Spotify Shares Plummet on Tepid Q1 Guidance; Ek Eyes 'Creator Economy'

Monthly average users (MAUs) grew 18% year on year in Q4 to 406 million; premium users grew 16% to 180 million. Ad-supported revenue was a record 15% of total revenue. Spotify had 3.6 million podcasts on the platform in Q4, up from 3.2 million at the end of September. Guidance for Q1 includes 418 million total MAUs, 183 premium subscribers, 25% gross margin and a $76.6 million operating loss.

Quarterly results came after a week of controversy pitting musician Neil Young against podcaster Joe Rogan. Young and some supporting musicians began pulling their music from Spotify to protest COVID-19 misinformation on The Joe Rogan Experience podcast (see 2201280056). Other artists to follow Young include Joni Mitchell, Nils Lofgren and India.Arie, who decided to pull both her music and podcast.

Citing previous controversies, Spotify CEO Daniel Ek said results are typically measured in “months, not days.” Commenting in Q&A on the “slippery slope” of censoring content on the platform, Ek called it a “complicated issue." Spotify is “trying to balance creative expression with the safety of our users," he said.

The executive referenced the steps Spotify is taking due to the COVID-19 controversy, including putting COVID-19 content on the platform from physicians and health experts (see 2201310029). Most important, he said, it’s providing an advisory notice next to COVID-19 content, linking to messaging by scientists, physicians and public organizations like the Centers for Disease Control and Prevention and the World Health Organization.

“The important part here is that we don’t change our policies based on one creator, nor do we change it based on any media cycle or calls from anyone else,” Ek said, not referencing Young by name. The company’s policies were “carefully written with the input from numbers of internal experts,” he said. “And while Joe has a massive audience -- he’s actually the No. 1 podcast in more than 90 markets -- he also has to abide by those policies,” Ek said.

Ek sidestepped questions whether any advertisers had left the platform in protest over Rogan, expressing a “tremendous amount of confidence” in Rogan’s audience numbers. “Of course, we’re hearing from our partners," he said, "but Spotify has a broad range of content on our platform, so there really is something for everyone here.”

Responding to a question on the status of Spotify's hi-res audio tier, expected last year, but not yet materialized, Ek said that “many of the features that we talk about," especially those related to music, end up "into licensing.” Spotify is in “constant dialogue with our partners to bring this to market,” he said. Chief Financial Officer Paul Vogel declined comment on additional Spotify price increases going forward.

Ek made clear the company’s intent to focus on “a subset of the creator economy. ... Some may still describe us as the leading music subscription service, and while this surely reflects where we’ve been, it doesn’t encompass all the advancements we’ve been making in audio. I don’t think it properly captures all the future initiatives that we’re working on, either." Paraphrasing former Netscape executive Jim Barksdale, Ek said: “It’s constantly about bundling and unbundling on the internet.”

On the target creator economy, Ek noted the term has different meanings. For Spotify, “the single largest trend to keep track of is the rapid professionalization of creators," which he called one of the biggest opportunities on the internet. To become “the preferred destination for audio creators,” Spotify will move from a “one-size-fits-all model to a much more dynamic and open platform,” he said.

Spotify plans to provide tools and access to “diverse revenue streams” that are personalized to creators, Ek said, saying that will create “millions of jobs for the creator economy.” Long term, he envisions over 50 million active creators on the platform, up from the current 11 million.

Ek said Spotify’s gross margin “more and more” will be based on tools and services for creators, not just on label and publishing licenses. Tools and services it’s building in its Two-Sided Marketplace were “part of that story” and exceeded expectations in 2021, he said. The Marketplace, in “early innings,” is an umbrella for tools Spotify will offer for “superfan monetization,” Ek said. He cited audiobooks that could be monetized by advertising or a la carte payments: “It's really about allowing more flexibility for creators and consumers alike.”

Ek wants Spotify to be a platform that allows creators to engage directly with their audience, transitioning casual listeners to fans, “to superfans,” which he believes is going to “unlock the next wave of growth in the music economy.” He compared this period to Spotify’s early days, which were “about stopping piracy.” The next step was to turn people toward paying for streaming, which is now “the most dominant way that the music industry currently exists.”

Streaming replaced the a la carte model, where superfans were the only ones paying for music and most people paying nothing at all due to peer-to-peer file sharing. “And now you see lots of subscription services getting to 100 million [subscribers],” he said. That’s under a one-size-fits-all model, he said, including paid and free, ad-supported models.

Ek wants superfans again to “unlock the next wave” of the music economy. That includes enabling more flexibility, more ways for creators to use their assets, including videos, engaging with people and having their content show up in “new, unexpected ways." That will drive engagement and enable new forms of monetization, he said.

Spotify will no longer issue annual guidance since most initiatives “are multiyear in nature and measured as such,” management said. For quarterly guidance, the company will provide a single estimate for each metric rather than a range of outcomes. Pivotal Research Group analyst Jeffrey Wlodarczak sees “significant" MAU and average revenue per user growth opportunities for Spotify long term on price hikes and a “likely major jump in advertising,” he wrote in a Thursday investor note.

Pivotal believes there’s “material growth” remaining for subscription music streaming. Its subscriber count and MAUs give Spotify scale and leverage, “which should translate into barriers to entry to new competitors,” the ability to invest in more exclusive podcast and live content and “greater than expected leverage over the 3-4 music royalty companies that control 90% of the music played on Spotify.” He also cited Spotify’s ability to take “material price hikes.”