Spotify to Test More Price Hikes After Another Quarter of ARPU Declines
Spotify shares fell after the streaming service reported a $46.8 million Q3 operating loss vs. a $63 million operating profit in the 2019 quarter. Revenue grew to $2.3 billion vs. $1.9 billion in Q3 2019, said Thursday's shareholder letter. Monthly average users (MAUs) advanced 29% to 320 million. Premium subscribership grew 27%, or 5% sequentially, to 144 million. Ad-supported users increased 31%, 9% sequentially, to 185 million. Shares closed 3.4% lower Thursday at $266.87.
Spotify’s average revenue per user fell 10% to $4.90, for what an analyst said on Thursday’s investor call was the 15th straight quarter of average revenue per user declines. Chief Financial Officer Paul Vogel said the company’s focus historically has been about growing users and subscribers first “before worrying about the monetization part second.” It focuses on the customer lifetime value to customer acquisition ratio, which is “staying in a 2.5-3 range,” he said.
The company has begun testing price increase models for its Family plan in seven geographically diverse markets, Vogel said. Spotify had stronger than expected subscriber growth from its Duo plan, which rolled out in Q3, said CEO Daniel Ek.
The company is continuing to test “where it makes sense to raise pricing,” Vogel said. “In markets where we think we have the opportunity to potentially raise prices, we will, and we’ll continue to test.” The company added “a tremendous amount of value” to a subscription over the past five to 10 years, he said, citing 65 million-70 million music tracks and 2 million podcasts. “We’ve done that without raising prices, so the value you’re getting as a subscriber has definitely increased materially.”
On how Spotify is deciding which markets to test for a price increase, Vogel said it's looking at its penetration in different markets and regions, the maturity of those markets and “thinking about where it may make sense for price increases and where it may not.” The company will be “very cautious and careful around COVID in terms of how we think about any potential price increase.” It’s testing, “and anything we do will be very market specific.” Ek noted price increases in Norway showed no negative impact on user engagement, but it’s too early to tell the impact of price hikes in other markets. He referred to Spotify’s “value per hour.”
Spotify doesn’t receive revenue from hosting podcasts where ads are sold by the content owner or creator, said Vogel. It does sell ads for content it owns, or for exclusive content, he said. “We don’t take revenue for anything that gets passed through onto our platform.” The company is looking at additional ways to monetize podcasts, he said. Some 22% of MAUs engaged with podcast content in Q3, up a point from Q2.
On Apple’s services bundling, Ek said Spotify hasn’t noticed an effect, but it’s likely to reinforce the iPhone maker’s ecosystem. “Most customers aren’t in just one ecosystem,” he said. Its biggest competitors -- Amazon, Apple and Google -- are trying to incentivize customers to stay within their ecosystem, which gives Spotify an advantage, Ek said: “This is where our ubiquity strategy is so important because we play very nice on all hardware.” It’s a key differentiator from “ecosystem players whose real business model is to just reinforce the ecosystem they’re already in.”
Global consumption hours surpassed pre-COVID-19 levels, and all regions “have fully recovered,” said the company. Average monthly subscriber churn rate fell below 4% for the first time. For Q4, Spotify guided to 340 million-345 million MAUs, including 150 million-154 million premium users, and $2.3 billion-$2.6 billion in revenue.