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Is Spotify Pandemic-Proof? Analysis Plus 8 Burning Questions From the Streamer’s Q2 Earnings

A CliffsNotes version of Spotify’s Q2 earnings report would boil dozens of pages of words and numbers down to two main points — both having to do with the COVID pandemic.

First, after a series of calamities, something has gone well during the pandemic: Spotify has proven that music subscription services are an enduring, constant part of the music business. This was arguably the biggest question for the recorded music and publishing businesses going into COVID. Now that subscription services are the industry’s breadwinner, disruptions to their growth will hurt rights owners and creators. But the subscription model’s recurring revenues gives the industry shock protection it lacks in the retail world.

Had COVID happened a decade ago, when CD sales dominated music sales, retail closures would have carried disastrous effects. The tumble in physical sales from retail closures has hurt record labels’ sales and resulted in the delays of some new album releases.

Never had this growth-oriented company’s bottom line been so unimportant for the record and publishing businesses. Spotify’s operating loss did deepen from €17 million to €167 million, missing its guidance of -€45 million to -€95 million. This miss was not as it seemed, however: some accrued, non-cash taxes exceeded Spotify’s expectations by €126 million; operating loss would have otherwise been just €41 million.

Spotify’s Q2 earnings showed consumers both kept their subscriptions, outside of normal churn, and became first-time subscribers. Q2’s 138 million subscriber count was at the high end of the company’s guidance of 133-138 million. In fact, growth quickened in Q2 to 138 million from 130 million on March 31. The eight-million gain topped Q1’s six-million increase and was the largest quarterly gain since Q2 2019.

Second, Spotify has enough liquidity to last through any remotely possible scenario in 2020 and 2021. Its balance sheet has €1.8 billion in cash and cash equivalents and short-term investments and no long-term debt (thus no interest expense). Unlike many music companies that have prepared for COVID disruptions by adding debt and credit capacity, Spotify is not exposed to problems at brick-and-mortar retail, closures of music venues, or suspensions of tours worldwide. And beyond concerts it holds for fans, Spotify is not exposed to absence of live events that has brought the concert business to a halt, sending ripple effects through promoters, venues and agencies.

Advertising is the problem of 2020 — not just for Spotify but also radio stations, news companies and any number of businesses that experienced sharp declines in both demand and rates. (Pandora’s advertising fell 31% in Q2. iHeartMedia reports earnings August 6, Entercom on August 7.) Yet because subscriptions typically account for 90% of Spotify’s total revenue, COVID does not pose a big threat.

Still, the advertising slowdown, off 21% from last year and 11% lower than Q1, pushed down advertising’s share of revenue to 6.9%, the lowest figure in Spotify’s quarterly reports dating back to Q1 2017 (the breakdown tends to be roughly 90% subscriptions and 10% advertising). The “marked deceleration in [ad] sales” began the last three weeks of Q1 and into April and May, the company explained. The quarter ended better than it started as June advertising sales were down just 12 percent from Q2 2019.



Got questions after reading Spotify’s earnings? Here are eight that come to mind:

Q1: Is Spotify expecting a slowdown in the second half of the year?
Not necessarily. Spotify did not revise its guidance for Q3 and still expects to have €146 million to €153 million subscribers at the end of 2020. But on Wednesday it cautioned that its expectations “are subject to substantial uncertainty” and COVID has created “a greater likelihood of variances” than in typical quarters.

Q2: Did Spotify’s average revenue per user (subscriber) decrease in Q2?
Yes, ARPU fell from €4.42 to €4.41. It has fallen steadily over the years — it was €5.52 in Q2 2017, €4.89 in Q2 2018 and €4.86 in Q2 2019.

Q3: Is a falling ARPU a problem?
A company would rather have higher than lower ARPU. But lower ARPU is the result of customer acquisitions that are ultimately beneficial. For example, family plans have lower ARPU — up to six users on a single account — but they also decrease churn and increase users’ lifetime value. In addition, Spotify carries a lower price in its newest markets compared to the oldest markets in Europe and North America. A single-account subscription costs $2.39 in Russia and $1.58 in India compared to $9.99 in the U.S. and $12.46 in the U.K.

Q4: Are Spotify users listening to podcasts?
In Q2, 21% of total MAUs listened to podcasts, up from 19% in Q1 and 16% in Q4 2019. Podcast listening has grown at triple-digit annual growth rates since last year. Given that Spotify is making huge bets on podcasting, these metrics need to show strong growth for many years.

Q5: Do music rights owners receive a share of podcast revenue?
No. Speaking about the new licensing agreement with Universal Music Group, the most recent deal completed with a major label, CFO Paul Vogel confirmed podcast advertisements will be entirely Spotify’s revenue and not shared with labels. He did not comment on other label deals, although there’s no reason to think they will treat podcast revenue differently.

Q6: Where will future subscriber growth come from?
Spotify believes large markets, namely in North America, are not saturated and have. CEO Daniel Ek said the launch in Russia was “bigger than our first week in India” and Spotify can reach an additional 250 million more listeners between the two countries.

Q7: What is Spotify’s “two-sided marketplace”?
The two-sided marketplace refers to two sources of revenue: an audio service monetized by subscriptions and advertisements, and a marketing services platform offered to artists and labels. The Spotify for Artists free suite of tools, core to the two-sided marketplace, is now used by 690,000 artists each month. Spotify also allows artists to reach likely fans through a paid marketing featured Sponsored Recommendations; on Wednesday’s earnings call, Ek suggested that labels use a portion of its marketing budget for feature, saying that Spotify’s scale makes it a cost-effective, efficient use of spending.

Q8: How does Spotify plan on turning a profit?
This is a frequent question that is more “when” than “how.” Spotify’s primary goal is subscriber and listener growth, not profit. Ek described a “virtuous cycle” in which more content creates greater engagement, leading to lower churn and thus a higher lifetime value of a customer, as well as the network effects of 300 million users sharing Spotify tracks and podcasts through social media.

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