MBW Reacts is an ongoing sequence of remark items from the Music Enterprise Worldwide staff. They’re our analytical (and generally opinionated) reactions to main latest leisure information tales.
“I take full accountability for the strikes that obtained us right here at present.” And so he ought to.
In my opinion, Ek’s loss-making firm has performed with hearth on three key issues these previous few years:
(i) Spending a monstrous sum of money on employees, gross sales, and advertising;
(ii) Spending a monstrous sum of money on Spotify’s podcasting technique, regardless of podcasting burning via Spotify’s funds; and
(ii) Stubbornly refusing to extend the value of Spotify’s flagship subscription service in its largest market – not even as soon as – over the previous 12 years. Although doing so would have seemingly made Spotify… a monstrous quantity of income.
These three components have coalesced to squeeze Spotify’s gross margin determine, which missed the firm’s personal steerage in Q3 2022.
This gross margin battle has despatched Wall Avenue analysts right into a flap these previous few months, and in the end contributed to Ek’s resolution this week to chop 6% of Spotify’s world workforce.
Issue 1) Spending a monstrous sum of money on employees, gross sales, and advertising.
At this level it’s value inspecting Daniel Ek’s personal phrases, from an inside letter despatched yesterday to Spotify employees.
In his reasoning for reducing 6% of Spotify’s world workforce, Ek wrote: “In 2022, the expansion of Spotify’s [operating expense] outpaced our income progress by 2X. That may have been unsustainable long-term in any local weather, however with a difficult macro atmosphere, it could be much more tough to shut the hole.”
Added Ek: “In hindsight, I used to be too bold in investing forward of our income progress.”
In that article, revealed earlier this month, we famous the next: “Q3 2022 was a milestone quarter for Spotify, which spent comfortably over USD $1 billion on working prices [in the three months].”
In actual fact, Spotify’s working prices in Q3 2022 (EUR €978m) had been practically double the scale of its working prices within the prior-year quarter (€593m, see chart under). Ek’s “too bold” quote rings within the ears.
SPOT’s enormous USD $1 billion+ Q3 2022 working value burden really swallowed up round a third of its complete revenues (EUR €3.04 billion) that quarter.
As identified in MBW’s ‘5 numbers’ piece, these stats clearly put paid to the fallacy that “the file corporations are consuming up all of Spotify’s earnings”.
Particularly, practically half of Spotify’s USD $1 billion+ spend on working prices in Q3 2022 (€432m, or near half a billion {dollars}) went on gross sales and advertising.
Spotify’s working expenditure in Q3 2022 was practically double the scale of its working expenditure in Q3 2021
Now let’s have a look at the opposite large drain on Spotify’s working bills: individuals.
Throughout 2021, in accordance with its newest annual fiscal report, Spotify employed 6,617 individuals on common, a rise of over 1,000 workers per yr.
The corporate spent EUR €860 million (USD $1.016 billion) on the wages and salaries of these 6,617 workers in 2021, in accordance with a Spotify SEC submitting.
Ergo: the common annual wage at Spotify throughout 2021 was roughly USD $153,543.
By the top of Q3 2022, Spotify’s full-time worker depend had mushroomed to a whopping 9,808 individuals in accordance with a SPOT presentation for buyers, up by round 3,000 workers throughout simply the prior 9 months.
(To place that Q3 2022 worker quantity into music biz context: 9,808 determine is extra workers than Common Music Group – the world’s largest music rightsholder – counted on the shut of 2021 at 9,505.)
We don’t have a determine for the whole wages/wage value absorbed by these 9,808 Spotify workers in Q3 final yr (Spotify solely consists of wages/wage knowledge in its annual reviews for the total yr).
But when the typical yearly wage of a Spotify worker from 2021 (USD $153,543) nonetheless held true in September final yr, then by this level Spotify would have been an annual wage invoice simply north of EUR €1.2 billion /USD$1.5 billion.
A $1.5 billion annual wage invoice. For a loss-making firm. Which had simply did not hit its personal gross revenue margin steerage. And was spending over $1 billion 1 / 4 (!) on working bills.
One thing needed to give.
Word: Q3 2033 annual wage determine is an MBW estimate primarily based on 2021 common worker wage
Issue 2) Spending a monstrous sum of money on Spotify’s podcasting technique, regardless of podcasting burning via Spotify’s funds
A method that Daniel Ek has rapidly fattened up the wage invoice of his firm is through acquisitions, in a single explicit space: Podcasting and speak content material.
Ek’s preoccupation with Spotify’s non-music enterprise has seen his firm spend EUR €1.11 billion (round USD $1.2bn) on talk-focused acquisitions over the previous 4 years (see chart under).
A few of these acquisitions look smarter than others at present: Spotify’s €117 million acquisition of audiobook service Findaway in 2022, for instance, has thrust Ek’s firm right into a profitable digital market (with a longtime paid-for mannequin) at the moment dominated by Amazon‘s Audible.
Others of Ek’s massive-money bets seem much less… prudent.
Could we remind you that in 2021, in the course of the pandemic, Spotify spent over USD $60 million on Betty Labs (Locker Room) – a dwell audio rival to the then-app-of-the-moment, Clubhouse.
Huh? What do you imply you don’t bear in mind Clubhouse?!
The most important space of acquisitive spending for Spotify all through the previous half-decade, nonetheless, has particularly been in podcasting.
From 2019 via 2022, SPOT spent EUR €850 million (round $925m) on buying a number of platforms to drive Spotify’s podcasting enterprise – from Parcast to The Ringer, Anchor FM, and, most lately, Podz, Podsights and Chartable.
That $925 million determine doesn’t depend the money Spotify spent on non-acquisitive Podcast content material offers: For one factor, we all know it spent not less than one other $200 million on a multi-year unique deal for the Joe Rogan Expertise. Spotify additionally spent additional huge sums on podcast content material from the Obamas, Kim Kardashian, and Harry and Meghan, amongst others. (Not all of those offers have labored out.)
So, financially talking, what’s Spotify obtained to indicate for 4 years and over a billion {dollars} in podcast investments?
In accordance with an Investor Day presentation by senior Spotify leaders in June final yr, the agency’s podcasting efforts generated beneath €200 million in promoting in 2021.
If you happen to had been questioning how that compares to the sum of money generated by music (through subscriptions and adverts) on Spotify in the identical 12 months, I like to recommend you have a look at this single picture, of Spotify CFO Paul Vogel, from that summer season 2022 investor presentation.
The inexperienced bit is music-related income in annually
The gaunt wisp of pink on the prime of the final bar? That’s income from every part else – together with podcasts. (Digital graffiti, writer’s personal.)
There have been, although, grand proclamations at that June 2022 investor presentation in regards to the riches that awaited Spotify for its heavy funding into podcasting.
Daniel Ek predicted that podcasting, though it was “not but worthwhile”, had a “40-50% gross margin potential” sooner or later.
Paul Vogel then revealed exactly how “not but worthwhile” podcasting was.
He confirmed that Spotify’s annual podcasting income grew by “greater than 300%” to “practically €200 million” in 2021, earlier than including: “Nonetheless, this progress got here with a €103 million unfavourable affect on gross revenue.”
A “unfavourable affect on gross revenue”, in the event you had been questioning, is coddling finance communicate for an enormous, fats, annual loss.
Vogel then admitted that 2022 would see a extra extreme “unfavourable affect” on gross margins from podcasting at Spotify (i.e. an excellent larger, fatter annual loss). However he forecast that podcasts would “flip worthwhile over the following 1-2 years [after that], with a significant ramp from that time onward”.
Essentially the most bullish particular person about podcasting on that July investor showcase, although, was Daybreak Ostroff.
Spotify’s Chief Content material and Advert Enterprise Officer, who joined the agency in 2018, recommended: “We see podcasts turning into a $20 billion world alternative by 2030.”
“We see podcasts turning into a $20 billion world alternative by 2030.”
Daybreak Ostroff, Spotify, talking in June 2022
Time will inform on all of those glowing predictions – however Ostroff gained’t be at Spotify to see if her phrases ring true.
Alongside its announcement that 500 individuals had been being laid off yesterday, Spotify confirmed that Ostroff – who has been answerable for making tons of of thousands and thousands of {dollars} in investments in ‘unique’ and ‘authentic’ podcasts – was exiting her position at SPOT.
Ostroff, whose duties have now been taken up by present administration at Spotify (primarily Alex Norström), pulled in a complete annual govt compensation package deal of USD$8.83 million in 2021, in accordance with Spotify filings, and USD$9.98 million in 2020 (see under), with a $1 million base wage in annually.
As such, Ostroff’s departure is more likely to end in a major working expense saving for Spotify of its personal accord.
Issue 3) Stubbornly refusing to extend the value of Spotify’s flagship subscription service in its largest markets
I stay flabbergasted on the simple experience Daniel Ek has been given from Wall Avenue analysts up to now few years on this one.
Let’s remind ourselves: In accordance with World Financial institution/OECD knowledge, when Spotify launched in america in 2011, the nation’s annual GDP – extensively accepted because the main financial indicator for any nation – stood at USD$15.6 trillion.
By 2019, a yr earlier than the pandemic despatched financial certainties shuddering and spiraling, that annual GDP determine had grown to USD$21.38 trillion. Unemployment within the States fell to historic lows in the identical interval.
The ‘twenty-tens’ had been an financial growth interval so good, then-President Donald Trump (bear in mind him? You’ve obtained to confess: extra memorable than Clubhouse) claimed, with typical self-effacement, that his administration had “constructed the best economic system within the historical past of the world”.
Guess what number of occasions Spotify raised its costs on the earth’s largest music market amid this decade of maximum financial a lot? Zero. Zero occasions.
Guess what number of occasions Netflix raised its US costs throughout the identical interval? 4. After which twice extra, as soon as in 2020, and as soon as in 2022.
In actual fact, Netflix’s Customary-tier month-to-month worth within the US is now practically double the scale of what it value again in 2011 ($15.49 vs. $7.99, see under).
For a second there, in early 2022, when Putin launched his despicable warfare in Ukraine and the globe’s macroeconomics began to crumble, this all got here again to chunk Netflix on the downstairs cheeks.
You may do not forget that in April final yr, Netflix introduced it had misplaced round 200,000 web subs globally. Issues obtained worse: In its Q2 outcomes, Netflix introduced it had misplaced one other million-ish subscribers.
The world, MBW included, jumped to the identical conclusion: Too many worth rises had damage Netflix, and cash-aware subscribers, with a recession on the way in which, had been fleeing of their droves.
Within the wake of Netflix’s H1 2022 woes, Daniel Ek didn’t waste the chance to border his firm’s inaction over US worth rises within the prior decade as a masterstroke.
In June 2022, discussing Spotify’s historic lack of motion on flagship worth rises, Ek instructed buyers throughout a Q&A: “I personally have a look at what’s occurred within the video streaming enterprise and I’m wondering to myself if that business didn’t get forward of itself.
“As a result of frankly, sure, it did enhance costs, nevertheless it’s additionally now discovering itself able the place it’s tougher and tougher to search out future progress.”
Aka: Me good; Reed Hastings dumb.
Yeah, that little narrative didn’t final lengthy.
In Q3 2022 – in what we’ll time period its ‘restoration quarter’ – Netflix added 2.42 million paid subscribers (see under).
And in This autumn 2022, because it introduced simply the opposite day – in what we’ll time period its ‘smashed it out the park’ quarter – Netflix added one other 7.66 million paid subscribers.
Regardless of its Premium tier costing double the value of a Spotify Premium subscription, Netflix had roared again to well being.
All of this got here off the again of a really profitable pandemic for Netflix, during which it added 18.18 million paying subs in FY2021, and 36.57 million subs in 2020.
Supply: Netflix letter to shareholders, Jan 2023
The argument usually made towards Spotify elevating its costs a la Netflix is that this: Music streaming is a unique beast to movie streaming, as a result of the main file corporations make sure that no single streaming service has the distinctiveness of content material – particularly authentic content material – that Netflix does. And that uniqueness of content material is important to safe buyer loyalty vs. rival providers, even via worth rises.
Certainly, making an attempt to safe that precise sort of unique content material is basically what’s been driving Spotify’s latest mega-spending on podcasts (that I’ve spent a good chunk of this column critiquing).
Each honest factors.
However there’s a counterargument, too: Could I remind you that Spotify itself suggests to its buyers that its algorithmic suggestion engine is particular sufficient to create distinctive buyer loyalty within the music streaming area. “Spotify is greater than an audio streaming service,” it boasts in its SEC filings. “We’re within the discovery enterprise.”
It provides: “Day-after-day, followers from around the globe belief our model to information them to music, podcasts, and leisure that they’d by no means have found on their very own. If discovery drives delight, and delight drives engagement, and engagement drives discovery, we imagine Spotify wins and so do our customers.”
Regardless, regardless of the undoubted lobbying of the main file corporations (plus Merlin and co), Spotify held agency on not elevating costs all through a decade (2011-2019) when the US economic system was stable as granite.
Spotify additionally balked at elevating its US costs throughout a pandemic (2020-2021) that resulted in media streaming providers – SPOT and Netflix included – seeing a number of the most profitable subscriber progress of their histories.
Spotify has raised some costs globally up to now two years: Most have affected household/scholar/Duo-type bundles, however the usual particular person Spotify Premium worth has itself been pushed up in latest occasions, for instance, in Brazil, Sweden, and Norway.
The monetary affect of those worth rises for SPOT (Daniel Ek claims there have been 46 separate rises around the globe in complete throughout 2020-2022) has been dramatic. The proof:
Spotify noticed smaller YoY progress in complete quantity of world subscribers within the first 9 months of 2022 than it did in the identical interval of 2021 (15m vs. 17m, chart No.1 under);
However when it comes to subscriber income progress, due to these worth rises, Spotify noticed its largest ever YoY enhance (+€1.37bn) in the identical nine-month interval (Jan-Sept, chart No.2 under).
Clearly, maturing streaming markets have been in a position to bear worth will increase from Spotify; swathes of subscribers didn’t disappear from the service in disgust.
But mysteriously, on the earth’s largest music market, america, Spotify’s flagship Premium providing has remained caught at that $9.99 worth level for 12 lengthy years.
Even now, in 2023, after Amazon Music and Apple Music have each hiked their commonplace particular person streaming costs within the States, Spotify continues to refuse to take action.
And that’s not even mentioning inflation: In accordance with CPI knowledge, Spotify would now should cost $13.00 per 30 days for its Premium service within the US for its price-tag simply to be value the identical, in actual financial phrases, because the $9.99 it charged in 2011.
Spotify had 195 million paying subscribers on the finish of Q3 2022, of which round 55 million had been situated in North America, in accordance with SPOT’s investor filings.
Had Spotify, in some unspecified time in the future over the previous decade, been in a position to elevate the typical spend of these North American subscribers by simply USD $1 per 30 days, it could now be producing $660 million extra in income per yr.
Had it been in a position to elevate the typical spend of those self same North American subscribers by USD $2 per 30 days – maybe, shock horror, through two worth rises throughout the course of a decade-plus – it could now be producing over $1.3 billion extra a yr in topline income.
Sure, most of that income (≈70%) must be shoveled again out to music rightsholders in royalties. However it could have offered Daniel Ek the quilt he wanted to overspend on podcasts in that essential 2019-2022 interval – agency in his perception, as he’s, that this podcast funding will ‘come good’ ultimately.
As an alternative, Spotify has wimped out of elevating its US pricing up to now 12 years, at the same time as Netflix has braved doing so a number of occasions over.
In consequence, that income cowl isn’t there, Spotify is reducing over 500 jobs, and Daniel Ek’s admitting it’s all his fault (with out, notably, really saying sorry to his employees or his buyers).
The colossal expenditure Spotify has thrown at podcasts – mixed with the shortage of income progress wanted to prop up its gross margin – jogs my memory of this line inside the firm’s ‘threat components’, printed in its annual report annually.
“Now we have made, and count on to proceed to make, important investments to develop and launch new merchandise, providers, and initiatives, which can contain important dangers and uncertainties, together with the truth that such choices might not be commercially viable for an indefinite time period or in any respect, or could not end in sufficient return of capital on our investments.”
It’s proper there in black and white. “[M]ay not be commercially viable for an indefinite time period… or in any respect”.
Nobody can say they weren’t warned.Music Enterprise Worldwide
