Spotify's Big Bets and Looming Questions

Spotify’s CFO Barry McCarthy was interviewed by the Wall Street Journal this week. He doubled down on several comments that CEO Daniel Ek recently made on Spotify’s aggressive podcast push and its strategy against competitors. The most interesting part of the interview was the company’s goal of a two-sided marketplace. Spotify wants to use its data to sell insights to record labels.

Here’s an excerpt of the WSJ interview:

Every streaming service has insights into the users that are engaging in artist content, such as what content they listen to, what competing artists they listen to and where they’re located. These are things that labels have wanted to know for a long time, but aren’t able to know, and those insights are enormously valuable for artists who are trying to decide something as simple as what playlist to play when they tour in different ZIP Codes, and what kinds of songs to include in a new album. The record labels are a lot like HBO or Showtime—their artists have lots of great engagement, but they don’t know who the audience is.

…

I think [this] revenue will punch above its weight from the margin perspective. If you think about the cost structure of extracting data from the platform in a way that can be useful to artists and can be monetized by Spotify, the costs are relatively low, so the margin is quite high, so it has the potential to be meaningful.

In the long run, Spotify would rather monetize from its fixed cost assets. Podcasts are a fixed cost. Data is also fixed cost (for the most part). Both have low marginal costs. Music, however, is variable. The record labels take at 60-70% of music streaming revenue to pay royalties.

I wrote about the value of this data back in January in How Hip-Hop Podcasts Can Adapt in the Streaming Era:

If Spotify can report on random data like this, it can easily present a prospective rapper-turned-podcaster with data-driven expectations on how well their podcast would perform in different markets.

In other words, instead of Spotify of just embarrassing me by telling me how many times I listened to E-40 “Tell Me When To Go” last year, why not package that data and sell the insights to those who want it??

With over 200 million free and paid users, Spotify’s data is more credible and less skewed than its competitors. Apple Music’s streaming data leans heavily on Americans who may be Apple fanboys and fangirls. SoundCloud’s data is likely skewed towards indie rap fans. And Tidal is most likely skewed towards those who love The Carters. It’s not a coincidence that Tidal’s first streamable film was Paid In Full. If you subscribe to Tidal, there’s a pretty high chance you’ve watched that movie and won’t mind seeing it again.

Exclusive content drives engagement—the underlying goal of each streaming service. In the past month alone, Spotify has announced several new initiatives that are aimed at keeping users (on both sides of the marketplace) on the platform:

• Promotional discounts: New premium subscribers can sign up for 3 months at 99 cents. Returning premium subscribers get 3 months for $10
• Storylines: New feature for artists to add commentary to their songs when played (similar to Instagram Stories)
• Podcast editing: Spotify’s Soundtrap subsidiary wants to make podcast editing as easy as editing a Google doc
• Voice enabled-ads: When ads are played, users can respond and be directly sent to an ad-supported playlist, podcast, or other content (like Siri/Alexa)

These initiatives should help, but they all come at a cost. The markets have had concerns about the viability of Spotify’s business model, but the company’s leadership tells us not to worry about profitability (yet). Here’s more from McCarthy’s WSJ interview:

The reason we said you should expect us to manage for growth instead of short-term profit is because initially in the life of the subscriber we lose money, but over their life they become profitable at a ratio of about 3 to 1 [in terms of their lifetime value vs. subscriber-acquisition cost]. The way to maximize profit is to maximize growth of profitable users, and that is why we are focused on growth.

Now, 3 to 1 is a healthy LTV to CAC ratio. But over time, profitability will need to matter. Most tech companies that prioritize growth over profits eventually raise prices. Amazon, Netflix, and Uber, and countless others have done it. Spotify is clearly focused on decreasing costs by acquiring cheaper content, but it’s only a matter of time before prices rise.

It might not be for a while since these promotional offers are as aggressive as ever. But $9.99 per month will seem like a bargain soon enough.

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