Spotify Technology SPOT Q3 2020 Earnings Call Transcript

Speaker 1: (00:00)
Ladies and gentlemen, thank you for standing by and welcome to Spotify’s Q3 2020 earnings call. At this time, all participants are in a listen-only mode. If you require further assistance, please press star zero. I would now like to hand the call over to your speaker today, Bryan Goldberg, head of investor relations. Thank you. Please go ahead.

Bryan Goldberg: (00:19)
Great. Thank you. And welcome to Spotify’s third quarter 2020 earnings conference call. I hope everyone’s continuing to stay safe. Our team is again hosting this call remotely. Our CEO, Daniel Ek, is participating from Stockholm. Paul Vogel, our CFO, is at his home office in New Jersey. And I’m joining from New York. We’ll start with opening comments from Daniel. After the remarks, Daniel and Paul will be happy to answer your questions. We’ll again be taking questions exclusively through Slido. Questions can be submitted by going to slido.com, S-L-I-D-O.com, and using the code #SpotifyearningsQ320. Analysts can ask questions directly into Slido, and all participants can then vote on the questions they find the most relevant. If for some reason you don’t have access to Slido, you can email investor relations at ir@spotify.com and we’ll add in your question.

Before we begin, let me quickly cover the safe harbor. During this call, we’ll be making certain forward looking statements, including projections or estimates about the future performance of the company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed on today’s call, in our letter to shareholders, and in filings with the Securities and Exchange Commission. During this call, we’ll also refer to certain non-IFRS financial measures. Reconciliations between IFRS and non-IFRS financial measures can be found in our letter to shareholders, in the financial section of our investor relations website, and also furnished today on Form 6K. And with that, I’ll turn the call over to Daniel.

Daniel Ek: (01:49)
All right. Hi, everyone. And thanks for joining us. So Q3 was a very strong quarter, surpassing our own expectations on several measures. And I think this is a testament to all the amazing contributions of the Spotify team. We, in these uncertain times, remain focused on the needs of our creators, fans, and partners around the world. Monthly active users beat the top end of our guidance and subscribers hit the very top end of our range. And our service now reaches 320 million users and 144 million subscribers. The size of our total catalog increased significantly, and our advertising business returned to growth. And we also beat expectations in our newest markets where we’re seeing growth continue to accelerate. And I think this affirms our belief that there’s a significant pent up demand for Spotify around the world, even in places where our service has yet to launch. These results illustrate the power of our business despite COVID and other related challenges across the globe. And as a result of our performance this quarter, we have updated our Q4 guidance ranges to reflect increased optimism on where we expect to end the year. It’s also worth noting that we’ve paid out more than a billion to rights holders in every quarter in 2020. And I’m proud to say that we’re on track to pay another billion plus in Q4. In addition to sharing our results, I believe these calls are also time to help frame where we’re headed. And our team remains laser focused on building the world’s largest audio network. And while it’s still early days, it’s clear to us that our strategy’s working. So we know that when we reach more listeners, we’re able to attract more creators to our platform. So with more reach comes more content, and with more content, especially content unique to Spotify, there comes more opportunities to monetize. And that interplay is super important because it’s really the foundation of our flywheel. And that’s why wheel continues to accelerate faster with every new user and creator that comes on our platform.

Daniel Ek: (03:54)
Bottom line, as I look at the increase specifically in reach that we’re seeing this quarter, it gives me the confidence in our ability to monetize that growth. So to fuel the flywheel, you’ll see us continue to invest in enhancing our user experiencing, furthering market expansion, and develop and acquiring unique content for both new and established creators. And related to this, you’ve seen us make a few big moves in launching new content. So I would like to shed some light on how it’s going. Our number of new podcasts increased over 20%, and music releases are up 13% over the prior quarter. And we saw a strong positive reaction when Michelle Obama and Joe Rogan’s podcast launched during the quarter. And we’re seeing great success with our original exclusives, which now account for more than 19% of all podcast listening on the platform. In addition, we’re hard at work on new content development that will roll out in the months ahead.

Daniel Ek: (04:51)
And one of the residual benefits of our time indoors is that many creators have turned back to what they do best, which is creating. And as a result, future music releases look very strong too. And as we know, new music is now coming from artists like Billie Eilish, Drake, and Sir Paul McCartney, just to name a few. Another benefit of the investment that we made in our content and user experience is that Spotify listeners are enjoying greater value than ever before. And we believe this presents two distinct opportunities. So one, with about 60% of Spotify subscribers starting out in our free tier and our outperformance on MAUs in 2020, we’re confident that we have a long runway to continue to grow our subscriber base in the months and years ahead. And two, long term is engagement and/or our listener value per hours high. It gives us the ability to selectively increase our price.

Daniel Ek: (05:49)
So here’s how I think about it. While our primary focus remains user growth, based on our maturity in certain markets and the increasing value we provide to our subscribers, including, of course, enhanced content, we’ve seen engagement and more specifically value for our growth substantially over these past few years. And I believe an increase in value per hour is the most reliable signal we have in determining when we’re able to use price as a lever to grow our business. And while it’s still early, initial results indicate that in the markets where we tested increasing prices, our users believe that Spotify remains an exceptional value and they’ve shown a willingness to pay more for our service. So as a result, you’ll see us further expand price increases, especially in places where we’re well positioned against the competition and our value per hour is high.

Daniel Ek: (06:39)
I would, however, throw in one big caveat. We will continue to tread carefully in these COVID times to ensure we don’t get ahead of the market. So to wrap it up, it was a really strong quarter. And as history has shown us, while we don’t always nail the timing, we’re usually right in predicting the outcome of our strategy. I continue to believe in the long term value of each and every listener on Spotify. And there are still billions of listeners that we’ve yet to reach around the world. Listeners who try Spotify tend to stay. And they often convert to a subscriber. That is why our continued focus is on reaching more listeners as ultimately this will translate into long term value for our investors. And with that, I’ll turn it back to Bryan.

Thanks, Daniel. Again, if you have any questions, please go to slido.com, #SpotifyearningsQ320. Once your question is entered, you can edit or withdraw your question by selecting the option in the bottom right. We’ll be reading the questions in the order they come in with respect to how people vote up their preference for questions. And our first question today comes from Matthew Thorton. When you think about the two-sided marketplace longer term, do you believe that there is opportunity to monetize and play a role in accelerating the discovery, consumption, growth of live and virtual events, as well as memorabilia and merchandise?

Daniel Ek: (08:04)
Yes. So long term, if you think about our marketplace strategy, it’s essentially about having creators meet fans. And so there’s three distinct components of this. One is to grow their fan bases. The second is to engage further in their fan bases. And the third is monetizing those fan bases. And we’re going to create tools and services in all three of these categories. First, how you grow your fan base. Second, in how you engage with your fan base. And then thirdly, how you monetize it. And of that, of course, live is a very, very interesting component. As is merchandise as well. And we’re early days in some of our experiments, but I do think the future of the platform certainly holds a lot more of those types of tools as well.

All right. Our next question comes from Michael Morris from Guggenheim. How has, excuse me, Joe Rogan performed overall since launching on Spotify? Any indication listeners from other platforms are migrating to Spotify in advance of exclusivity?

Paul: (09:17)
Yeah, so Jerry has performed really well so far. It’s exceeded expectations since it’s been moved over to our platform. We obviously had some expectations of what would happen now and then what would happen in the exclusivity period. So we feel really good about how it’s performed. We’ve definitely had faster growth than we expected, and we’re expecting another step up when the podcast goes exclusive to us before the end of the year.

All right. Our next question comes from Richard Kramer of [inaudible 00:09:53]. Can you share some rough percentages of premium subscribers that are actually paying? We understand the number is around 60% with the remaining 40% under family plans.

Paul: (10:04)
Yeah, so we don’t break out the mix by product. As we’ve talked about, ARPU has come down. And some of that has been product mix or most has been product mix. And so family plan has grown as a percentage of the overall user base. And it is a decent amount of our users right now. For us, as we’ve talked about a lot, we’re looking holistically, as Daniel mentioned, about growing overall users and growing overall subscribers. And are we able to grow them in a way that has a positive LTV to CAC? And something that’s going to be long term profitable for both us as well as the industry to continue to add more users overall, to generate more revenue, gross revenue, for the entire industry and for Spotify. And so that’s been a real big success for us. And so with an LTV to CAC of two and a half to three times, which has been pretty steady since we’ve gone public, we feel really good about the product mix within our portfolio.

All right. Another question from Richard. Spotify has now had 15 straight quarters of declining premium ARPU, even adjusting for FX. With the industry trend towards further bundling and towards saturation to developed markets, should investors expect any reversal of this trend in 2021?

Paul: (11:22)
Yeah. So just sort of I guess dovetailing on my last answer, for us, it has been historically about really thinking about growing users and subscribers first before worrying about the monetization part second. And as I mentioned, it really has been focused on the holistically as the LTV to CEC positive and staying in that two and a half to three range. That being said, well, let me back up. And with ARPU in the quarter, it was down 10%, it was down 6% on an FX neutral basis, which was pretty much in line with our expectations. So the quarter did stay in line with where we thought it would be. We did announce a little while ago, a couple weeks ago, that we have raised prices in a few markets, continuing to test where it makes sense for us to potentially raise pricing. And for us, it’s that balance. It’s continuing that balance of growing users and subscribers. And in markets where we think we have the opportunity to potentially raise prices, we will. And we’ll continue to test.

Paul: (12:19)
If you look back over the last five to 10 years, we’ve added a tremendous amount of value into this ecosystem. Now having sort of 65 to 70 million music tracks, two million podcasts, and we’ve done that without raising prices. So the value you’re getting as a subscriber has definitely increased materially over that five to 10 years. And so, for us, it’s really looking at different markets and different regions, looking at the overall streaming penetration in those markets, looking at our penetration in those markets, looking at the maturity of markets, and thinking about where it may make sense for price increases and where it may not. I would just reiterate what Daniel said in his opening comments. We’ll be very cautious and careful around COVID in terms of how we think about any potential price increases moving forward.

Daniel Ek: (13:03)
… COVID in terms of how we think about any potential price increases moving forward. And again, we’re still testing and learning and anything we do will be very market specific.

All right. Our next question comes from Eric Sheridan at UDS. How should we think about podcast investments beyond 2020? Are you at the necessary scale or are further investments needed in areas such as tools for creation and measurement, exclusive content and local language content outside the US?

Daniel Ek: (13:33)
Yeah, I actually just want to back up, and I think this kind of relates to the prior question as well about this sort of long-term opportunity. So one is we’re aiming to be the number one audio platform in the world and that category in itself is huge. We’re talking about billions of users and many, many millions of creators. And so to the extent that we’re still cashflow positive, and to the extent that the LTV to SAC is as favorable as we’ve seen in the past, we will continue to invest. And we still believe we’re early days in our growth. And so that’s why the vast majority of our focus has been on growing that user base and growing the number of subscribers rather than sort of raising prices.

Daniel Ek: (14:19)
We are, however, adding that to the mix. Because again, the overall growth in each and every market is the priority that we’re having and that’s the revenue growth. And we can grow that by either adding more users or raising the prices of the existing users that we’re doing it in. But because we really have this macro opportunity and we’re still in the beginning even though we have 320 million monthly active users, we still think that there are billions more to go after in this ecosystem. And we’re going to invest in better tools and that will increase the engagement. And if it increases the engagement that increases our ability to monetize them as well. And if you add them into marketplace and all these other things, you’ll see monetization increase even further, and that can drive up our [inaudible 00:15:10] and gross profit for both us and the whole ecosystem as well.

All right, next question comes from Matthew Thornton. On pricing, you guys raised family plan price in seven markets. What are you seeing in those markets, for example, penetration, engagement, FX, something else that led you to raise price? Do you expect similar actions in more markets in fourth quarter and into 2021?

Paul: (15:38)
Yeah, so I guess I’ll just reiterate what I said in the last question, which is for us it’s about looking at each market individually, looking at overall streaming, streaming growth, streaming penetration, our market share there, our position in those markets and being smart and selective about where we think it made sense. So that’s where it was for those seven markets. They’re also sort of geographically different, so ways to kind of test and learn and see how the impact of those price increases evolve. We’ve done it selectively. We did it in Norway a little while ago. We did it in New Zealand a little while ago. So we have some early learnings of what happens there. No indications yet in terms of any impact on retention, return or engagement or new subjects. It’s too early to tell. But again, given how we’ve been smart about their selections in the past, we feel pretty confident about the markets we’ve changed so far.

Daniel Ek: (16:32)
I would just add as an addition, Norway we did quite a while ago, and we do know that it had no impact whatsoever on our, negative impact I should say. So that gives us confidence. We don’t have a lot of data on these recent market launches that we have that’s mature yet, but it’s looking very good. So I think this kind of adds to our optimism and the framework that I outlined in the opening remarks about the value per hour, which is the thing that we’re looking at as we look at to our future ability to raise prices.

All right, next question from Richard Kramer. Does Spotify get any revenue from hosting podcasts where ads are sold by the content owner/creator?

Paul: (17:23)
So the short answer is no. Obviously we sell the ads for things that we own or explicitly license. We don’t take any revenue for things that just sort of gets passed through onto our platform. That being said, Daniel mentioned in his opening comments that on a trailing 30 day basis, 19% of our podcasts MEU now engages with their own O and O content. And so to the extent that that continues to move up on our platform, it gives us even more opportunity to monetize.

All right, our next question comes from Justin Patterson. How do you think about Tik Tok’s influence on the music industry? What if any traits from Tik Tok can you layer into your business?

Daniel Ek: (18:06)
Yeah, Tik Tok is a great discovery vehicle for music as it is for a lot of cultural memes that’s going on in the world today. I obviously, like many others, are fascinated with the growth of it and fascinated with the creative expression from creators on that platform and really the whole kind of remix in culture, I would say. Now that said, related to Spotify, again our focus isn’t so much on making the average user a creator that many of the social platforms do. We instead want to add super powers to the people who want to be professional creators and that’s kind of our focus.

Daniel Ek: (18:48)
But to the extent that we’re looking at something like Tik Tok, it’s more about giving our artists, looking at what they’re doing on that platform and making sure we provide more creative ways that allows them to express themselves on our platform, too. And we have been trying out a number of these things, music and talk being the most obvious example that we launched more recently. But there has also been music stories as a way for creators to talk about their content and their expression. Katy Perry made a great one more recently that I’d really encourage you guys to check out.

All right, our next question comes from Rich Greenfield. Can you talk about the controversy created by the Joe Rogan podcast and how are you handling this with your employees?

Daniel Ek: (19:44)
Yeah, again overall, I would just say we have millions of millions of creators on the platform and almost 70 million pieces of content. And the most important thing for us is that anything we do on our platform is consistently applying those policies. So we have a constant policy. It’s openly available to anyone can look at it. We obviously review all the content that goes up. And it doesn’t matter if you’re Joe Rogan or anyone else, we do apply those policies. But it’s important to note that this needs to be evenly applied, no matter if it’s internal pressure or external pressure as well. Because otherwise we are a creative platform for lots of creators, and it’s important that they know what to expect from our platforms. If we can’t do that, then there are other choices for a lot of creators to go to. So that consistency is super important in terms of our messaging.

All right, our next question comes from Eric Sheridan. Can you provide more granularity on the recovery and advertising trends? Is it a broader array of advertisers engaged with the platform? Is it a recovery and overall ad budget trajectory versus earlier this year? Can you quantify the exit rate in September that you referenced in the shareholder letter?

Paul: (21:13)
Yeah, so the recovery was pretty broad based. If you look at it by the different products we sell, our direct business was pretty strong and sort of in line with our expectations and it improved pretty significantly from a pretty significant downturn in the prior quarter due to COVID. We’ve seen programmatic grow and was in line with expectations and we saw particular strengths on the ad studio side, which is our self service tool and podcasting was up pretty significantly year on year as well. So it was kind of, that’s sort of the breakdown of how advertising recovered and we do feel good about where the quarter was and it did perform a little bit above expectations.

Paul: (21:57)
When you think about the trajectory coming of September again, pretty strong. We feel good about where it was. We had positive advertising growth in all three months of Q3. And it built upon itself within the quarter. And I would say while we don’t explicitly guide to both premium or advertising revenue, our expectation is that Q4 advertising revenue will grow faster than it did in Q3.

All right, another question from Richard Kramer. How long do you anticipate until the two-sided marketplace effort covers its costs?

Daniel Ek: (22:41)
Do you want to start with that one, Paul?

Paul: (22:42)
I’m not sure how to answer that since we don’t actually break up the profitability or the cost of any of our businesses that way. I would say at a high level, we feel really good about the two-sided marketplace in general. We feel good about the trends through the first nine months of the year. And beyond that, I’m not really sure how to comment on that. Maybe I’ll turn it over to Daniel to talk about the marketplace growth in general.

Daniel Ek: (23:07)
I think the metric that we evaluate our investments over is whether or not the traction they have in the marketplace. And to that extent on the marketplace side, what I’m encouraged by is that we’re obviously seeing a tremendous uptick in our sponsored recommendations. So it’s up to 76% and more importantly, it’s retained over 74% of the customers that experimented with the format from the quarter before. So that’s a strong engagement metric, and it shows that we’re providing a lot of value to the ecosystem. And that combined with the growth of the number of creators that are using that, gives us the confidence that this will be a great thing for the music industry and a great thing for Spotify in the longterm.

All right, next question from Brian Russo with Credit Suisse. Can you help us quantify how much of your advertising revenue is related to podcast listening versus music and how different the growth rate of podcast related advertising is from your overall advertising revenue growth?

Paul: (24:12)
Yeah, we don’t, we don’t break it out that way. I would say podcasts revenue was a significant driver of growth in the quarter. It was up I would say very significantly from last year. So year to year growth in podcasting was very, very strong. I think we feel really good about podcasting in general. I think Q3, my memory serves me correct, had about two X the number of podcasts advertisers in Q3 than we did in Q2. And the retention among those advertisers was very high between the people who advertised in Q2 who advertise in Q3. We’ve seen big upfront podcasts, media buys as well. So in general, the traction around podcasting is strong, both from a revenue, from a retention standpoint, and then from a growth in the number of podcasts advertisers spent.

All right, next question from Eric Sheridan. You cited a stronger than expected rush to launch in a successful India marketing campaign. How has your approach to market launches and/or stimulating user acquisition in emerging markets evolved over the past few years and what that might mean for medium, long-term growth prospects?

Daniel Ek: (25:24)
Yeah, I mean, overall it’s an evolving toolbox is what I would say. So I’ll just give you one example. In the Western world, we tend to focus a lot on signups by email. In many of these emerging markets, you can’t do that. It’s all about phone numbers and the ability to interact with already existing services like What’s App and the others to drive growth. So whether we’re extending the toolbox and it adds value and amortizes over the whole base, like for instance, our WhatsApp integrations our Instagram integrations, or for instance adding the sign up flow to involve …

Daniel Ek: (26:03)
… adding the signup flow to involve signing up by your phone number instead of an email. All of those are sort of small changes and tweaks that we’re adding that then gives benefits across the base globally. And so we continued to do that. And then the separate thing that we’re doing is that because of our platform and our knowledge of culture and the team that we hire on the ground, we really focus on getting the cultural aspects might. So we invest a lot in understanding that and spending that time. And you see that very, very clearly when it goes right, such as the Russia launch where you saw us, not only, like many international players, get the international content right, but you saw people also to a wide degree getting the local content too. So it’s the combination of those things, macro learnings, but more importantly, I would say adding more tools in the toolbox, which is something that we’ve been doing over these past years that then compound, making us better and better and better as we launch new markets.

Daniel Ek: (27:07)
And so I’m very encouraged by that. And, but the big surprise that I do want to address for all investors is that there seems to be a lot of pent up demand for Spotify in markets that we haven’t launched in. And I think Russia is the great existence proof of that. And that has surprised even us internally. We were very optimistic about the launch, but it exceeded our wildest expectations. So that’s super encouraging, and that gives us even more reinforcement as we go and launch the rest of the world.

All right. Our next question comes from Josh Le of Covenant Capital. Your turn rate has been declining due in part to low ARPU. How do you think of the balance between ARPU and churn? At what churn rate would you raise price?

Paul: (28:06)
Yeah, so I think it’s obviously all tied together. We have a number of products that have very high retention that have helped to lower churn over time. Our Affinity plans, like family plans and student plans, have really done a good job from that standpoint. As we’ve talked about, not to repeat myself again, but all of what you’re talking about gets into that LTV to SAC calculation. And it’s all about thinking about how are we growing overall revenue for the longterm, how does that impact the overall churn and retention over the longterm and what’s the maximum amount of gross profit dollars we’re going to get on a user over that period of time. And that’s what we’re thinking about.

Paul: (28:45)
And so your churn has come down for a couple of reasons, or I guess a number of reason. Obviously, the product continues to get better, so that’s number one. Number two is just as you get bigger, the number of users you’ve had for a longer period of time, you have more users who are on your platform for a longer period of time, which naturally helps churn when you have a product like ours, which is great. And so for us, it is combining that balance. And as we talked about before, you looking at the ability to continue to grow users and continue to grow subscribers over the long term and to get to the billion plus users that our long-term target is looking after and balancing that with what’s the right pricing for that.

Daniel Ek: (29:29)
I would just also add is I think the important mental model to look at this is a ladder. So we start off where users in many cases are in either an illegal environment or in a much lower monetized environment, like traditional radio in the US for creators. And we then moved them into our free tier. Most of them don’t wake up thinking, I’m going to pay $10 a month for music there. There are very few of those customers around that have that mindset. So we start getting them into the service. They like the service. They enjoy the service. Then whether it’s a family plan or an introductory offer or just the fact that they love the service that gets them to upgrade to one of our plans, that’s all good and great. But then what happens as they get to that plan and they get even more benefits, the ad-free environment, even more platforms where Spotify becomes available, like cars and Sonos and a bunch of other things, that adds to the experience. And you’re spending more and more and more hours on Spotify. And that’s the value per hour, the metric that I was referencing in my introductory remarks. And the more hours you’re spending, then the more value you’re driving from Spotify. And we’re seeing a clear correlation with that and our ability to then later on raise prices.

Daniel Ek: (30:49)
But the key here is to really look at the balancing act for overall growth. That is what we’re focusing on. So to the extent where we focus on the top of the funnel to grow that, that’s obviously the most long-term beneficial. But in some markets that are more mature, we can also add that the later part of that, which is focusing on the ones that are already in the funnel and raising prices for them. So it’s that balancing act that we need to play all the time. But I would want to say, think about that mental model of the staircase and the ladder. And we are constantly in various stages in various markets on that. And even among certain demographics in an existing market, we may be at various stages in that ladder too.

All right. The followup from Josh Le on pricing. What could be the impacts of Apple’s bundle to Spotify’s pricing?

Daniel Ek: (31:50)
Well, I think the primary impact… One, I would start off by saying we haven’t noticed any impact. And I think that’s evident by the quarter we had., But to the extent that there is an impact, it’s obviously going to reinforce their ecosystem. So if you’re already bought into the Apple ecosystem fully, this gives you an even further reason to stick with that ecosystem and double down on that. Now that said, what we’re actually finding is most customers aren’t in just one ecosystem because most of our competitors, by the way, are the ecosystem competitors, like Google or Amazon or Apple, at this point. And they’re all trying, obviously, to create as many incentives as possible to get customers to stay within one ecosystem.

Daniel Ek: (32:39)
And what we’re finding is more and more the customers are actually experimenting across many different ecosystems. So they may be an Apple iPhone user, but they may have an Android auto car. Or they may have an Alexa device in their homes. So they’re across many of these different ecosystems. And this is where our ubiquity strategy is so important because we play very nice on all hardware, regardless of if it’s Google’s devices, Apple devices or Amazon devices. So I think this is a key competitive difference between us and the normal ecosystem players whose real business model is to just reinforce the ecosystem that they’re already in.

Okay. And the next question comes from Richard Greenfield. Advertising is still less than 10% of your revenue despite how fast you scaled and the use globally. What do you think the long-term revenue mix looks like?

Daniel Ek: (33:40)
You want to go first, Paul, or do you want me to go?

Paul: (33:43)
I can go first. Look, I think we are very bullish and optimistic on the advertising opportunity for us at Spotify. I think we’ve talked about it, and you should be north of 10%, I think. Could it be 20%? I think a 100% it could. We have tremendous growth on the music side, on overall MOUs and free music. And then you throw a podcast on top of it and the growth there, we think there’s a lot of opportunity. I think for us, the innovation we’re bringing into the market and the ecosystem I think is really going to be helpful. I think there’s been very little innovation, particularly on the podcasting side, in terms of how to better target advertising and allow creators to actually monetize their product in a much higher way. And I think our ability to help bring those tools and services into the ecosystem will be great for the overall growth of the business and will allow creators to actually make more money off of their podcasts. And I think it will benefit us as well. So I think we still see tremendous opportunity for advertising to be a larger share of our overall revenue growth.

Daniel Ek: (34:47)
My only addition, again, is our goal is to be the number one audio platform in the world. Audio as a category is going to be absolutely massive. And I think the good news is if you look at the comparison, I do think we have a [inaudible 00:09:01]. Just look at video. I think it’s very evident that some of the growth in the ad platforms that you saw this quarter from the other players in the industry was focused on video ads. And so as I look at that and I look at audio, we still have a lot of innovation to do on that format. But it’s evident to me that at maturity, the business model will not be just about a subscription for Spotify. It’s going to be the combination of subscription, it’s going to be advertising, and it’s going to be a la carte, all three of them in an interplay.

Daniel Ek: (35:41)
And our goal is to try to grow up into becoming the largest platform in that. And I think you can add innovation on the outside and you get to into that level of monetization, which if you think about it from the offline to online parallel, online usually is worse at the beginning. But then over time, as it sees more innovation on the stack, usually following a big platform growth on user side, then monetization starts to catch up. And I think you should expect the same journey here. That’s certainly what we’re investing against.

Next question comes from Ben Swinburne of Morgan Stanley. What drove the decision to raise prices in the markets you called out in the shareholder letter? Why these seven? Why family plan? What are the signals you’re looking for in other markets to move tho raise prices? And what’s your assessment of the risk competitors continue to discount more or subsidize, in the case of Apple TV Plus free with Apple Music, in order to take share?

Paul: (36:49)
Yeah, I think it goes back to what I said earlier on. For us, it’s a lot about looking at each market individually and thinking about where are they in the evolution of streaming, where are we in terms of market share within those markets, how long have we been in those markets, what are the new trends we’re seeing. To some extent, if you look at the markets, we did raise prices, and they’re somewhat diverse. It gives us some element of testing and understanding of different types of markets, some larger ones, smaller ones in different geographic mix. Why family planning? Obviously, we think there’s a tremendous amount of value within the family plan. So we thought that was an area where there might be an opportunity where it would work in some markets. And so we’re really testing and learning. As we’ve mentioned earlier, we’ve done this in a couple of markets, and we’ll continue to learn and iterate where we think it makes sense.

All right. Next question from John Egbert at [Steeple 00:00:37:48]. You’re about two months into the non-exclusive addition of Joe Rogan to the platform. Can you talk about how the podcast has performed relative to expectations thus far? Are you reaching a large number of listeners that are also consuming music for the first time? Are people listening outside the US?

Daniel Ek: (38:08)
Yeah, overall great success so far. I think the real test will come, however, when the podcast becomes exclusive at the platform. But we’re very encouraged with the launch so far. It’s very much been an international hit, which may have been a little bit of a surprise. We thought maybe it would skew more US than what it has. So I think that speaks to the appeal just of the platform that we have for someone like Joe Rogan, but also, of course, the appeal of his show that it has on audiences all around the world. So we’re encouraged with that. And in fact, we’re encouraged with most of the original and exclusives that we’ve launched so far, which I do want to just add a caveat, Joe Rogan launched in September. So these are recent numbers. And on the list for Q4-

Daniel Ek: (39:02)
And on the list for Q4, the slate looks just fantastic, so I think you should be expecting us to do a lot more than what you’ve seen even so far. And I think once we summarize the year and certainly the next sort of six months, when we look back on it, I think you’ll see that a part of the success will be Joe Rogan, but it’s really a whole slate of number of different content pieces that are interacting and creating a much better experience on Spotify than what you can find on other platforms.

Paul: (39:31)
Yeah, and I would just add just on top of that, Jerry’s the number one podcast in a number of markets and some markets that are non-English speaking as well, so we know that he travels really well globally.

Okay, great. Next question from Kevin Rippey at Evercore ISI. Can you discuss the factors that led the Michelle Obama podcast to be made available on platforms other than Spotify?

Daniel Ek: (40:02)
Overall, I think it’s important to talk about the fact that in many cases, when we do deals and then when they become available on the platform, we’ve done the deals and sometimes even a year prior to the deals to becoming available and more and moreso our strategy going forward will be to make more and more of the content exclusive to Spotify but in this particular instance, it was the early days and we made the decision to experiment and have it windowed by being available on Spotify first and then later make it available on the platform and we’ll still experiment by the way, I do want to say, but I think as a strategy, you should expect more and more of the content to go entirely exclusive like with Joe Rogan.

Okay. Another question from John [inaudible 00:01:55]. Can you discuss the adoption and P&L impact of the two-sided marketplace tools relative to your expectations? Are you on track to meet or exceed the 50% growth target for gross profit from two-sided marketplace? And has UMGs commitment accelerated adoption or has the cadence of album releases during COVID been a headwind?

Paul: (41:18)
Yeah, so at a high level, we are still on plan to meet the expectations for the full year that we gave in terms of marketplace contribution to gross profits, and nothing has changed there. And then maybe I’ll let Daniel talk about the UMG side.

Daniel Ek: (41:33)
Yeah, again, it’s still early days in terms of the UMG deal, but obviously I think this is fantastic for just, it’s an enforcement for the marketplace strategy, and we’re still ramping up that partnership and bringing more and more of UMGs inventory onto the marketplace, so that’s still very much the focus, but I think it goes really well for 2021 and as I mentioned before, we have a 76% increase in unique participants on our products and a 74% retention, so I think that speaks well to the fact that people are enjoying this. It is becoming a bit more of a word of mouth where more and more creators and artists see this. And again, to kind of take two steps back, the goal here is in the marketplace strategy, we want to do three things. We want to create more and more tools for artists and labels to grow their fan base on Spotify, and then add more and more tools and services to enable them to interact with those fans and more and more tools and services that enable them to monetize those fans and better than what they’re currently doing. That is the strategy and we’re adding more and more tools and you should expect us to double down on that strategy.

Great, the next question comes from Steven Cahall at Wells Fargo. We’ve seen a number of advertising companies speak to Q4 being sequentially worse for ad growth due to rising coronavirus cases. What’s baked into your Q4 guide in terms of ad revenue or ad [inaudible 00:43:18].

Paul: (43:17)
Yeah, as I said earlier, we don’t give specific guidance on our premium versus ads, but I did say we expect that the year over year growth in advertising Q4 will be higher than what we saw in Q3. Obviously there’s a lot of uncertainty around COVID, around a second or third wave and so there’s some conservatism in our numbers, we would hope, but again, there’s a lot of uncertainty as well.

Daniel Ek: (43:42)
And my only addition of course, is that while of course we care about advertising it’s still a relatively small part of the overall revenue pool.

All right, the next question comes from Justin Patterson. Podcasts have been a meaningful investment area for the past two years. Can you discuss what you have learned during this timeframe and how audience reach is translating into listening hours and subscriber conversion? What are the next levers to improve the user experience?

Daniel Ek: (44:14)
Obviously a tremendous amount of learnings in podcasting. Some that’s translated incredibly well from music into audio. I think the most important was the core thesis we had as we started doing this was that we could serve users better by not just doing music, but actually adding podcasting as well. And that the net result would be that you would see a higher engagement, a higher retention across both categories. That has turned out to be true and I think that should give you a lot of encouragement as investors that the strategy’s working. Then in terms of all the other aspects, of course, if you think about music, it’s a three and a half minute piece of content that you’re selling. It’s not a huge investment for people to try out a new song. In podcasting, in many cases, it may be half an hour to an hour’s worth of investment to try a new podcaster.

Daniel Ek: (45:11)
So the way we merchandise content, the way we recommend content is entirely different in a podcasting as it is in for music, so that’s still an area where we’re developing a lot of learnings and trying a lot of things. So for instance, we shipped a few quarters ago, trailers, as a way of giving people a snack, by a way of discovering new shows and we have many, many more experiments currently underway and many more things that you should expect us to ship to. But overall, I think the key thing to look into is we are using the podcast staff now to give the creators further ability to engage with their fans. Music and talk being the primary example this quarter, where whether you’re a podcaster now, we know music is a huge use case for a lot of podcasters, but licensing has been a big problem.

Daniel Ek: (46:12)
And because Spotify has music and podcasts on the very same platform, we now have that benefit where podcasters can talk about music and incorporate that in their shows. And that’s great. And just as similarly, we know a lot of music artists want to talk about the music that they’re creating and so music and talk works really well for them, too, so this is just another way where you can see a natural extension of this audio first strategy playing out in the open, and you should look for more developments on those formats. We’ve talked in the past about polls as well, being one of those things that we have experimented with, so many, many more things to enable more engagements between creators and fans.

All right, great. And we are actually out of time for today’s Q&A session. I’d like to turn the call back over to Daniel for some closing remarks.

Daniel Ek: (47:06)
All right. Well, thanks Brian. Well, I’m really proud of our team and how well our business has performed over the first nine months of the year. And as I said earlier, it’s a real Testament to our flywheel and as we gain momentum, I strongly believe that you’ll see us drive greater acquisition, retention, engagement, and monetization, which is good for Spotify, good for our users and good for creators. And there’s no doubt it’s all the good for the entire audio ecosystem. And for that reason, as well as the continued out performance of our business, I remain very optimistic. For more on this quarter, by the way, listen to the Spotify For The Record podcast, which will go live on our platform tomorrow morning, so that’s a big plug for me to end it all. Thanks again for joining us and have a great day.

Okay, thanks again, everyone for joining the replay of this call will be available on our website and also on the Spotify app under Spotify earnings call replays. Thanks again.

Speaker 2: (48:09)
This concludes today’s conference call. You may now disconnect.

Spotify Technology SPOT Q3 2020 Earnings Call Transcript

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