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Spotify has been in the news in recent weeks due to the acquisition of Gimlet Media and Anchor. Since its debut in 2008, Spotify has focused on one thing: music. A few years ago, Spotify added a podcast section, but until now, it was a minor part of the platform. In the future, it is clear that Spotify is moving from a music company to an audio company. Spotify deserves a lot of credit for advancing the music industry, but I am concerned about the health of his business in the long run.
The main problem of Spotify is not to offer an excellent service, but rather that nobody wants to pay the high price. Spotify users continued to grow (as well as the number of Apple Music subscribers), but its average revenue per user (ARPU) has continued fall quarterly. Although some websites are not interested in lowering the ARPU, I am.
For a company that is already struggling to generate operating profit, lower revenue per user may seem like a bad sign. Beyond the ARPU, however, there are a few important factors that indicate that Spotify's financial data continues to move in the right direction.
Although some Spotify financial data shows a positive trend (termination and subscriber acquisition costs), average revenue per subscriber (PPA) is decreasing. In the first quarter – 2018, it was down 14% from the previous year, the second quarter, 12% compared to the third quarter, a further decline of 6% and finally a decline of 7 % in the fourth quarter.
Find ways to make money
In the last call for results, badyst Dick Delfas asked, "Do you plan to charge artists for data or promote paid service work in any way?"
Daniel Ek (CEO): "Our strategy in the market is identical to that of Spotify, ie a freemium activity, which means that there will be a certain amount of products that the artists and the labels can get. for free, and there are others for which we will charge money. It is therefore an evolving strategy for our product portfolio. It is very unlikely that the data in particular will be part of these costs. "
Eric Sheridan, badyst, asked, "How should we think about the opportunity of e-commerce (ticketing, merchandising, etc.) on the platform in the coming years?"
Ek: I think that if we improve the process and not talk about the specifics of merchandising and ticketing, but rather that at Spotify, our goal is to connect artists and fans, and in this context, for many artists, they have a huge audience on Spotify, and over time we have a better ability to discern those who are true fans compared to those who are not. In this context, you can expect us to create opportunities as part of our market strategy to create more opportunities for creators to offer these super fans various products.
As Spotify continues to increase its number of premium and free customers, it will need to find a way to increase its ARPU and generate profits. It is not enough to register more users. In some ways, the more registered users are, the lower the number. It reminds me a lot of the Michael Scott Paper Company of the Bureau. Spotify will eventually run into population limits and will be unable to continue to increase the number of subscribers. Can Spotify podcasts help increase ARPU?
Are podcasts a cash cow?
The announcement of Spotify's acquisition of Gimlet Media and Anchor left me confused. Ben Thompson has done very well in a recent article about the ambitions of Spotify's podcast.
The problem for Spotify is that the company's financial returns are not very representative of its impact on the music industry. The company achieved its first operating profit of the last quarter with a turnover of 1.5 billion euros, but the most important factor is that its operating costs decreased by 17% due to the decrease in "accumulated social costs" in Sweden as a result of the decline in the Spotify price. . To be honest, Spotify said it would have made a small profit even without this adjustment, but the long-term outlook is tough when the company's gross profit is only 27%, like last quarter.
The problem, as pointed out last year in Lessons From Spotify, is that Spotify's main cost driver is not, like most technology companies, fixed investments in R & D or in Sales and Marketing. but marginal gains for labels. Basically, as Spotify's revenue increases, so does its costs, which can be overcome if the turnover is large enough – see last quarter – but limits the long-term growth potential of the company. .
The less Spotify can count on music, the better their finances in the long run. The problem is that today, the podcasting industry is only a fraction of what it is (the music industry generated $ 8.7 billion in revenue in 2017, while music generated about $ 300 million in the United States).
In my opinion, Spotify was simply overpaid for what it bought, believing it had spent more than $ 340 to buy Gimlet and Anchor. I do not know how the financial situation of Spotify will be played over the next decade, but this is the moment of the "House of cards". House of Cards is the first "original" of Netflix that has changed its path forever. Netflix knew that she had to stop simply licensing content and start producing hers. Since then, the Netflix ARPU has continued to grow.
Will Spotify be able to find other ways to increase its revenue outside of the $ 9.99 / month subscription? That's the million dollar question. The growth of the Spotify podcast can certainly help with this (advertising, premium issues, etc.), but it remains to be seen if this will increase revenues.
Spotify has a loyal brand and a great product, but can they continue to fight against companies like Amazon, Apple and Google? One of my main concerns for Spotify is that it's hard to compete with companies that do not have to make money in their music business. For Apple, Music is a gateway for iPhone, iPad and Mac. For Amazon, music is a way to integrate into the Amazon ecosystem. For Google, music is a way to better serve ads on the Google platform.
With Spotify's podcast efforts, they will fight Apple's podcasts and the industry's open ecosystem. If they decide to venture into audio books, they will open the door to a battle against Audible (owned by Amazon).
Photo of Heidi Sandstrom. on Unsplash
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