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Spotify Needs to Fix Its Stalling User Growth

The music-streaming service didn’t delight investors with its latest quarterly financial results — but still has a chance to return to its roots of innovation and originality before it’s too late

Traders work on the floor during the Spotify IPO at the Dow Industrial Average at the New York Stock Exchange on April 3, 2018 in New York. (Photo by Bryan R. Smith / AFP)        (Photo credit should read BRYAN R. SMITH/AFP via Getty Images)Traders work on the floor during the Spotify IPO at the Dow Industrial Average at the New York Stock Exchange on April 3, 2018 in New York. (Photo by Bryan R. Smith / AFP)        (Photo credit should read BRYAN R. SMITH/AFP via Getty Images)

Traders work on the floor during the Spotify IPO at the Dow Industrial Average at the New York Stock Exchange on April 3, 2018 in New York.

Bryan R. Smith/AFP via Getty Images

Spotify’s not having a great time. The streaming service faced a punishing reaction on Wall Street following its second-quarter results last month: Daniel Ek’s firm’s share price fell 5.7 percent in a day, wiping around $2.5 billion off the market cap of the company in a few short hours.

On reflection, this market reaction was a touch harsh: Spotify gained seven million Premium subscribers globally in Q2 (the three months to end of June), which was nearly five times the amount of net subscriber adds (+1.5 million) that Netflix reported for the same quarter, and only a whisker away from the 8 million subs Spotify added in the same quarter of 2020. There was good news, too, in quarterly advertising revenues — long a bête noire for Spotify investors — which bounded up 110 percent year-on-year to $331 million in Q2, partly thanks to growth in podcast ads. In a major milestone, this meant that Spotify’s Q2 ad money made up comfortably more than 10 percent of the firm’s total quarterly revenues.

But the stinkbomb amongst the roses of Spotify’s Q2 results was that the company’s total Monthly Active User (MAU) count, including paying and ad-supported users, climbed up by just 9 million from Q1, falling short of Spotify’s own expectations. Spotify is now at 365 million active users worldwide; Ek himself has admitted he’s “disappointed” by this number, which represents significantly slowed-down quarterly growth.

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In a further danger sign for Spotify shareholders, the platform’s non-paying user base (i.e. ad-supported users) grew by just 2 million people in Q2 versus Q1. Such statistics will be enough for Spotify watchers to ask an important question of the management team: You’ve just invested around a billion dollars in podcasting. Now what?

Spotify, once the leader of the streaming pack, faces a potential crisis of confidence from those watching on the sidelines. Here are three moves for Spotify that I believe it will — or at least should — explore in the coming months to materially expand its business.

Refocus on distribution to snatch the labels’ throne

Spotify continues to push a mission statement of “giving a million creative artists the opportunity to live off their art”. But it… ain’t going to happen.

Is Daniel Ek slowly shape-shifting his priority ambition to something more attainable? On Spotify’s Q2 earnings call, Ek stated that his company “is all about moving from 8 million to 50 million creators.” This was actually the second time Ek had mentioned the “50 million creators” objective; he did the same back in February at Spotify’s Stream On event, when he dared suggest Spotify might hit the milestone by 2025.

What’s interesting about Spotify emphasizing the number of creators on its service — rather than what they earn — is exactly the theme I wrote about in this Rolling Stone column the other week. Every “creator” on any service brings with them an audience. That audience might be a million people; it might just be a sympathetic mom or school friend. Either way, at scale, if a tech platform can bring in a vast number of creators, it’s nail-on guaranteed to attract a multiple of that number as users of its platform. Spotify currently has 365 million active users. If it had 50 million “creators” on its platform, and each of those creators brought an average audience of eight people to Spotify tomorrow, its active user count would easily top 400 million.

Why does this matter — other than Spotify getting a slightly bigger audience? Because of Ek’s ever-present ulterior motive: diluting the power of major record companies on his platform. In 2020, the major record companies plus indie collective Merlin claimed 78 percent of all streams on Spotify. That’s a big number — but it was down from 87 percent in 2017. A new influx of tens of millions of independent artists to Spotify would undoubtedly accelerate the dilution of this shared power, and thus loosen the majors’ stranglehold on the service.

This would allow Spotify to care less about the major record companies’ reaction to its own power moves… which is where Spotify running its own distribution outfit comes in. Right now, the only way you can get your music on Spotify is via a third-party distributor or label: you cannot upload it direct. Spotify experimented with allowing artists to do this back in 2018, before shutting down its “Upload Beta Program” 10 months later.

Why did Spotify scrap its move into distribution? Possibly because it underestimated the cost and resources required to manage an influx of a million tracks a month. Or possibly because it simply made the major record companies uncomfortable — and they pressed their annoyance home. (The fact that podcasters can upload their creations to Spotify today — and even sell subscriptions direct to fans — but musicians cannot, suggests the second mooted scenario here is the more likely.)

If the majors’ share of Spotify’s total listening continues to reduce, and Spotify does indeed attract 50 million creators onto its platform, it would be mad not to take fuller advantage of a direct relationship with said creators. For one thing, there’s serious cash to be made from the subsequent data harvest — as proven by Distrokid recently inking a deal to effectively sell Republic Records insider analytics on its hottest unsigned artists.

Speaking of Distrokid, Spotify acquired a minority stake in the US-based TuneCore rival in late 2018. We haven’t heard much about this part-ownership from either party since. If Spotify does reconsider its distribution capabilities down the line, don’t be shocked if a full acquisition plays out.

Finally grasp the live music opportunity

You can sense that Spotify investors are becoming increasingly frustrated with Ek’s refusal to consider his platform’s potential as a live music powerhouse, particularly a ticketing powerhouse. Spotify has unique first-party data about its 365 million active users worldwide. It knows the artists they love, the artists they’re starting to love, and the artists they’ll probably love tomorrow. In a marketplace where recorded music listening often — though not always — correlates with ticket purchases for live shows, this data is hugely valuable.

Spotify could make decent money charging artists and outside companies for access to this data. But the bolder move would be for Spotify to mold itself into a ticketing vendor, plus maybe a merch vendor, that can take advantage of truly unique and truly global audience insights.

There was some evidence that Spotify was on this path back in 2017, when its then-head of global creator services Troy Carter revealed that his employer had sold some $40 million-worth of tickets direct to fans that year via Spotify’s Fans First program. Fans First saw Spotify give the most hardcore streaming fans of certain artists unique opportunities to get close to them — whether that was front-row tickets to see Interpol in Mexico, or afternoon tea with Kacey Musgraves in London.

This forward-thinking initiative from Spotify since appears to have been mothballed, as the company has shifted its investment focus away from music and towards podcasts. On the subject of ticketing, Spotify’s site now baldly states: “We don’t handle purchasing for presale ticket offers, so it’s best to contact the companies responsible.”

Is it time for Spotify’s potential as a first-party live music company to be reborn?

Sadly for investors, it doesn’t look like Ek is strategically interested. Ek was asked last week by analyst Hamilton Faber about how easy it might be for Spotify to “scale in this space”; the Swedish founder replied in vague terms about Spotify continuing to hold its own one-off branded shows — while offering a murmur of excitement about the possibilities with live-streaming concerts. Ultimately, though, Ek said Spotify was forging a path as an “open” business that wanted to work with “as many partners as we can” in the live music arena. In other words, Spotify hasn’t got the appetite to steal a morsel of market share from the likes of Live Nation and Ticketmaster, AEG and AXS, or CTS Eventim. It would rather buddy up with them, rather than irk them.

Some would suggest, as the live music world stands poised to explode back into life post-pandemic, this is a short-sighted viewpoint. And that, for the world’s leading music streaming service, a serious slice of the live music market is obviously there for the taking.

Stake a claim in the massive market of audiobooks

Spotify’s podcast strategy is a well-known tenet in the firm’s quest to become “the world’s number one audio platform”. And yet, when it comes to Spotify’s relationship with paid-for audiobook subscriptions, this strategy — just like the platform’s approach to live music — remains confusingly hands-off.

Case in point: In May, Spotify partnered with Storytel, a leading audiobook library service, to allow the latter company’s subscribers to listen to their libraries within Spotify. This was evidence of Spotify dipping its toe into a lucrative, growing market that it could yet corner with a more aggressive game plan.

According to the US-based Audio Publishers Association, audiobook revenue in the US alone rose to US $1.3 billion in 2020, a 12 percent year-on-year rise. Some 71,000 audiobooks were published in the States in 2020, which was up 39 percent on 2019. Scale-wise, this is nothing to intimidate Spotify, where over 60,000 music tracks are being uploaded every day.

That billion-plus audiobooks revenue is being driven by subscription services like Amazon’s Audible, which charges its subscribers a monthly fee and rewards them with credits to download audiobooks. (Non-subscribers to Audible can also pay one-off premium prices to download titles a la carte.)

This is big business: filings on UK Companies House show that Audible’s annual revenues in Britain more than tripled between 2015 and 2019 (from GBP £44.66 million to £143.58 million).

Spotify is now firmly established as a destination for talk media: It said in Q4 2020 that 25 percent of its monthly active users listened to podcasts, and now says this percentage figure has barely changed — meaning upwards of 91 million people are currently playing podcasts on Daniel Ek’s platform each month.

Why wouldn’t Spotify look to capitalize on the booming audiobooks market with an additional paid-for subscription (or one-off a la carte) option for its listeners? No doubt the prospect of paying a percentage of content costs to audiobook rightsholders — as opposed to podcasts, which are not royalty-bearing — doesn’t appeal; remember, Spotify already has to pay out around 70 percent of its revenues to music rightsholders due to licensing agreements.

But surely the counterweight is the clear and obvious opportunity for Spotify to challenge Audible in the ten-figure annual audiobooks market, and to use its brand strength and audience profile to make another major dent in a fast-growing audio marketplace? Spotify has all the tools and ability to act. Investors are impatiently waiting.

Tim Ingham is the founder and publisher of Music Business Worldwide, which has serviced the global industry with news, analysis, and jobs since 2015. He writes a regular column for Rolling Stone.

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