Music sharing platform, Spotify Technology said it expects to reach US$100-billion revenue annually in the next 10 years and promised high-margin returns from its costly expansion into podcasts and audiobooks.
The audio streaming company hosted its first investor day since going public in 2018, hoping to stoke Wall Street’s enthusiasm despite the slowing global economy.
To reach its ambitious goal, Spotify would need to make its revenue grow nearly 10-fold from 2021 revenue of $11.4-billion, and CEO Daniel Ek also forecast gross margins to jump to 40% and operating margin to 20% in the same time.
Spotify CEO Daniel Ek
Spotify would need to make its revenue grow nearly 10-fold from 2021 revenue of $11.4-billion
“Spotify will put out these pretty audacious targets and we are going after these because that’s how we see the world and we are going to invest behind that,” Ek said.
Shares of the company rose 6.5% on Wednesday after losing 53% of its market value so far in 2022, worse than the 24% drop in the S&P 500 communication services sector index, which includes Spotify and other media and social network companies.
Ek began the nearly four-hour investor presentation trying to reset Wall Street’s perceptions of the company, saying some may think “we’re a bad business or at least a business with bad margins for the foreseeable future”.
One of the reasons for not reaching its long-term goals was its aggressive spending to build up its podcast and audiobooks platforms. Though Ek said its investments are already performing “better than you probably expect”, with gross margins of 28.5%, well on its way to reaching the company’s 30-35% long-term goal.
Spotify’s chief content officer, Dawn Ostroff, said the company has committed more than $1-billion to podcasting, and expects podcast revenue to increase materially this year from the $215-million it made last year. She said the company was still in investment mode, but it believes podcasting to be a $20-billion opportunity.
Ek expects the podcast business to have the potential to generate margins between 40% and 50% and audiobooks to also have margins over 40%. He did not specify how long it would take for the company to hit those numbers.
Apart from music, podcasts and audiobooks, Spotify is also planning to enter new types of content over the next 10 years that would boost its average revenue per user, engineering manager Alexander Nordstrom said. He said Spotify was on track to hit its goal of a billion users by 2030.
Kelechi Deca
Kelechi Deca has over two decades of media experience, he has traveled to over 77 countries reporting on multilateral development institutions, international business, trade, travels, culture, and diplomacy. He is also a petrol head with in-depth knowledge of automobiles and the auto industry
Spotify’s founders Daniel Ek and Martin Lorentzon could have had a big dream of building the biggest music streaming experience in the world, but not to the degree with which the dream has succeeded. It could still have come like a big surprise to them. Indeed, they were even more surprised, when on 3 April, 2018, the Company shares opened on the floors of the New York Exchange at the price of $165.90 per share, the cost of about 13 physical CDs then.
The music streaming company traded 30 million outstanding shares of its 178 million total, bringing the company’s market value to stand at $27 billion, and on the next day, Wednesday, after the first day trading, Daniel Ek’s shares (about 9 percent of the company) were worth $2.3 billion.
In fact, Spotify has become so popular a streaming music service that today it can boast of more than 96M paid subscribers. Why would something as less significant as listening to music in a very busy world suddenly acquire billions of dollars worth of value. Here is why Spotify made a difference.
Spotify’s Revenue/Loss Analysis as at 2018
Spotify Focused on Breaking Away From The Conventional Ways of Streaming Music
Daniel Ek and Lorentzon were not the only people in the world with the idea of changing the world’s music space. Sean Parker’s peer-to-peer music sharing service, Napster, had already become so popular with music fans, although playing some illegal games for profit. Apple’s iTunes already sold songs for as much as $2 per track. Daniel EK and Lorentzon’s plan was to find a space between Napster’s illegality and Apple’s great iTunes.
Daniel Ek put it this way then:
“I just really believe that if we create the right product, which is better than piracy, that people will come.” — Daniel Ek
And then, the solution was born:
First, Spotify would deliver instant music, with high-quality audio, no downloads, in ways that are completely legal.
To make this happen, Ek and Lorentzon would have to invest heavily in technology to make every aspect of Spotify’s user experience memorable.
With the broader music industry in decline and a strong understanding of the market, Spotify’s timing was perfect. The company was able to leverage this timing and market knowledge to negotiate its crucial early licensing deals.
Spotify spent the first few years of its existence growing the business by developing a strong product, instead of rushing for profit. In fact, it restricted how many invites users could give away to their friends. This gave it the chance to focus on continuous product development as well as plan for and manage steady, gradual user growth. It also manage the image of the product by making it seem as if it were only available to some select people. Users would therefore think it was really a privilege to have the Spotify App.
Spotify’s Early Negotiation With Record Labels Changed its Course Forever
Spotify made the best move linking the music streaming company with the best of celebrity bloggers. These bloggers not only danced to the music but spread the good news.The result: they kept coming back for more of the music. In just one year, Spotify had built a product that music bloggers were already excited about.
“Even today, Spotify’s traditional music player is better than everything I’ve tested on this side of Winamp / iTunes and a really good Direct Connect hub.” — Henrik Torstensson, CEO and Co-founder of digital health company, Lifesum, who worked at Spotify for three years, holding major roles such as Head of Premium Sales said of that era.
This was followed by negotiations with record labels.With sales falling, negotiation with the American “Big Four” record labels — EMI, Sony, Universal, and Warner Music — became an option. A couple of smaller labels also agreed to make their entire back catalogs available to Spotify for use outside the U.S. on a limited basis. The price of this deal is that the Big Four record labels would become Spotify’s biggest shareholders, pocketing almost one-fifth of Spotify’s stock for just $112,000.
Indeed, this was a game-changing deal. In fact, Spotify needed the labels — and their back catalogs — as much as the labels needed a new way to reach young music fans.
Another game changer also came, this time from Napster’s Sean Parker who was so surprised that Spotify has grown so fast and fat that he quickly took up his pen and wrote what WIRED described as a “1,700-word love letter” to Spotify. He followed up on the love affairs by introducing Facebook founder, Mark Zuckerberg, who was even more fascinated that the introduction lead to the official integration of Spotify into Facebook — a partnership that would propel Spotify to new heights of growth when it launched in the United States.
Spotify’s Freemium Model Helped the Company To Set Its Foot Right in a Crowded and Strongly Competitive Market
Spotify was already the best bet by 2011. It had earned almost over 10 million tracks in its catalog, accumulated over 1M music fans across seven European countries. The Freemium has made this growth possible.
Freemium users could get access to millions of songs, share playlists with friends, and play local music files using Spotify. Spotify’s Premium subscription, on the other hand, eliminated the friction of the Freemium app. Not only were there no ads on Spotify Premium, there were no listening limits, either. Premium users could listen to music in Offline Mode, a feature that was introduced shortly before Spotify’s launch in the U.S., and play tracks on their mobile devices — a significant differentiator at that time.
Relying on this Freemium features, Spotify expanded to the U.S., where it partnered with some of America’s biggest brands, including Chevrolet, Coca-Cola, Motorola, Reebok, and Sprite, among others. Spotify ran display ads for its American launch partners on its freemium product. In exchange, the American partners gave away exclusive Spotify invitations to their social audiences. This drove traffic and brand awareness for the advertising partners.
Staying Ahead of the Competition Ensures Spotify Keeps Winning
How Spotify compared with Apple as at 2018
Spotify has kept the momentum and stayed ahead since then. The company has since launched a series of new features that would enhance user experience, such as, Discover Weekly, Release Radar, Time Capsule among others. This shows just how focused Spotify is on the core underlying technology behind its products.
Spotify’s greatest challenge is achieving profitability. Spotify revealed it currently has more than 207 million monthly active users worldwide, of whom 96M are paying subscribers. Fourth quarter financial results of 2018, showed the company making operating profit for the first time of €94 million ($107 million).
“ Sit down and think about the problems in an industry you know well, then brainstorm solutions. You have enough coffees with people, [and] you start to hear the same problem over and over again in the industry,” Brickley says.
The world is moving so fast and the next big thing, apart from Spotify, is indeed still yet to come.
Charles Rapulu Udoh
Charles Rapulu Udoh a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organisations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution and data analytics both in Nigeria and across the world.
