Spotify Buys 2 Firms to Bolster Podcast Business as It Looks to Expand Platform
Spotify's buy of two podcast-related companies is part of a strategy to become “the world’s leading audio platform,” said CEO Daniel Ek on the company’s Wednesday Q4 webcast. The company said earlier in the day it's buying podcast content producer Gimlet Media, and Anchor, a podcast technology company with creation, publishing and monetization services. Spotify Chief Financial Officer Barry McCarthy said future SEC filings will include prices: “I don’t want the transactions we’re closing to bleed over into deals we may be negotiating.”
Sign up for a free preview to unlock the rest of this article
Communications Daily is required reading for senior executives at top telecom corporations, law firms, lobbying organizations, associations and government agencies (including the FCC). Join them today!
Ek said the Gimlet buy will bring Spotify a larger library of podcast content, making the platform more attractive to current and new users: In Q4, Spotify had 14 exclusive shows, and early takeaways are that listeners engage at twice the rate of non-podcast listeners, and users “who wouldn’t have considered Spotify otherwise are now signing up to the platform.” As engagement increases among new and traditional customers via podcast content, that reduces churn “and makes the business overall much stronger,” Ek said. Spotify is the second-biggest podcasting platform globally, he said.
Asked about guidance for gross margin compression in 2019, Ek referenced the investment in original content, which he said will be offset over time by improvements in engagement and customer retention. McCarthy compared Spotify’s investment growth in podcasts to Netflix’s investments when it shifted from DVDs to streaming. “It greatly enhanced the value proposition for users and over time, it shifted the cost structure from variable to fixed,” said the ex-Netflix executive. Podcasts bring an “ad revenue dimension” because for now advertisements are embedded in podcasts for both free and paid users, he said.
Spotify's Q4 revenue was $1.7 billion, up 30 percent year on year. Shares fell 2.8 percent Wednesday to close at $135.45.
In Q4, Spotify customers listened to more than 15 billion hours of content, a company high. It had 207 million active users worldwide vs. 160 million in the year-ago quarter and 191 million in the September quarter. That was “impressive growth,” Ek said, but Spotify has a “much bigger vision for what this business can become.” Audio streaming is a tenth the size of the video market, said Ek, leaving a “massive opportunity” for audio to evolve to a personalized, immersive experience, mirroring video market trends. Spotify believes that over time more than 20 percent of listening there will be content other than music.
The December holiday conversion promotion, a Google Home mini giveaway to master account holders, brought in 7 million additional subscribers. Spotify sees smart speakers as a “critical area of growth” for music and audio content, and it’s looking at different ways to “explore and refine our offering in this arena,” said Ek. “Ubiquity on all platforms” is an important part of Spotify’s smart speaker strategy; the app is on more than 500 devices overall, Ek Said.
A December ad campaign giving users visibility into their listening habits through the year brought 28 million users to the Wrapped Holiday brand campaign website, said Ek. On a question on whether promotions encourage consumers to jump in and out of competitive services, McCarthy said the year-on-year trend in churn is down. He acknowledged some effects of seasonal churn during the holiday campaign, but overall, Spotify is seeing “increased engagement, increased retention, lower churn.”
Q1 revenue is forecast at $1.54 billion-$1.76 billion, with gross margin between 22 and 25 percent. It forecast a 24-27 percent increase in total monthly average users to 215 million-220 million, including 29-33 percent growth in premium subscribers to 97 million-100 million.