The third quarter of 2018 was a good one for Spotify: It grew to 191 million monthly active users, 87 million of which are paying subscribers, and turned its first-ever profit.
And the third quarter of 2018 was also a bad one for Spotify: Its new numbers are only modest advances from its last report in July (180 million users, 83 million of them paying subscribers), and the profit was only due to a one-time tax benefit related to its investment in China’s Tencent Music. For the next quarter, Spotify expects to return to the red thanks to the regularly scheduled programming of expensive royalty payments it has to make to labels and artists — and it has also tempered its growth outlook for subscribers by about a million.
Following the release of the company’s Q3 numbers, Spotify’s CEO Daniel Ek said on a conference call with investors Thursday that Spotify has a “significant opportunity for growth” in its partnerships, such as the integration with Samsung devices that it announced in August, but that it is “really too early yet” to be able to report progress on those deals. Ek also highlighted new Spotify features on the artist side, such as playlist submission process for artists and labels and a beta tool allowing independent U.S. artists to upload music directly, as examples of the “two-sided marketplace” it has been setting up in order to one day charge artists and labels for extra services for an extra revenue stream in addition to users’ subscriptions.
“It’s quite substantial to bring new artist to the masses,” Ek said. “If we can bring the cost down for that we should see a lot more artists and labels being successful.” The notoriously tight-lipped Ek also hinted at renegotiations with record labels in the near future, which will contribute to gross margin improvements, but did not comment on any planned path to profitability. As Bloomberg points out (with the poetic headline “Spotify dances to a slow waltz in an up-tempo world”), the streaming service’s average revenue per user has been dipping steadily as it sells more discounted subscriptions, often bundling them with media offerings from other companies. Wall Street remains upbeat, but cautious. Since its direct listing on the New York Stock Exchange on April 3rd, Spotify’s share price has swelled and then bounced back down to about where it started.