Bundles of Optimism: What You Should Know About Spotify’s Earnings

Spotify’s stock surged 12% on Tuesday after Spotify reported quarterly earnings that beat subscriber growth and profit margin expectations.

In a wide-ranging discussion of the company’s earnings that touched on the controversy sparked by Spotify’s audiobook bundling, its plans for a premium music tier and missing its target for monthly active user growth, Spotify chief Daniel Ek said the company he helped found 18 years ago is reaching a turning point.

“While many believe that Spotify has a great product, we needed to prove that we could also be a great business,” Ek said. “I think we’re really starting to show this now.”

Here’s what else you should know about the global streaming giant’s most recent quarterly earnings and what was said on the call.

“It was a very strong quarter across most of our key metrics”

Ek said at the top of the webcast. The streaming giant, which has for most of its 18-year history failed to be profitable, reported its third-straight profitable quarter spurred on by the addition of seven million net new subscribers, an expanded gross profit margin of 29.2% and 490 million euros ($533 million) in free cash flow, the most in the company’s history. However, the company missed its internal target for total monthly active users (MAUs), reporting a total of 626 million MAUs compared with a goal of 631 million.

Ek said they are tackling this by enhancing free products to boost engagement and retention in developing markets.

The bundle controversy

When Spotify announced plans to raise subscription prices in the U.S. and the addition of 15 hours of audiobooks per month in May, it also asserted it could pay a discounted “bundle” rate to songwriters for premium streams that Billboard estimates could cut songwriters’ and music publishers’ royalty payments by $150 million. The Mechanical Licensing Collective sued Spotify, claiming it “improperly” classified its premium tiers as bundles. Ek declined to comment on the lawsuit, but defended Spotify saying that it paid out a record-high amount to music labels and publishers in 2023 and will “beat those numbers” in 2024.

“A lot of people want to make this a zero sum game where we have to win in order for them to lose or they have to win and we sort of lose,” Ek said. “It’s not as much a zero sum game as people make it out to be. That’s not to say we don’t quibble around various things at various points. That’s the nature of all supplier and distributor relationships.  Overall we have had healthy relationships with the music industry for the better part of now 18 years. … Overall the music industry is growing. We are spending a lot of time and effort making sure it keeps growing.”

Spotify’s interim CFO Ben Kung declined to share details of Spotify’s royalty payout agreements but said the company is confident in its position.

New ultra-premium tier on the horizon

Asked about Spotify’s plans to launch a long-delayed high definition audio offering, Ek described the company’s effort to bring something like a “deluxe version” of Spotify to life for “a large subset” of Spotify’s now 246 million subscribers.

“The plan here is to offer a much better version of Spotify. So, think something like $5 above the current premium tier, so probably around $17-$18 price point, but sort of a deluxe version of Spotify that has all the benefits that the normal Spotify version has plus more control and quality across the board,” Ek said.