Voice demand drives Spotify breakthrough Q4

Talk about ending the year on a high. Music streaming leader Spotify posted its first ever quarterly operating profit and closed out 2018 with 96 million paid subscribers. Aptly, the Swedish firm toasted the achievements with a duo of acquisitions, and also handed an unexpected commendation to a certain hardware partner.

The thing we like so much about Spotify as a business, is that generally with services offering both a free tier with advertisements and a paid tier without ads, the balance of users naturally weighs heavily towards the free tier (more so in Europe and elsewhere than the US). Yet such an imbalance in swing is not the case with Spotify. The premium service has closed the gap on its ad-supported sister service to 20 million, down from 22 million in Q4. But is Spotify simply benefiting from trialists and gift cards during the festive period, or is there genuine scope for premium subscribers to do the unthinkable and overtake ad-supported MAUs?

If we trawl back a few quarters, in Q1 2017 the difference in users between the two was 30 million – with 52 million premium and 82 million ad-supported. A few quarters later, in Q4 2017, the gap is closed to 29 million, and in the first quarter of 2018, that gap is squeezed further to 24 million. Today, they stand at 96 million and 116 million respectively.

The trend is clear, but is there a key driver? We suspect there are a combination of factors, such as consumers becoming increasingly frustrated with ads, the huge content library boasted by Spotify, a great UI, intelligent recommendations system, and other desirable features. According to Spotify, however, the main driver for growth was none of the above, but in fact the company attributed outperformance to its Google Home promotion. This was Spotify’s debut hardware bundle, offering master account holders of the Family Plan in the US a Google Home Mini speaker free of charge for a limited time only during Q4.

It shows how, despite the dominance of Google and Amazon in voice-activated smart speakers, there is an enormous opportunity in the voice technology space for streaming services and technology vendors. To that end, Spotify says it is exploring a number of different ways to refine its offering in the voice speaker arena – which it describes as a critical area of growth particularly for music and audio content.

Maybe, just maybe, there could also be an argument that Spotify has increased the frequency and/or length of ads as a sneaky conversion technique. This strategy would certainly make sense from a business standpoint and would also presumably adhere to advertising standards as long as they remained within the parameters set out.

The ad-supported offering also performed well though, gaining 7 million new sign ups in the quarter, while the premium tier added 9 million new subscribers, making it 25 million for the year.

Of course, another reason for the steady rise in subscribers is Spotify’s geographical spread, expanding into 13 new countries in the Middle East and North Africa region last quarter to total 78 countries. Comparing premium vs ad-supported user bases by region, we see Europe as Spotify’s primary region in both tiers, accounting for a 30% share of total ad-supported MAUs and 36% of premium subscribers. Interestingly, North America accounts for a 30% share for both free and paid user bases, while Latin America accounts for a 22% share of free and a 20% share of paid subscribers, followed by the rest of the world with 12% free and 10% paid.

To the financials now, proving that freemium streaming services can make money, Spotify reported operating income up 6.3% to €94 million ($107 million), on revenue growth of 30% to €1.5 billion ($1.7 billion). Premium subscription revenue accounted for €1.3 billion ($1.5 billion) of this, also growing 30%, while ad revenue accelerated 34% in Q4 to €175 million ($200 million). Gross profit came in at €399 million ($454 million), a 42% year on year jump.

Growth in the programmatic and self-serve (Ad Studio) channels continued to outpace the growth of direct, rising a combined 60% year on year and together accounting for 25% of total ad sales revenue. Spotify says more than 2,000 advertisers used its Ad Studio platform in Q4 to run campaigns.

Regarding Spotify’s 2019 strategy, the company has introduced millions of people to the varied world of podcasts, boasting 185,000 podcast titles today. So, this week Spotify decided to bolster its podcast presence further with the acquisition of two small podcast companies, Gimlet Media and Anchor.

Anchor claims to have built the world’s easiest podcast-making platform, to tackle the difficulties in making, promoting, distributing and monetizing podcasts, when compared with traditional radio. Anchor says expensive tools, confusing software, and fragmented, friction-filled workflows have hindered podcast creators.

It originally emerged as a social audio platform for voice, before getting into podcasts due to increased demand. Now the company has developed Anchor 3.0, a free Android and iOS app designed specifically for making podcasts. It handles creation, automatically building a new episode for your podcast every day you use it, and from there, you can record (by yourself or with up to 10 friends), add full songs from Spotify and Apple Music (for now) for your Anchor listeners, add a range of transitions, or broadcast voice messages from your listeners.

It sounds like a unique piece of software, tapping into a market which has grown exponentially in recent years, with figures showing nearly 70 million people in the US listen to podcasts regularly. Spotify’s co-founder and CEO Daniel Ek said in a recent blog post that he anticipates over 20% of listening on his service to eventually be non-music content.

Gimlet Media, on the other hand, is an acquisition made purely with an eye for fattening up its existing line up of podcasts. Gimlet says it has a vast array of fiction and non-fiction podcasts, with one called Homecoming even getting readapted into a Netflix series.

Prices for both deals were undisclosed, although some media reports have valued Gilmet Media at approximately $200 million – making Gilmet the most expensive podcast acquisition on record.