Notes of interest from Spotify’s Q2 2019 earnings call

It’s no secret: Spotify’s earnings calls aren’t meant to be interesting. They’re an exercise in repeating key corporate messages; parrying tricky questions; and striving not to say anything that will spook the Wall Street or music-industry horses.

CEO Daniel Ek isn’t the kind of executive who lurches off-piste with controversial, off-the-cuff opinions, and CFO Barry McCarthy is an experienced pro at playing a straight back to analysts’ probing.

In other words, if there are only ‘notes of mild interest’ from a Spotify quarterly earnings call, that counts as a success for the company. With that in mind, here’s a summary of today’s call, which followed the publication of Spotify’s Q2 financials earlier in the day.

Spotify listening grew by 35% year-on-year

Not listeners, listening: “Our users listened to more than 17bn hours of content on the platform, up 35% year on year,” said Ek in his introduction. There isn’t really a useful comparison to this stat: Pandora reported 3.49bn ‘ad-supported listener hours’ for the same quarter, but it’s only available in North America and has 64.9 million active users compared to Spotify’s 232 million, so it’s not a fair fight.

Spotify threw a jab at Apple over subscriber growth

A mild one, mind: Ek said that Spotify’s 31% year-on-year growth in subscribers is “roughly twice the rate of growth of our nearest competitor” – i.e. Apple Music. Is he right? Apple Music had 40 million paid subscribers in April 2018, which grew to 60 million by June 2019. (using the public figures that didn’t include free trials).

That’s 20 million new subs in 14 months, or around 1.4 million a month. Spotify, meanwhile, added 25 million new subs in the 12 months between the end of June 2018 and the end of June 2019 – around 2.1 million a month. More like 1.5x the rate of growth, then.

Still, Spotify is keen to shout about out-growing Apple globally. “I know relative market growth was a concern for investors a couple of quarters ago. The most recent comparison shows we’ve got very strong traction in the business,” is how McCarthy put it.

Spotify is still sticking to its pricing guns

Analysts didn’t press Ek or McCarthy on whether Spotify is going to raise (or lower) its standard $9.99-a-month price in developed markets. Ek got in early during the call with his latest message of resistance just in case, though: “We’ve said for a long time that we believe in the current pricing strategy that we have in order to drive future growth…”

Of course, $9.99 isn’t the price for Spotify in India, various Middle Eastern countries and in other parts of the world, so the pricing debate is much more nuanced.

Surprise! Spotify won’t gossip about label negotiations

Spotify said earlier today that it has signed renewed licensing deals with two of its four label partners (Universal, Sony, Warner and indie-licensing agency Merlin), although it didn’t say which two – MBW is claiming it’s Sony and Merlin though. During the call, Ek and McCarthy were careful not to spill any beans on the structure of those deals, or the key aspects of the remaining negotiations.

To questions about whether the deals give Spotify more flexibility for ‘bundles’ with other services, or provide labels with any clauses relating to growing podcast listening on Spotify (and one label, at least, is thinking about those kinds of clauses) came sturdy deflections.

Spotify’s message: the big thing about the licensing renewals is its plans for a ‘two-sided marketplace’ with tools to help labels and artists connect with fans. “The primary focus for this round of negotiation has really been about enabling the marketplace strategy,” said Ek.

Spotify had already said that it hopes to launch some of these tools early in 2020. One moment of light relief came when an analyst asked if these tools would be ‘revenue-generating or cost-reducing’ for Spotify. “For the most part, we expect them to be margin-enhancing,” said McCarthy. Either/or. Or both!

Spotify’s recent decision to ditch its efforts in direct artist-uploads might also be seen as part of those label negotiations, but Ek declined to elaborate, saying merely that they were merely an experiment “and as it happens with some of those experiments, they just don’t pan out to the same extent that we originally believed… we’re very much focusing on the marketplace side of the business, and in there we’re actively prototyping new products together with our partners.”

Spotify’s CEO and CFO also fielded a question poking at the idea of whether some of the marketing tools they plan to launch for artists and labels might have a negative impact on listeners: the implication that more ways for companies to pay to promote music on Spotify might mean less ways for people to discover music organically.

Ek said not, and McCarthy was explicit in his denial. “Everybody wants to know if you’re gonna promote content that Paul [Vogel, Spotify’s investor-relations exec who was sat alongside him during the call] doesn’t care about in order to drive revenue. The answer to that is no.”

Maybe podcasts mean Spotify doesn’t have to do audiobooks

This was interesting, actually. One analyst asked whether Spotify is planning to do more with audiobooks, as part of its drive into non-music content. That would be a challenge, since it would mean going up against the 900lb gorilla of the audiobooks market, Amazon’s Audible. Ek hinted that this may not be necessary.

“I would say though that when you look at the podcasts we have in, say, true crime, there isn’t really much of a difference between those and some of the audiobooks that are available,” he said, before predicting a lot more experimentation with formats, as longer-form storytelling formats merge and evolve.

Later, Ek said that true crime is “a massive category for us and growing very fast” – no surprise, given that it’s a staple for the Gimlet Media and Parcast production studios that Spotify bought earlier this year. Here’s something interesting: Ek said that Spotify is also seeing listening to music podcasts growing very fast. “If you look historically at podcasting that’s not been a big category, but it’s becoming a bigger one…”

Spotify’s student plan flop was due to poor marketing

Well, not even that. Spotify’s subscriber growth was at the lower end of its forecasts, and in its financials it said that “below-plan” signups for its student subscription were why. McCarthy explained more in the call.

“The problem was the execution… we didn’t tell anybody about it,” he said. “It was only if you stumbled across it randomly by chance if you were a user would you have known it was in the mrketplace… That’s on us.”

Africa, Russia and South Korea are on the to-do list

Having launched in the Middle East and India, what’s next on Spotify’s world-tour itinerary? The company is live in 79 countries so far, but Ek mentioned some of its next priorities. “There’s still some room left to grow. Primarily that relates to Africa, Russia, South Korea among a few,” said Ek.

Spotify IS interested in ways for fans to tip artists

Earlier this month, Spotify’s chief premium business officer Alex Norström hinted that the company was exploring the idea of new ways for artists to make money on its service: “You can add stuff on top like micro-payments, a la carte, prepaid plans for different contexts…”

Ek was asked about direct monetisation such as tipping during the earnings call today. “It’s something that we’re overall interested in. We definitely look at it as part of the scope of the types of marketplace tools that you can expect,” he said. “You should expect us to try a lot of things… it certainly could be very interesting specifically for a lot of artists…”

Who knows how much Spotify has overpaid to publishers?

In June, Spotify announced that it had overpaid “most” music publishers in 2018 in the US, according to the terms of new royalty rates set by the Copyright Royalties Board there – the same rates that Spotify is currently appealing. Cue anger from publishers who were already furious about the appeal.

One analyst today asked whether Spotify can say how much it thinks it overpaid the publishers, and got short shrift. “No, we haven’t quantified it,” said McCarthy.

There’s no update on Spotify’s competition complaint against Apple

Spotify made its complaint to the European Commission, Apple has submitted its defence, and now both companies are awaiting the EC’s decision on whether to launch an investigation.

“Really no update at this point, it’s a process that takes quite a lot of time, so you shouldn’t expect a speedy response back on that,” said Ek. Spotify’s battle with Apple is a long-term affair, then. “This is really a multi-year effort.”