Report: Spotify Shifts Strategy As Losses Widen

Podcast revenue growth of 30% at Spotify has helped to drive 14% growth in ad-supported revenue growth, but, despite its near half billion users, the audio streaming platform has struggled to turn popularity into profit, according to a WARC report.

Context: Music is expensive, and while users can get most of it for free on Spotify (with a few ads), music rights cost the platform around 70% of its total revenues. As a result, podcasts became not only a critical area for revenue growth but also for profitability. Up until very recently, Spotify’s strategy had been focused on creating hits and buying studios or exclusive contracts with the likes of Joe Rogan, and Harry and Meghan.

Why it matters: Hits are important, but it appears that driving the use of tools might be more important. Now the trick it seems Spotify must pull off is to become more like its bigger, richer, and more versatile competitor YouTube, as  Bloomberg’s Luke Shaw observed recently. That means building a platform for all podcasters, and to build an ad capability that can funnel money toward the creators to keep them sweet – but without these same creators working directly with a brand and circumventing Spotify’s plumbing. It’s a big and difficult bet.

The ad story: While podcasts and their advertising potential do appear to be moving in the right direction, this has come at a cost: operating expenses grew 44% year-over-year, in part as the global ad sales team expanded and higher advertising expenses were incurred in targeting emerging markets and Gen Z.  While ad-supported gross margin dipped in Q4, the company reported that the year-on-year trends “reflects improving podcast profitability offset by new podcast content investments and softer Ad-Supported music profitability (as advertising monetization lagged engagement in select markets)”.

The bigger picture: Spotify echoes many of the other stories coming out of the tech world: while it remains well-used, its hefty pandemic-era investments are becoming tough to sustain and as a result it’s cutting 6% of its staff. Monthly active users grew to reach 489 million versus an expected 478 million. Within that, premium subscribers grew to 205 million while ad-supported users grew by 22 million in the quarter to reach 295 million.