What started as a music-only streaming platform has evolved into a broader audio platform that includes podcasts and audiobooks. Currently, Spotify is experimenting with both video snippets and long-form content, although the latter is only in the experimental stage.
During Tuesday's second quarter earnings conference, the CEO said: Daniel Ek and Interim CFO Ben Kun He repeatedly referred to the Spotify Machine when explaining the company's expansion beyond music. As Ek explained, the term means the company is “no longer just a one-trick pony, but actually multiple industries working together” to create more choice for consumers and drive more engagement. It means that
“Because people might come to listen to the music and stay to listen to the audiobook,” Ek said. “Some customers may come for the podcasts and stay for the audiobooks.”
This term has meaning. Spotify is an increasingly complex product with multiple moving parts, numerous audio and video formats, and different paid tiers. Each new component of the machine is intended to increase the value of the company as a whole. Similarly, Live Nation, a concert promoter and ticketing company, uses the term “flywheel” to describe how its various products and business segments create momentum for the larger entity. I am. However, the word “machine” sounds better.
This machine is essential for becoming a sustainable and profitable enterprise. As Spotify detailed in its 2022 Investor Day presentation, expanding beyond music will help it improve its gross margins and become the profitable company it has long wanted to be. Music margins will be around 30% of sales, with the remaining 70% going to rights holders, with a maximum of 35%, the company said. In its 2022 presentation, Spotify said that podcast gross margins could reach 40-50%, and overall gross margins could reach 40% (Q1 gross margins were up from the same period last year. (increased from 25.2% to 27.6%).
This machine helps increase engagement. Spotify becomes more valuable the more time people spend on it. Increased engagement reduces churn, which reduces the cost of winning back lost customers. Higher engagement increases the likelihood that your free users will become paid subscribers. The last thing streaming services want is the rare customer who doesn't enjoy the features or dig deep into the content. Audiobooks are a great example of keeping people engaged. Ek said that in markets where audiobooks are available, his 25% of users listen to audiobooks. Additionally, he said that in his first two weeks when a Spotify user listens to an audiobook, Spotify will increase his usage by “more than two and a half hours on the audiobook side.”
This machine gives users greater freedom of choice. Ek confirmed that Spotify has an audiobook-only subscription tier in addition to a music-only tier. The standard subscription tier offers both music and audiobooks. Spotify has offered consumers multiple options for years, including an individual plan, a two-person plan called Duo, a multi-user family plan, and the ability to buy one day at a time in certain markets. I did. Ek explained that Spotify wants to provide “as much flexibility as possible in the next phase of Spotify” to convert more users into paying members.
This machine is built to maximize value. Ek and Kuhn frequently mentioned a particular internal metric that Spotify has been using as a north star lately: value-to-price ratio. By adding podcasts, audiobooks, education, and features like Wrapped, Spotify's personalized year-end roundup, Spotify offers more value than when it was a simpler music-only service. Offers. Ek highlighted the videos Spotify has added to its “11 or 12” marketplace, raising expectations for video clips that allow artists to tell stories about new releases. Videos like this, Ek said, are one way Spotify is “focusing on winning discovery” to make the platform a better listening experience. Spotify's recent foray into educational video courses in the UK is another attempt to add value.
This machine will ultimately give Spotify the ability to raise prices. As Spotify adds products and features, the value-to-price ratio increases, EK explained. As a result, it is possible to raise prices from time to time to recover the value created. “As an investor, the way you think about this is that you can make your product better, get more people involved with it, and ultimately create more value,” Ek said. “And the more value we create, the more we need the ability to capture some of that value through price increases.” After more than a decade of value creation and price stagnation, Spotify is set to move forward in 2023. Prices were raised in January. It is expected to raise prices again in some markets in April, including the UK and Australia, and extend the increases to other markets.
This machine also requires some engineering feats. “This is a fairly complex machine,” Kuhn said. That's because Spotify has both variable cost models, such as revenue sharing and hourly royalties, and fixed cost models, perhaps including some in-house and licensed podcast content. “This machine handles all the back-end complexity to address a problem that has historically been very difficult to solve: multiple business models in one consumer experience,” Ek said. ” he added. Spotify's engineering challenge is to incorporate additional vertical elements into a seamless user experience without becoming clunky. This criticism is a common criticism of his iTunes, which started as a music store and added his iTunes U, a place for videos, books, apps, podcasts, and educational materials. “Simple is difficult,” a former Apple product designer once wrote. “It's very tough. But when you get it, it's very beautiful.”
Machines may take some time to get used to. Spotify is expanding beyond music, with stakeholders beyond the music rights holders, artists and songwriters it has served for more than a decade. Currently, Spotify supports podcasters, authors, and even in its early stages, educators. There is already some tension between music publishers and Spotify following the news that Spotify is considering its music and audiobook subscription service to be a bundle based on the US's Phonorecords IV mechanical pricing structure. It is occurring. Subscription bundles allow Spotify to pay slightly lower royalty rates. But really, is anyone surprised that this machine is trying to save you a little money?
