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Six Questions Answered From Spotify’s Third Quarter Earnings

Spotify, music's most scrutinized company, reported decent financials and fair podcast growth in its third quarter earnings last Thursday. Between the letter to investors, which doubles as financial…

Spotify, music’s most scrutinized company, reported decent financials and fair podcast growth in its third quarter earnings last Thursday. Between the letter to investors, which doubles as financial statements, and a jargon-filled earnings call, the company left much to digest.

Earnings releases are important for two reasons:

First, outsiders get to see the performance of the company through trustworthy, albeit unaudited, financial statements. Spotify’s existing trends continued in the third quarter: revenue improved 14.7% year over year and 4.6% from the previous quarter. From a financial point of view, the COVID-19 pandemic does not appear to have stunted Spotify’s growth outside of poor second-quarter ad revenues.


Second, executives’ prepared comments and their answers to analysts’ questions reveal communications’ and investor relations’ talking points. Spotify’s message became clear through sheer repetition: the streaming market is young; Spotify most helps stakeholders by focusing on growth; and it will consider raising prices beyond recent tests in seven select markets.

To dig in deeper, here are six questions, with answers, stemming from Thursday’s earnings.

Why is Spotify’s average revenue-per-user still declining?
ARPU is the measure by which people judge Spotify’s ability to monetize its audience. Most of ARPU’s decline comes from the growing popularity of family plan accounts that charge $14.99 for up to six people — ostensibly family members under one roof — on a single account. When Spotify and other services report their number of subscribers, a family plan account is not counted as a single subscriber. Instead, each person on the family plan counts as a subscriber. So, for example, family plans with two subscribers have a $7.49 ARPU, $4.99 ARPU for three subscribers, and so on.

Six Questions Answered From Spotify's Third

Will Spotify raise prices?
The answer is a qualified yes, Spotify will raise prices. Spotify has experimented with higher prices on family plans — because the multi-user option provides the most value, said Ek — in seven countries. But price hikes will be staggered because Spotify is “constantly in various stages in various markets” and for different demographics within a market, said Ek. Engagement is a key signal, Ek added. Spotify sees “a clear correlation” between a person’s listening hours — a proxy for the value being derived — and its ability to raise prices.

Why did Spotify’s share price fall after earnings were released?
Spotify’s share price dropped as much as 10.2% on Thursday and as much as 9.3% on Friday. The likely culprit was Spotify’s $0.65 net loss per share, deeper than what analysts expected. Not that it matters much. Net loss, which takes into account non-operating expenses such as depreciation, is relatively unimportant for a company that puts growth above profits. Nevertheless, earnings per share is a traditional focal point for investors. Besides, Spotify’s impressive run in 2020, from $149.55 to $299.67, primed its share price for a fall. At close Friday, its share price was $239.89, up 60.4% year to date.


Is Joe Rogan a distraction?
Yes, the insanely popular podcaster probably is. The Joe Rogan Experience has been Spotify’s most popular podcast since launching on the platform in September. Continued success could easily make his $100 million licensing agreement a good deal for both sides. But Rogan has quickly become a minefield Spotify must traverse delicately. First, some past episodes with controversial guests were absent upon his Spotify launch. Then, Alex Jones, whose episode was among the removed content, was again Rogan’s guest on a Oct. 27 episode released two days before Ek defended Spotify’s content policy to investors. Rogan’s guests have so offended some Spotify employees that his show has reportedly become a mini-crisis within the company. That puts Spotify in a sticky situation of needing to appease its employees while having no editorial control; it only licenses The Joe Rogan Experience and, according to Rogan, has given Rogan complete editorial control.

Six Questions Answered From Spotify's Third

How popular are podcasts?  Podcasts are increasingly popular at Spotify, but growth in podcast listeners is slow: 22% of monthly users listened to a podcast, up from 19% and 21% in the first and second quarters, respectively. Given that two prominent podcasts debuted in the quarter — The Michelle Obama Podcast in July and The Joe Rogan Experience, in September — and podcasts receive a growing presence on the platform, a one-point improvement seems light. On the plus side, Spotify-owned podcasts are popular: 19% of Spotify’s monthly active users in the quarter listened to Spotify-owned podcasts. That number is key since Spotify sells ads for its owned podcasts; they were “a significant driver” of advertising revenue growth in the third quarter, said Ek.

Will Spotify branch out into the live business?
Spotify has pondered getting into live music for over a decade. In 2009, Ek wrote in a Spotify blog post that the new streaming business model is a mix of ad-supported music, downloads (which it sold through a third party until 2013), subscriptions, merchandising and ticketing. Spotify could sell concert tickets on its platform rather than link to third party sellers. But here, the past predicts the future: Spotify focuses only on audio, nothing more, and treats the streaming market as a race that just started. Ek feigned interest when asked about concerts during Thursday’s earnings call. Ticketing strays from Spotify’s mission. In the last few years, Spotify has added tools for musicians, developed features on the platform and invested in the podcast business — all audio-based initiatives. It has wisely avoided YouTube’s dominance in streaming video and the distractions of other business segments.