Spotify to Be 'Smart' About Price Hikes in Uncertain Economy: CFO

Spotify believes it has “pricing power over time, but we’re going to be smart about how and when we implement anything,” said Chief Financial Officer Paul Vogel on the company’s Q2 earnings call Wednesday, citing current macroeconomic uncertainty. Price increases Spotify implemented previously are now a couple quarters old; the company hasn't seen a material change in churn relative to those increases, he said.

CEO Daniel Ek said Spotify offers customers value and that “over time, we should be able to translate that value into price increases.” For the near term, “we’re very concerned about the uncertainty in the marketplace, and we’re going to evaluate that uncertainty into any decisions that we make.”

Spotify grew monthly active users (MAUs) 19% in Q2 to 433 million, 5 million ahead of guidance. It had a 14% bump in premium subscribers to 188 million, 1 million above guidance, which Vogel credited to growth across regions, led by Europe and Latin America, plus an extra week of promotional activity for multi-user offerings. Ad-supported users grew 22%, the company said. Total revenue in Q2 grew 23% year on year to $2.89 billion, with premium subscriber revenue rising 22% to $2.5 billion on subscriber gains; revenue from ad-supported users rose 31% to $360 million on music and podcasting gains, it said. Shares jumped 12.2% Wednesday to close at $116.61.

Spotify is monitoring the global economic outlook but to date has seen no impact on its user or subscriber outlook, Vogel said. In Q3, Spotify expects “another quarter of accelerating MAU additions” with subscriber net additions in line with Q3 2021, he said. It expects average revenue per user on the premium side to grow by mid-single digits. Vogel noted “some softening in trends” in the advertising business in the last few weeks of June, but the company expects “solid growth in Q3, albeit slower than we might have forecast earlier in the year.”

Spotify canceled production of its Car Thing hardware device designed for use in the car, Vogel said. The company tested a number of price points, “and we frankly haven’t seen the volume at the higher prices that would make the current product financially viable,” Vogel said. Rising inflation and component costs and delays also factored into the decision. Expanded lead times to order parts “has significantly altered the risk-reward for continuing to lean into further product development,” he said. The decision to stop production resulted in a one-time charge of $31 million, with a 109-basis-point impact on gross margin this quarter, he said. The device was selling on the Spotify website Wednesday for $49. It had been priced at $89 earlier this month.

Operating expenses grew 38% year on year, reflecting growth initiatives approved late last year and the impact of recent acquisitions including Podsights, Chartable and Whooshkaa, Vogel said. Last month, the company announced it would curb employee growth by 25% beginning in Q3, while also “taking a closer look at marketing activity.”

At the end of Q2, Spotify had 4.4 million podcasts on the platform, with the number of MAUs engaging with podcasts growing by double digits. The company released 100 new original podcasts globally in the quarter; video podcasts are now available to creators via Anchor in 11 markets, it said.

Spotify bought audiobook technology company Findaway in June (see 2206170005). Integration is underway now with the Findaway team, Ek said, saying an offering will go to market “imminently,” in coming months or weeks. Release rates will “rapidly” improve, he said. First-half 2023 will show “the full extent” of the audiobook effort, he said. Second-half 2023, “you’ll start seeing some of our work in some of the other categories that we’re doing as well.”

On the Spotify Live social media initiative that’s designed to connect artists with fans, Ek said, “It’s early days on experimentation on our Live initiatives,” both physical and digital. The company experimented “quite a bit during the pandemic” when it was difficult for users to attend physical live events. Many of those learnings "are inconclusive,” Ek said. Now, in what he called a post-COVID-19 pandemic world, "it’s just very different from the experiences that people were willing to pay for and experience during the pandemic.”

Ek is optimistic about the prevalence of live social formats in many Asian markets with “everything from live shopping to formats where you see [non-fungible tokens], you see consumers wanting to participate in the livestream with their favorite creators." He noted "lots of innovation going on in Asian markets in this space.” Spotify is looking at those markets “for inspiration,” he said, "but it’s not something you should expect to be a rapid improvement in the near quarters; it’s a multiyear effort from us.”