Spotify's Q3 MAUs Rose 19% Year on Year; Ad Revenue Up 75%

After COVID-19 “choppiness” in the first half, Spotify grew monthly active users (MAU) by 19% year on year to 381 million in Q3, said CEO Daniel Ek on a Wednesday earnings call. Revenue grew 27% year on year to $2.9 billion, led by $2.6 billion in premium subscriber revenue, said a Wednesday shareholder letter.

Advertising revenue beat “optimistic expectations,” jumping 75% to $375.2 million. Long term, Ek said advertising should be 20% of revenue and could be as much as 40% over five-10 years. Q4 guidance is unchanged with total MAUs of 400 million-407 million, 177 million-181 million premium, and revenue of $2.9 billion-$3.1 billion.

Spotify had improved listener momentum in the 86 markets launched this year, including India, the Philippines, Indonesia, South Korea, Bangladesh and Pakistan, where it rode promotions with smartphone vendors. Fifty-eight percent of MAUs are in Europe and North America, 22% in Latin America and 21% in remaining regions.

Sequentially, MAUs grew 4%, which Chief Financial Officer Paul Vogel attributed to a tough compare with 2020's "exceptional growth” of over 30 million net subscribers. The streaming audio service has averaged 27 million net additions over the past three years. Spotify still sees growth opportunity in the developed North American and European markets, along with newer Latin American and rest of world markets, Vogel said.

Ek said newer markets respond to different payment structures that require innovations in payment models. In Southeast Asia, the company has been testing daily and weekly plans “to great success.” It took several years to learn how to do subscriptions well in Western markets, and it’s in a similar phase in Asian markets, Ek said.

Ek said linear radio still has 46% share of audio listening in the U.S. alone, “despite consumption shifting steadily away from it.” In 2021, more than 60% of all audio ad spending will go to traditional radio, leaving Spotify “plenty of room to grow” in listening hours and monetization, he said.

The executive compared the opportunity to ads moving from print to digital in the media world. “When they became digital, they became a lot more effective,” he said. Ek's vision of future advertising includes location technology and virtual and augmented reality. He described a person walking down a street who gets an audio offer for a deal when approaching a nearby store: Advertisers will be able to provide display and audio ads together for "an even more immersive ad experience that helps advertisers convey their messages.”

Spotify's podcast library grew from 185,000 when it launched three years ago to the current 3.2 million, Ek said, calling the company still a “relatively new entrant.” It’s the top podcasting platform in more than 60 countries and No. 1 in the U.S. “Hundreds of improvements” and interactive features including polls and Q&A have helped retention, Ek said. It's working on ways to improve discovery.

Spotify has said it’s giving 100% of paid podcast subscription revenue back to creators through 2022. In Q&A, Ek said content engagement is the “base layer” that’s funded today primarily through subscription income, plus advertising. In the future, “additional modalities,” including paid podcasts, or targeted content for “super fans,” could be used for upsell opportunities, he said.

Spotify experimented with virtual live shows during the pandemic with “really nice results,” Ek said. Long term, the company hopes to be an important part of that ecosystem, which will help listeners discover more live shows and enable artists to interact with fans. “We’re thinking about what the right experience is," Ek said. Live performances could fit into Spotify’s two-sided marketplace offering in the future, Ek said. In testing, the marketplace had strong engagement with artists, teams, and labels, with artists seeing uplifts of 50%-100% on their campaigns, he said.

Commenting on Spotify’s Car Thing in-vehicle entertainment device, Ek said chip shortages have affected supplies: “We just can't make enough of them to get them out there,” he said. Spotify began offering the devices for sale this month for $79, after trickling out a limited number of devices free to interested subscribers by invitation earlier this year. The purpose of the device is to expand Spotify use in the car beyond what Ek called a substandard Bluetooth experience using a mobile phone. He called initial feedback “encouraging.” Two million people have signed up for the device.

Spotify partnered with Shopify to give artists more ways to monetize fan relationships through merchandise sales. Ek cited “creator excitement” about the offering but said the program is still in early days, and “it's hard to say what the impact will be on the business.”

Responding to an analyst’s question on lower cost subscriptions, Ek said the company has been running tests in some markets “to learn more.” Generally speaking, he said, if lower cost subscriptions would be “accretive” to business “we will look at it" without specifying geographies.

Pivotal Research Group analyst Jeffrey Wlodarczak, in a Wednesday investor note, called Spotify’s Q3 results “nicely ahead of expectation." He highlighted Spotify's 2% growth in premium average revenue per user. ARPU was “much stronger than expected,” despite price hikes, he said. Shares closed 8.3% higher Wednesday at $273.13.