Spotify, the world's largest music streaming platform, delivered an eye-catching financial report in the third quarter of 2024, with revenue reaching 4 billion euros, an annual increase of nearly 19%, and quarterly EPS of $ 1.49, compared with only $ 0.33 in the same period last year, reversing the loss trend in one fell swoop. The full-year revenue in 2024 is expected to be 15.5 billion euros, which is promising compared to last year's 13.2 billion euros.
The key reason for the flip is that Spotify has made major changes to its management and business strategies this year, which have finally yielded initial results.
What did it do right?
The answer is that the company has completely reformed its operating strategy, reduced costs and successfully increased prices, transforming itself from a single music platform to a multi-media content service provider.
The cost is high and it is difficult to make money. The more people use the business structure, the more losses it will make.
Spotify's biggest problem is that its business model is not stable enough. Because it lacks its own content, it has to pay high royalties to record companies. The more users and the more plays it has, the higher the royalties will be. But revenue only relies on user subscriptions and advertising fees.
Once royalty costs are too high or advertising revenue declines, its revenue structure will have problems and it will be difficult to maintain profitability.
This creates a contradictory problem —the number of users is increasing but it is not making money. When Spotify was founded, it made an agreement with record companies that no matter how well the Spotify platform operates, record companies will not suffer losses. Therefore, record companies usually require Spotify to pay nearly 70% of revenue as copyright fees, and it holds nearly 90% of global music copyrights. The three major groups, including Universal Music, Sony Music, and Warner Music, have continued to demand increases in royalties in the past.
Secondly, Spotify focuses on "freemium", which means it first provides basic free services to reach more users, and then charges subscription fees (premium) to users who are willing to upgrade to advanced services. This makes Spotify even if other services are not considered Cost, royalties and platform maintenance fees alone make it thankless.
Huge operating pressure has caused Spotify's net loss to reach 532 million euros in 2023, and its operating conditions are more severe than the previous year. Platforms such as YouTube and social media are more attractive to advertisers, causing advertising revenue to fall from the peak of 20% to 12% of revenue.
What to do? They have to start from the most fundamental transformation of business logic.
How can subscription price increases become a profit engine? The test is all about user loyalty
In order to avoid over-reliance on advertising, Spotify believes that it should expand its profit margins from subscription fees, so it announced a monthly fee increase. However, instead of driving away users, the increase has instead hit a record high number of subscriptions. As of September this year, paid subscription users have increased to 239 million, and monthly active users (MAU) have also exceeded 574 million.
This is due to the stickiness of Spotify's personalized recommendations and services, which use advanced algorithms and sophisticated music tags to provide personalized recommendations, allowing users to discover music that matches their preferences and establish a differentiated advantage.
Spotify combines AI to create "AI DJ" (which allows the DJ to automatically play playlists based on the playlist algorithm) and "AI Playlist" (input prompt word requirements, and AI will select songs that match the theme, such as "suitable for listening to rainy autumn music"), adding value to user experience.
There are also functions with social diffusion, such as annual review (Spotify wrapped), which further enhance user participation and brand identity. Recently, they have also launched new features such as AI DJ and AI playlists to more accurately serve user needs through semantic analysis and music preferences. Let users not only "listen to music", but also participate in a music community.
Therefore, even if the monthly price is increased by 1 to 2 US dollars from the original price, it is still within the acceptable range for users. Moreover, Netflix, Apple Music, etc. have also been raising prices since last year. Users will not choose other products because of low prices. Instead, we must use platform services to win. This feeling of value has instead stimulated subscriber growth. This year, the number of paying users has increased by 16 million year-on-year, and paying users have increased by 3% every quarter.
Spotify has also improved its social functions, allowing users to share music and playlists, and interact with friends, which can enhance user participation and community diffusion.
To conquer the attention economy, music and videos must be satisfied in one stop
Based on 239 million users, the estimated price increase revenue is considerable. According to statistics, this can bring revenue of at least 2.44 to 5.2 billion euros to Spotify, and the Q3 financial report also announced that operating cash flow reached 710 million euros, 229% year-on-year, and gross profit margin reached 31.1%, both hitting a new high in the past 2 years.
But Spotify has finally made money, but it has to take risks and invest funds in the second growth curve —substantial growth in audio-visual content. Because Spotify not only wants to attract your ears, but also your eyes.
There are two types of video content. One is video podcast, which allows users to watch related video content while listening; the other is to bundle "audiobooks" with subscription discounts, and even launch audiobooks into short videos and pictures, intended to rival Amazon's "Audible". Spotify has observed that this increases listener engagement, spending up to 10 hours longer on the platform than before.
To import audio and video content, you must first have a good creator. Spotify will adjust its profit-sharing mechanism in January next year. It will pay creators based on their traffic and advertising volume, making them more willing to provide audio and video content. It is equivalent to embarking on the YouTube model and co-producing programs with creators.
Spotify has just joined the audio and video track now. What are the advantages of Spotify? The key is that Spotify has powerful data analysis capabilities and can recommend relevant video content based on users' listening habits and preferences. In the future, it will extend the advantages of algorithms to video recommendations.
References: "Spotify Inifrån", WSJ, Business Insider, Nasdaq, The Media Leader, The Vergo, Music Business Worldwide, Spotify
