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A high bar for growth, defying expectations, and more from Spotify to investors

In Spotify’s Q4 earnings call with investors, the word “podcast” was not spoken in the prepared remarks. Only when an investor asked about it in the Q&A portion did the company address its podcast business by name.

In reply, Spotify CEO Daniel Ek numbered four ways in which value has been added to Spotify’s advertisers: “AI is one of those ways, video is obviously another one, podcasting is the third, audiobooks is the fourth.”

we’re finding more ways to drive up the engagement and driving down the churn.”

Spotify vs. YouTube and the multi-home creator

Rich Greenfield asked tis provocation: “Spotify offers an ever larger platform for video podcasting. It’s still dwarfed by the scale, reach, and engagement of YouTube. We presume that’s why creators like Joe Rogan want to be on YouTube and not just Spotify. How do you change that over time?”

Ek replied that Spotify has competed against much bigger companies in its growth history. “I feel like this is the story of Spotify,” he said. “We don’t thinkmuch about competition, is the honest answer.” Instead, Ek affirmed, Spotify thinks about consumer needs and creator needs. And he described a globalist attitude within the industry: “People make it out to be this sort of a winner-takes-all dynamic in that there’s only one player that can solve all of it. What we’re actually seeing is creator wants to be multi-home, they want to be in more platforms.”

Paying for Ad-supported?

Investor Steven Cahall asked whether Spotify would consider a “modest subscription fee” on the ad-supported tier which has always been free. That sounds startling, but it’s natural for an investor to be interested in new revenue flows, and Cahall noed (without citing a source) that the idea “appears to be attractive to labels.”

While the unpaying ad-supported users might hope for a brisk rebuttal of that idea, Ek’s evasive answer stayed in the middle of the road, leaving the door open to charging for ad-supporedlistening: “I can’t really comment on specifics about pre-announcing what we may or may not do, but I can talk about the sort of general views. We’re always open to considering how we evolve our opportunity.”

The high bar for growth

Investor Jennifer Reif asked Daniel Ek to circle back on a revenue goal stated in 2022: 20% annual growth. Is Ek still comfortable with that prediction, she asked, “and can you help us think throught the various levers to reach this target?”

Ek’s reply contained a soft affirmation of the 20% annual goal. He repeated “very high goals” twice. His reply was generalized: We want to be one of these very few iconic companies that defy expectations and that’s certainly what I’m focused on every day of my task here.” Then he re-asked the question to specify the driver. “Well,” he continued, “it’s probably a combination of both super strong top line user growth and then on top of that, very strong monetization.” Pretty general so far; then he got into audience arithmetic:

“As you think about the addressable universe, there’s definitely more than three billion people around the world that care about music. We’re only at 640 million so far. So there’s plenty of growth left to be had. Now obviously, if you stretch out 20% across the decades on, it will be very tough because we’ve run out of people.” Going down that road pretty much forced Ek to confess, “So eventually that growth depending on what sort of time period you’re looking at, will be hard to accomplish.” He shifted from the population to money, explaining that on the revenue side Spotify can “close some of that between the value-to-price ratio.” He suggested that as Spotify continues to add more value (tools for consumers), the company can close the price gap, presumably by selectively raising price points.

Ek noted that raising prices is only a recently assumed and forgiven tactic: “A few years back, it was a big question around whether Spotify could even increase prices at all. I think we’ve proven now that we have that ability to do so.” We might paraphrase this way: Spotify has earned permission, from investors and users, to raise prices. Industry observers can sensibly expect future raises to meet the company’s revenue promises to investors.

What about AI DJ?

The in-app assistant AI DJ was referenced by an investor wanting to know how it has user engagement and satisfaction.

Daniel Ek observed that with a user population numbering 640 million, very few product components move user metrics in the aggregate. “There are more things that may move numbers on small individual cohorts.” But that preliminary answer, which seemed to prepare for disappointing user statistics, actually led to a success story for AI DJ: “We’re seeing amazing results, not just on quantitative metrics, but also on quality metrics, how people feel about Spotify, what they say they love about Spotify.” 

That’s a remarkable endorsement of the AI DJ feature. We are at our best when we can bring great innovation to our consumers,” Ek declared.


 

Brad Hill

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