overall revenue at the music giant grew 8.7% to 2.93 billion euros ($3.16 billion) and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 17.4% to 580 million euros ($624 million).
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But investors focused on UMG’s streaming numbers above all else. The recorded music division’s subscription revenue grew 6.9%, down from 12.5% in the prior-year quarter, while overall streaming revenue grew 4.1% compared to 11% a year earlier. A number of analysts lowered their UMG price targets following Wednesday’s earnings announcement, albeit by smaller margins than the decline in the share price.
UMG went public in Sept. 2021, giving investors an opportunity to capitalize on the largest music company during a time of streaming growth and industry expansion. Even optimistic investors will have to bear through short-term ups and downs, however. “If you think the longer term analysis holds then [UMG’s current price] represents a significant buying opportunity,” J.P. Morgan analyst Daniel Kerven wrote in an email to investors on Friday (July 26). “Ultimately we believe you will still get to the same destination…just the pace of getting there was never likely to be linear, particularly on a quarter by quarter basis.”
The Billboard Global Music Index (BGMI) fell 1.2% to 1,757.70 this week, marking the third consecutive weekly decline. The index has risen 14.6% year to date but fell 3.2% in July and is 4.9% off its all-time high of 1,847.64 set on May 17. Nine of the index’s 20 stocks were winners, 10 lost ground and one was unchanged.
UMG’s earnings appeared to have an impact on similar companies that have yet to release their own. Warner Music Group shares fell 6.6% the day UMG released earnings and ended the week down 6.8% to $29.83. Believe shares dropped 9.1% to 13.76 euros ($14.96). However, because UMG’s publishing business fared well — revenues grew 10.1% to 511 million euros ($550 million) — it’s not a coincidence that shares of Reservoir Media, which gets most of its revenue from music publishing, jumped 11.4% to $8.61.
Many major indexes lost ground this week despite gains on Friday following encouraging U.S. inflation data. In the United States, the Nasdaq composite fell 2.1% to 17,357.88 and the S&P 500 declined 0.8% to 5,459.10. South Korea’s KOSPI composite index dipped 2.3% to 2,731.90. China’s Shanghai Composite Index was down 3.1% to 2,890.90. An outlier was the United Kingdom’s FTSE 100, which gained 1.6% to 8,285.71.
In 2022, Will Page, the former director of economics at Spotify, encouraged a U.K. committee looking into streaming economics to consider how collecting societies have divvied up fixed pots of cash for more than 100 years. A fairer system for paying royalties, he said, might consider how long a person listens.
Page’s suggestion wasn’t a new, radical idea. Other royalty accounting systems already take listening time into account. In the U.K., collection societies such as PRS For Music and PPL apply a “value per second” rule to royalty payouts. So, Page explained, Queen’s “Bohemian Rhapsody,” which clocks in at 5:55, earns twice the royalty as “You’re My Best Friend,” which runs just 2:52. A similar approach is codified into U.S. copyright law: Songs over five minutes long receive a higher mechanical royalty than shorter songs.
But streaming platforms have long paid royalties using a “pro rata” method that treats every song equally. At Spotify, for example, any two songs by Queen are treated the same. But there has been a movement in recent years to make royalty payments fairer to non-superstar artists. SoundCloud adopted a user-centric approach that pays royalties from each listener rather than pool all listeners’ revenue. Deezer has a “user-centric” approach — adopted by Universal Music Group, Warner Music Group and Merlin — which rewards professional artists at the expense of “functional” music.
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Two years after testifying to the committee, Page has released a paper, “A Case for Completion,” that outlines how streaming platforms could reward songs that get streamed in their entirety. The idea is simple: For each stream, the streaming service asks whether the song was streamed to completion. If the song was skipped before the listener got to the end, a portion of the royalties are transferred to songs that were streamed to completion.
The financial model looks like this: Labels earn about 50 million pounds ($64 million) for 10 billion streams. Page estimates that 10% of the songs will not be streamed to completion. Of those songs’ 5 million-pound ($6.4 million) royalty pool, 40%, or 1.3 million pounds ($1.7 million), goes to the completed songs’ royalty pool. That in turn increases the completed songs’ pool from 45 million pounds ($58 million) to 46.3 million pounds ($59.6 million). On a per-stream basis, a typical 0.0048-pound ($0.0062) pro-rata royalty becomes either a 0.0035-pound ($0.0045) incomplete royalty or a 0.005-pound ($0.0064) complete royalty.
Importantly, Page believes this completion-based scheme complements the current royalty accounting system, whether it’s pro-rata, user-centric or artist-centric. “If we are going to depart from the pro rata model, which has served us since Rhapsody got its license in December 2001 — which is 23-plus years ago — then we need a baby step that doesn’t mess with royalty accounting,” says Page. Tracking duration would add too much stress to a royalty accounting system that encompasses trillions of streams annually, accounting experts told Page. In contrast, setting a threshold that creates a binary outcome — either a song was completed, or it wasn’t — is more feasible, he argues.
The proposal may run into naysayers who believe skipping is a critical aspect to streaming. On-demand services with hundreds of millions of songs charge for the right to skip through playlists and algorithmically created radio stations. In contrast, free, non-interactive streaming services such as Pandora don’t allow unlimited skipping. What’s more, decidedly unskippable formats such as terrestrial radio are losing listening time to platforms that give the listener greater freedom. Whether TikTok has reduced attention spans or listeners are impatient in a world of unlimited choice, skipping is simply a way of life in 2024.
But skipping, however prized by today’s music listeners, isn’t necessarily rampant. As Page explains in an interview with Billboard, he gained confidence in completion-based royalty accounting after learning that completion rates surpass 90% once a person has been listening longer than three minutes. To Page, this means shorter attention spans select shorter songs and people willing to listen longer will do so. “Sprinters enter sprints; marathon runners enter marathons,” says Page. “For the most part, people who want longer songs go for longer songs and stay the journey. Jazz and classical have got the highest completion rates from all the genres.”
Paying based on completing a song makes sense intuitively, because in streaming the business goal is listener engagement, and one sign a listener is engaged is how much a song gets heard. From that perspective, a stream that ends halfway through a song is less valuable to both the streaming platform and the rights holders than a song that somebody listens to all the way through. So, rewarding completion makes sense from this business point of view.
It does. And I think a key strength of the proposal, and I’ve road tested it with the great and good in music and tech — I’m very open on strengths and weaknesses and anomalies. I’m putting all my cards on the table here for this to be accepted and be a model to give people even more assurances. But the strength is it’s asymmetrical. I am not promoting completion. If Glenn Peoples does nothing with this listening experience, I do nothing with these royalty calculations. I must be absolutely clear here. I am only punishing incompletion. I take action when you show intent. If you do nothing, I do nothing. If you step in there and say, “I’m done with this song, move me on to the next one,” I’m going to do something with the royalty structure. That’s crucial in terms of the argument. It’s got a strong common-sense property, as you alluded to, but it’s asymmetric. And to be absolutely clear, streaming services don’t pay a penny more or a penny less. We simply reallocate away from the incomplete pool to the complete group.
The deterrence against fraud or gaming the system, whatever you want to call it, seems to be a strong argument. If some artists are making music based on this 30-second threshold, I don’t see how that’s good for anybody. The royalty model shouldn’t be influencing how music is created and released.
Drake had an album where there were like eight songs which lasted between 40 and 50 seconds — skits — and they’re going to get paid the same as a seven-minute jazz composition with McCoy Tyner? These are questions of fairness. The current model has unfair properties in it as well. We have to remember [that] nobody thought about jazz and classical when they invented the 30-second rule. [An on-demand stream earns a royalty if it is streamed for 30 seconds or longer.] Nobody argued for duration.
Now let me allow me to play Devil’s Advocate. As a user of a subscription service, I pay for the ability to skip songs. And if I skip a song 45 seconds in, it doesn’t necessarily mean that song is less valuable. It means that I enjoy that ability to skip songs. If I don’t want to skip songs, I’ll listen to SiriusXM. And the ability to skip songs is one of the best things about an on-demand service. So why should skipping be punished if it has so much value to me?
I respect that view. I would say that argument is weak because the majority of people are paying for the concierge service. In the vast majority of instances, the act of skipping is a negative signal by the consumer. And for a lot of people, the engagement they have with their music platform is approximately this: in the pocket it goes and that’s it for the day. I’m not paying so I have to skip songs. I’m not paying so I have to select songs. I’m paying to enjoy the music. If you can serve it up for me, I’ll pay, I’ll stay even longer. So I quote [intellectual property expert] David Safir in a piece where there was a heated debate at the NY:LON conference in London. David calmed the debate down by saying, “Hold on, we haven’t even decided who we’re defining fairness for. Is it the creator, the platform, or the consumer?” As the consumer pays for convenience, the act of skipping, or the act of even leaning in, could be a sign of inconvenience. That is negative for the consumer’s experience in terms of willingness to pay and willingness to stay.
When I skip, it’s to sample the big catalog of music. It’s one way to listen to more music — not all of which I’m going to go back and listen to again. But at least I hear it. Again, whether it’s an editorial playlist, or just bouncing around the app, skipping allows me to sample the catalog. And not skipping would really get in the way, I think.
I remember with [Spotify’s] Discover Weekly, we began to wonder whether the reason it was successful is you used to spend a bit of your time searching for music that could involve a lot of skipping, and a bit of your time consuming music. And as time became more precious, you didn’t have any time to search. Nobody went to record shops anymore, and therefore there was even less time to consume. And what Discover Weekly did was internalize the search cost, the experimental costs, the skipping costs, and it gave you exactly what you needed. In terms of what pays everyone’s bills in this business, it might be the skipping — I doubt it. It might be the searching — I doubt it. I think what drives it is I just pull out my phone and it delivers me music and I stay the course. I think it’s that.
The [U.K. Competition and Markets Authority] asked the four streaming platforms in the U.K. to reveal a source of streams and just how much is human editorial: not a lot, 5% back then, probably two and a half percent now. How much is algorithmic? Not a lot. The vast majority of listening is people-owned playlists. That was a bombshell. That shook the industry out of a rut because, wait a second, 85% of listening might not be platform directed.
So, you know, it’s interesting to just think about that context as well. If you’re skipping, and you look at that table, you look at all the evidence, I think that the evidence weighs towards skipping as a negative signal in terms of the attribution, the value, utility that person’s gained from their platform, as opposed to a positive one. People want to stay in the saddle of music. They want to complete.
Reading the paper, I sensed some undercurrents, perhaps, of criticism of how people, especially young people, listen to music these days. You quoted somebody saying that wedding bands only play two minutes of a song because TikTok has ruined its users’ attention spans. Is part of this about trying to get people to listen to an entire song, and get their attention spans back?
I really owe a long-time mentor of mine, Fred Goldring, for that quote. He told the story about a wedding band that played a two-and-a-half-hour medley because people don’t have the attention spans for full songs anymore. I was like, “Oh, my goodness! What has TikTok has done? Is that what the 30-second rule has done to our music? Is that where we’re at?” If I can expand on that, Arctic Monkeys are a very successful band. They played the Emirates Stadium [in London] twice last summer. The first night was predominantly die-hard fans in their 40s and 50s. The second night was teenage girls who had discovered them on TikTok, and they only knew 34 seconds of all its songs. If you stick around after the chorus, we’re going to sing another verse. It’s called a composition, people; we’ve had these things for a long time. Yeah, there is a concern there.
Now, the concern could just be misplaced. I think the concern is actually very real. Songs are getting shorter. Choruses have been moved to the front, and Swedish artists were doing this in 2013. Many artists are doing it now. But in an attention economy, any alteration to pro rata [royalty calculations] that helps music win attention, that creates incentives that compete for attention, has to be good. Because music is in competition with so many other distractions. Now, completion has a different agenda, but it’s going to help this industry think about, how does it compete for attention?
You noted in the paper that complexity could be the opponent of a successful royalty system. I’m wondering to what extent people, and mainly creators, will need to understand how this royalty system would work. You’ll understand it. Attorneys will understand it, as they must. But ostensibly, these new royalty schemes are to create more fairness for creators. Do you think creators would understand this well enough?
Is the consumer aware that under pro rata, that if I’m a light user, and Glenn Peoples is a heavy user, my money is being used to compensate Glenn’s consumption? Probably not. If they were, would they change your habits? Maybe. Maybe that user-centric property is interesting. But I’m not sure how interested the consumer is in the actual royalty model. If you surveyed them and said, “How many people know it takes 30 seconds before you get paid?” Less than 1%.
On the industry side, something as simple as a completion index, a third threshold, I feel fits the curve. Even drummers will understand this. That’s really important. Now, where it could get complex in that proposal is that Glenn’s completion of a two-minute pop song would be worth more than my incompletion after listening to six and a half minutes of a seven-minute song. Curb the concern, though, because I did go on to show that genre is not necessarily a driver of completion; neither is song length. That’s a reassurance.
Spotify is presenting The Gold Standard art exhibition next week to celebrate women in hip-hop, and Billboard is sharing an exclusive look at Latto‘s portrait Wednesday (July 24). Fine artist Manon Biernacki illustrated larger-than-life portraits of some of the biggest female rappers today, including Cardi B, Megan Thee Stallion, Doja Cat, City Girls, Saweetie, Sexyy […]
Don’t be surprised if Spotify decides to further raise prices on its premium subscription plans.
Although CEO Daniel Ek and interim CFO Ben Kung didn’t provide a timeline for future price increases, they sent numerous signals during Tuesday’s second-quarter earnings call that additional price increases are possible.
Spotify waited more than a decade to raise prices in the U.S. and many other markets in 2023 — from $9.99 to $10.99 a month for an individual plan. In 2024, the rate was bumped up to $11.99 per month. If those price increases were poorly timed, Spotify would have seen subscribers leave and revenues would suffer. Neither happened.
In the second quarter, the company added 7 million subscribers from the prior the quarter — 1 million more than it told investors it expected — and revenue reached 3.8 billion euros ($4.15 billion), up 20% year over year, the company announced Tuesday. Higher prices, combined with extensive layoffs, helped Spotify turn a 247 million euro ($269 million) operating loss in the second quarter of 2023 into an operating profit of 266 million euro ($290 million) — a swing of 513 million euros ($559 million).
Following widespread price increases in 2023 and additional price hikes this year in the U.S., U.K. and Australia, “We’re seeing less churn in this round of increases than we did in our prior one, which was already very low by any measure,” Ek said. The churn rates following the second round of increases were “better than expected,” added Kung.
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Following the two rounds of price hikes, Spotify is “very encouraged by what we’re seeing in the three major markets where we’ve taken price now, that’s basically about two times in the last 12 months,” said Kung. “And so I think we see that as a great data point for … what might be possible … in the rest of our territories.”
Why are subscribers not leaving? Ek attributes its churn rates to “the tremendous value we’ve added to the service over the last several years.” That includes features such as the year-ending recap Wrapped and Discovery Weekly, a personalized playlist of new releases. More recently, the company invested heavily in podcasts and audiobooks. Spotify is now a well-rounded audio platform, not the music-focused streaming service of its early years. “Access to all of this content would cost a user approximately $26 — significantly more than a Spotify subscription,” said Ek. “Spotify remains a pretty outstanding deal.”
Engagement is important for subscriber retention. As long as Spotify can keep listeners listening, it believes it has an ability to raise prices. “The most important thing in the near term is just making sure that audiobooks are driving incremental engagement for the platform, and we’re seeing this happening in a way that makes us feel good about the path that we’re on here,” said Kung.
The U.S., U.K. and Australia appear to have absorbed two rounds of price increases without missing a beat. Spotify executives didn’t say what to expect in other large, mature markets, but Ek suggested that listeners in developing markets, which currently skew more toward ad-supported listening, could stomach paying more. “The high engagement in [developing] markets gives us tremendous confidence in our ability to raise prices,” he said.
Separately, Spotify believes a subset of its subscribers are willing to pay substantially more for an elevated experience. Spotify first announced a high-quality audio tier, called HiFi, in 2021 but delayed its launch. Now, it appears HiFi is back on. “The plan here is to offer a much better version of Spotify,” said Ek. “So, think something like $5 above the current premium tier, so probably around $17-$18 price point, but sort of a deluxe version of Spotify that has all the benefits that the normal Spotify version has plus more control and quality across the board.”
Spotify’s stock surged 12% on Tuesday after Spotify reported quarterly earnings that beat subscriber growth and profit margin expectations.
In a wide-ranging discussion of the company’s earnings that touched on the controversy sparked by Spotify’s audiobook bundling, its plans for a premium music tier and missing its target for monthly active user growth, Spotify chief Daniel Ek said the company he helped found 18 years ago is reaching a turning point.
“While many believe that Spotify has a great product, we needed to prove that we could also be a great business,” Ek said. “I think we’re really starting to show this now.”
Here’s what else you should know about the global streaming giant’s most recent quarterly earnings and what was said on the call.
“It was a very strong quarter across most of our key metrics”
Ek said at the top of the webcast. The streaming giant, which has for most of its 18-year history failed to be profitable, reported its third-straight profitable quarter spurred on by the addition of seven million net new subscribers, an expanded gross profit margin of 29.2% and 490 million euros ($533 million) in free cash flow, the most in the company’s history. However, the company missed its internal target for total monthly active users (MAUs), reporting a total of 626 million MAUs compared with a goal of 631 million.
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Ek said they are tackling this by enhancing free products to boost engagement and retention in developing markets.
The bundle controversy
When Spotify announced plans to raise subscription prices in the U.S. and the addition of 15 hours of audiobooks per month in May, it also asserted it could pay a discounted “bundle” rate to songwriters for premium streams that Billboard estimates could cut songwriters’ and music publishers’ royalty payments by $150 million. The Mechanical Licensing Collective sued Spotify, claiming it “improperly” classified its premium tiers as bundles. Ek declined to comment on the lawsuit, but defended Spotify saying that it paid out a record-high amount to music labels and publishers in 2023 and will “beat those numbers” in 2024.
“A lot of people want to make this a zero sum game where we have to win in order for them to lose or they have to win and we sort of lose,” Ek said. “It’s not as much a zero sum game as people make it out to be. That’s not to say we don’t quibble around various things at various points. That’s the nature of all supplier and distributor relationships. Overall we have had healthy relationships with the music industry for the better part of now 18 years. … Overall the music industry is growing. We are spending a lot of time and effort making sure it keeps growing.”
Spotify’s interim CFO Ben Kung declined to share details of Spotify’s royalty payout agreements but said the company is confident in its position.
New ultra-premium tier on the horizon
Asked about Spotify’s plans to launch a long-delayed high definition audio offering, Ek described the company’s effort to bring something like a “deluxe version” of Spotify to life for “a large subset” of Spotify’s now 246 million subscribers.
“The plan here is to offer a much better version of Spotify. So, think something like $5 above the current premium tier, so probably around $17-$18 price point, but sort of a deluxe version of Spotify that has all the benefits that the normal Spotify version has plus more control and quality across the board,” Ek said.
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.
Although most music stocks gained value this week, Spotify dropped 4.6% to $302.27 despite the U.S. markets surging to record heights and two new analyst reports that indicated the company’s share price has much room for improvement.
On Wednesday (July 10), KeyBanc increased Spotify’s price target from $400 to $410 on the belief that the market is underestimating the company’s revenue, earnings and gross margin for 2025 and 2026. In addition, Wolfe Research initiated coverage of Spotify with a $390 price target. Given Spotify’s closing price of $302.27 on Friday, KeyBanc’s new price target implies 35.6% upside while Wolfe’s price target implies 29% upside.
There was one Spotify dissenter this week, however. Redburn Atlantic downgraded Spotify to “sell” with a $230 price target — 23.9% below Friday’s closing price. While Redburn’s analysts are impressed with Spotify’s operating momentum, they believe the market “is simply forecasting too much growth,” they wrote in an investor note. In April, Spotify — which will release its second-quarter earnings on July 23 —said it expects second-quarter revenue to be 3.8 billion euros ($4.1 billion), which would be a 19.6% increase over the prior-year period. It also said it anticipated 245 million subscribers, up 11.4% year-over-year.
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Spotify also bucked the trend among all stocks, which enjoyed a record-setting week. The Dow Jones Industrial Average and S&P 500 reached all-time highs on Friday (July 12) while the Nasdaq composite hit a new peak on Thursday (July 11). After gaining 0.2% this week, the tech-heavy Nasdaq is up 22.6% in 2024, while the S&P 500 added 0.9% and has gained 17.7% year to date.
Spotify’s fall was a major factor in the Billboard Global Music Index (BGMI) dropping 0.9% to 1,828.20 this week, though a couple of other valuable stocks also played a role even as only six of the 20 stocks lost ground this week. The index’s second-most-valuable component, Universal Music Group, declined 2.2% to 27.40 euros ($29.92) while its sixth-most-valuable component, HYBE, fell 3.9% to 189,700 won ($137.95). Despite this week’s decline, the BGMI is up 19.2% in 2024, just shy of the Nasdaq and ahead of the S&P 500.
Among stocks that saw gains this week was Warner Music Group (WMG), whose share price improved 2.0% to $30.93. On Thursday, Jefferies lowered WMG’s price target to $38 from $43, which implies 22.9% upside over Friday’s closing price. On Friday, Wolfe Research initiated coverage of WMG with a $37 price target, which implies 19.6% upside. Meanwhile, Redburn downgraded WMG from “neutral” to “sell” and has a price target of $23, 25.6% below Friday’s closing price.
Sphere Entertainment Co. led all music stocks by gaining 16.6% to $43.66, bringing its year-to-date gain to 28.4%. On Thursday, Morgan Stanley boosted its price target to $45 from $42, which implies 3.1% upside from Friday’s closing price. The company’s shares got a boost two weeks ago after hedge fund titan Steve Cohen’s Point72 Asset Management took a 5.5% stake. Sphere’s sister company, MSG Entertainment, gained 8.0% to $37.21.
It’s earnings season once again, with Spotify the first music company set to report second-quarter earnings on July 23. Which is fitting — not only is the Swedish streaming giant the most valuable publicly traded music company by market capitalization at $60.4 billion, it’s also an important bellwether for much of the music business.
Music subscriptions will continue to be the driving force for Spotify, other streaming companies, record labels and music publishers. Subscriber gains mean more money flowing through to creators and rights owners, while rising prices are benefitting streaming services and could flow down to creators and rights owners, too — although analysts have mixed opinions on whether price increases have those downstream benefits or simply pad streaming companies’ bottom lines.
Another giant of the music business, Universal Music Group, is up next, with its earnings slated to drop the day after Spotify’s (July 24). Believe and SiriusXM earnings are due the following week (both Aug. 1), while Warner Music Group is set for the week after (Aug. 8). Follow Billboard‘s list of upcoming industry events for more earnings release dates once they’re announced.
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On the touring front, for all the hullabaloo about weakened consumer demand and canceled tours and festivals, the live music market is likely to have produced another banner quarter. While everyone’s eyes will be on Live Nation to gauge the health of the business, the concert giant has yet to announce its earnings release date; CTS Eventim, which will report earnings on Aug. 22, is the only promoter to have announced so far.
Here’s what to expect in the upcoming slew of earnings reports.
Subscription gains — but without churn?
The recorded music market is having its cake and eating it, too: subscription prices are increasing, and customers don’t appear to be leaving in droves. Music subscription services are benefiting from price increases — namely Spotify in 2023, with some additional price hikes in 2024 — with little churn. Higher prices and continued subscriber growth will lead to gains in total revenue and average revenue per user (ARPU); Spotify expected 245 million subscribers at the end of June, which would be 6 million net additions in the quarter and a whopping 25 million greater than the 220 million subscribers it had on June 30, 2023. Watch out for any indications that higher prices negatively affected Spotify’s churn rate, however — although the company does not release specific churn data, it will likely warn investors if subscriber losses were greater than expected and are headed in the wrong direction. So far, however, any consumer complaints have been more bark than bite. In another good sign, streaming activity has been healthy, too. U.S. audio streams — by count, not by dollar value — were up 8.1% in the second quarter, according to Luminate.
Payoffs from price increases and cost-cutting
Spotify expects to have operating income of 250 million euros ($273 million) in the second quarter, which would be a nearly 500-million-euro ($545 million) improvement over the 247-million-euro operating loss it saw in the second quarter of 2023. If attained, that big shift from loss to profitcould be chalked up to r Spotify’s decisions in 2023 to raise prices and drastically cut back on its headcount (including a 17% workforce reduction in December). Those moves quickly produced benefits: Gross margin increased to 27.6% in the first quarter of 2024, up from 26.7% in the fourth quarter of 2023 and 25.2% in the first quarter of 2023. The reduced expenses from layoffs also helped operating margin improve to 4.6% in the first quarter — a big gain from the -2% and -5.1% margins it saw in the fourth and first quarters of 2023, respectively. Additionally, Spotify’s second-quarter guidance of 3.8 billion euros ($4.1 billion) of total revenue would be a 19.6% improvement from the prior-year period revenue of 3.18 billion euros ($3.47 billion). ARPU also increased 7% in the first quarter and is likely to improve again in the second quarter.
More advertising weakness
Music subscription services chose a good time to raise prices. Weak advertising revenues have been a recurring theme since music and tech companies began warning investors in 2022, and continued unsteadiness in the advertising market will impact ad-supported revenues for streaming companies, record labels and music publishers. On July 1, Guggenheim lowered its estimate for Universal Music Group’s recorded music ad-supported streaming growth to 10.6% from 11.1% “to better reflect more challenging comparisons” against the prior quarter, as Guggenheim analysts wrote in an investor note. However, that revision was still above the first-quarter estimate of 10.3% due to UMG’s renewal of a licensing agreement with TikTok in May.
Continued strong demand for live music
For all that has been written about fans’ lessened appetites for live music, public companies appear to be in stable conditions. In its first-quarter earnings report in May, Live Nation said that through mid-April, the percentage of large shows booked was up double-digits while concert margins had improved, too. “We are seeing no weakness,” said president/CFO Joe Berchtold, adding that artists who toured in both 2023 and 2024 are seeing better sell-through this year. And with fewer stadium shows in 2024 than 2023, Live Nation will have more concerts in the more profitable arenas and amphitheaters that it owns or operates. Analysts are still bullish on Live Nation in the wake of the Department of Justice’s antitrust lawsuit against the company filed in May: As of this week, 18 analysts have “buy” recommendations on Live Nation, four have “hold” recommendations and only one has a “sell” on the stock. CTS Eventim expects another solid year, too. In April, the German promoter and ticketing company reiterated comments contained in its 2023 annual report that predicted “further moderate sales growth” in 2024.
The Taylor Swift Effect
UMG’s financials will get a boost from Taylor Swift’s latest album, The Tortured Poets Department. Released on April 17 through UMG’s Republic Records, Tortured Poets has remained at No. 1 on the Billboard 200 album chart for 11 consecutive weeks since its April 19 release, with sales boosted in subsequent weeks by additional variants that helped it maintain chart position. In the most recent chart week, for example, two CD versions of the album that fans initially ordered through Swift’s webstore in early June were shipped. In all, Swift’s latest album topped the Billboard 200 for 9 of the second quarter’s 13 weeks and sold 2.4 million units in the U.S., with about 2 million of those coming from CD and LP sales, according to Luminate. That led Republic Records’ U.S. market share to reach an industry-leading 15.72%, up from 12.42% in the first quarter – greater than Warner Music Group. UMG’s total market share in the quarter was 36.37%, up from 34.48% in the prior-year quarter and well ahead of its 33.9% share in the first quarter of 2024.
A group of consumers have dropped a class action lawsuit against Spotify over its recent decision to kill its short-lived “Car Thing” device, a case that claimed the streamer left users holding “a useless product.”
Filed in May, the case came just days after Spotify announced that the Car Thing — a device launched in 2021 for playing music in a car — would be bricked in December. The customers claimed the move left them “with nothing more than a paperweight that cost between $50 and $100.”
But less than two months later, attorneys for the jilted consumers said Tuesday (July 9) that they would drop the lawsuit. The move came without explanation and does not indicate that any kind of settlement with Spotify was reached.
Trending on Billboard
In their initial complaint, the aggrieved buyers claimed Spotify had refused to offer refunds and, at the time of the lawsuit’s filing, the company’s FAQ addressing the deactivation did not make any mention of refunds. It simply told users that Spotify was “not offering any trade-in options” and urged them to consider “safely disposing of your device following local electronic waste guidelines.”
But after the news of the lawsuit had spread, Spotify’s website was updated to include a new section covering refunds. In the updated text, Spotify tells users: “Individuals seeking a refund can contact customer support with proof of purchase to discuss their options.”
It’s unclear if the move to more clearly offer refunds resulted in the withdrawal of the lawsuit, and neither side immediately returned requests for more information. But the voluntary dismissal was made “without prejudice,” meaning the accusers could refile the case at some point in the future if they choose to do so.
Spotify announced Car Thing in April 2021, saying it would provide users with a “seamless and personalized in-car listening experience.” The product — a touch screen with a physical dial that still requires access to a smartphone — rolled out in February 2022 at a price point of $89.99. But just months later, Spotify said it would cease production, telling investors that they “frankly haven’t seen the volume at the higher prices that would make the current product financially viable.”
Then in May, Spotify alerted users that it would stop supporting the devices entirely. The company told users that it was “not a decision we made lightly” and offered a link to customer service to “ensure that you have the right place to reach out if you have any questions.” A week later, the company confirmed in a public statement that the move, set to take effect Dec. 9, would render the devices fully inoperable.
On May 28, three Car Thing buyers — Hamza Mazumder, Anthony Bracarello and Luke Martin — filed their lawsuit, accusing Spotify of violating state and federal laws by essentially duping their clients into buying a “useless product.”
“Had plaintiffs and other members of the class known that Spotify manufactured the Car Thing with the ability to brick the product at any point after its introduction to the marketplace and in Spotify’s total discretion, they would not have bought a Car Thing, or would have paid substantially less for them,” the lawsuit read.