Spotify Turns a Profit for the First Time — and Reveals Its Bigger Ambitions
Spotify’s fourth quarter of 2018 saw the 10-year-old Swedish music-streaming company posting an operating profit for the first time, adding 9 million premium subscribers, expanding into 13 new markets and positioning itself to be something much bigger than just a music service.
The company posted its fourth-quarter earnings (pdf) before the bell Wednesday, showing decent growth in the last few months of last year: Spotify’s user base is up to 207 million, 96 million of them paying subscribers, representing a quickening of pace in user growth; it posted an operating profit of €94 million ($107 million) due to lower operating costs. “Movements in our share price in Q4 had a sizeable impact on our reported results, although the business would have been profitable regardless,” Spotify said in a letter to shareholders. The first-ever profit is cause for Wall Street to sigh in relief, as investors have been nervously watching Spotify’s performance ever since it went public last year on the New York Stock Exchange and was swept up in several months of volatility in tech stocks.
But proof of its ability to turn a profit wasn’t the biggest thing Spotify wanted to share on Wednesday. Just a few hours before releasing its Q4 earnings report, the company confirmed media rumors that it was buying Gimlet, a major podcasting company, and also announced the purchase of a second podcasting company, Anchor.
Despite Spotify’s history of playing down its aspirations — it famously says it does not want to be a record label, while at the same time signing direct distribution deals with indie artists and incubating new acts on signature playlists — the company’s language with the podcasting purchases is crystal clear. “We want Spotify to continue to be at the center of the global audio economy,” CEO and co-founder Daniel Ek wrote in a note posted to Spotify’s website early Wednesday morning. “To be clear, this doesn’t make music any less important at Spotify. Our core business is performing very well. But as we expand deeper into audio, especially with original content, we will scale our entire business, creating leverage in the model through subscriptions and ads. This is why we feel it is prudent to invest now to capture the opportunity ahead.”
Ek reiterated those points on CNBC Wednesday morning, emphasizing original creative content. “Our core business is very strong,” he said. “What we’re doing now in 2019, however, is we’re investing in more original content on the platform. That will broaden the appeal. It will broaden the engagement, which of course is a virtual cycle that then grows the platform and leads to more profitability long-term.”
Such ambitions can be seen in the earnings report as well: According to the Q4 statement, Spotify has 4,165 full-time employees and contractors, and its hiring in the last quarter continued to “focus heavily” on research and development, with over 40 percent of new hires going into that area.
Read Ek’s letter in full below.
More than 10 years ago we founded Spotify to give consumers something they couldn’t get — music any time, anywhere, and at the right price. Along the way, we broke the grip piracy had on our industry and restored the growth of global music through paid on-demand streaming. I’m proud of what we’ve accomplished, but what I didn’t know when we launched to consumers in 2008 was that audio — not just music — would be the future of Spotify.
With more than 200 million users around the globe, Spotify is already one of the world’s most-used apps, but we see an opportunity apart from where we sit today. An opportunity that will allow us to reach beyond music to engage users in entirely new ways.
To really understand, take the current value of the video industry. Consumers spend roughly the same amount of time on video as they do on audio. Video is about a trillion dollar market. And the music and radio industry is worth around a hundred billion dollars. I always come back to the same question: Are our eyes really worth 10 times more than our ears? I firmly believe this is not the case. For example, people still spend over two hours a day listening to radio — and we want to bring that radio listening to Spotify, where we can deepen engagement and create value in new ways. With the world focused on trying to reduce screen time, it opens up a massive audio opportunity.
This opportunity starts with the next phase of growth in audio — podcasting. There are endless ways to tell stories that serve to entertain, to educate, to challenge, to inspire, or to bring us together and break down cultural barriers. The format is really evolving and while podcasting is still a relatively small business today, I see incredible growth potential for the space and for Spotify in particular.
In just shy of two years, we have become the second-biggest podcasting platform. And, more importantly, users love having podcasts as a part of their Spotify experience. Our podcast users spend almost twice the time on the platform, and spend even more time listening to music. We have also seen that by having unique programming, people who previously thought Spotify was not right for them will give it a try.
Based on radio industry data, we believe it is a safe assumption that, over time, more than 20% of all Spotify listening will be non-music content. This means the potential to grow much faster with more original programming — and to differentiate Spotify by playing to what makes us unique — all with the goal of becoming the world’s number one audio platform.
We are building a platform that provides a meaningful opportunity for creators, excites and engages our users, and builds an even more robust business model for Spotify in an industry we believe will become significantly larger when you add Internet-level monetization to it.
That’s why we announced today the strategic acquisitions of two podcasting companies, Gimlet and Anchor. These companies serve two different, distinct roles in the industry. Gimlet is one of the best content creators in the world, with unique, celebrated podcast shows like Homecoming, which was recently adapted into a critically acclaimed show on Amazon Prime, and the internet culture hit Reply All. And Anchor has completely reimagined the path to audio creation, enabling creation for the next generation of podcasters worldwide — 15 billion hours of content on the platform during Q4. These companies are best-in-class and together we will offer differentiated and original content. Gimlet and Anchor will position us to become the leading platform for podcast creators around the world and the leading producer of podcasts.
Just as we’ve done with music, our work in podcasting will focus intensively on the curation and customization that users have come to expect from Spotify. We will offer better discovery, data, and monetization to creators. These acquisitions will meaningfully accelerate our path to becoming the world’s leading audio platform, give users around the world access to the best podcast content, and improve the quality of our listening experience while enhancing the Spotify brand.
To be clear, this doesn’t make music any less important at Spotify. Our core business is performing very well. But as we expand deeper into audio, especially with original content, we will scale our entire business, creating leverage in the model through subscriptions and ads. This is why we feel it is prudent to invest now to capture the opportunity ahead. We want Spotify to continue to be at the center of the global audio economy.
As much as the next decade will be defined by a more personalized, immersive audio experience, it also will be defined by fierce competition. We know we aren’t the only company thinking about or preparing for this future. That said, I wouldn’t trade places with anyone in the audio space today as we believe no other company has Spotify’s scale and audience around the globe with the 78 markets where we do business. No other audio company has the two-sided marketplace that we have built at Spotify — a marketplace that benefits artists and creators along with consumers. Nobody else has both audio advertising and subscription revenue model at scale globally. Nobody else in music has the engineering capabilities and the expertise in audio that we have at Spotify. And with the addition of Gimlet and Anchor, Spotify will now become the leading global podcast publisher with more shows than any other company. These levers of growth have the potential to double the size of our industry. And no other global company is as focused on this one thing — audio — as Spotify.
Ultimately, if we are successful, we will begin competing more broadly for time against all forms of entertainment and informational services, and not just music streaming services. We welcome this. Fair competition on an even playing field is what yields the most creative output and innovation, and will result in the best experience for listeners and creators.
In our industry, things change fast but the path ahead for Spotify is clear — we want to become the world’s leading audio platform, and today is an important step in that direction.