Spotify targets 1 billion listeners by 2030 amid profitability concerns

CEO Daniel Ek lays out an ambitious vision for Spotify over the next decade, one in which he envisions becoming a business 10 times its current size.

Spotify Technology plans to expand into new businesses to address investors fears that the audio market opportunity is limited. Picture: Alberto E. Rodriguez/Getty Imagesy

Spotify Technology defended the company’s strategy Wednesday and outlined plans to expand into new businesses to address investors fears that the audio market opportunity is limited.

At its first investor day since taking the streaming giant public four years ago, Spotify highlighted the loyalty of its hundreds of millions of listeners, its industry-leading music recommendations and its podcast unit’s success. The company also pointed to its expansion globally, its growing set of tools for creators, and areas it plans to expand into including audiobooks and eventually education, sports and news.

The presentation came amid investor and analyst concerns the company isn’t going to turn a profit any time soon and a 55 per cent slide in its share price so far this year.

Chief executive Daniel Ek kicked off the live-streamed event by laying out the company’s successes from the past four years and combated the notion that “we are a bad business.”

The CEO laid out an ambitious vision for Spotify over the next decade, one in which he envisions becoming a business 10 times its current size. “That’s why we’re investing so aggressively in building not only a bigger but, we’re thinking, a much more profitable business,” he said in an interview.

He said Spotify would reach one billion listeners by 2030, and generate $US100bn ($A139bn) in revenue annually with a 40 per cent gross margin.

“We believe this is a risky bet,” said Daniel Ives, an analyst at Wedbush Securities. “The Street has lacked confidence in the name and it’s an impressive but aggressive goal.” Shares of the Stockholm-based company have fallen 70 per cent from an all-time high set last year.

The stock’s price was up nearly 6 per cent in trading on Wednesday. Shares of other tech companies have also fallen dramatically since the start of the year After up-ending the record business, Spotify has grown into an audio giant with new verticals in podcasting and audiobooks, executives said, that differ in their prospects and their financials. The company’s expansion beyond a music-focused tech platform is good, they said.

“This is a much bigger business than the one you saw in 2018,” Mr Ek said in the interview. “It’s a much more resilient and diversified business than you saw in 2018.” Mr Ek told investors the company hasn’t done a very good job of explaining its strategies.

“We all know that we’ve weathered our share of challenges, but we’ve also morphed pretty dramatically as a business, and I’m not sure that journey is fully understood,” he told investors, speaking remotely from a theatre in Spotify’s New York office.

Not only has Spotify become ubiquitous — available across more than 2,000 devices from watches and smart speakers to cars and kitchen appliances — it has attracted and retained customers thanks to its ability to make personalised music recommendations.

Mr Ek said Spotify’s “freemium” model has given listeners a chance to try the platform risk-free while also helping the music streamer use its free, ad-supported tier to help funnel listeners to its subscription business.

For years, Spotify executives have said they would put a priority on growth and investment in the business over profit. The company has spent around $US1bn on podcast deals since 2019.

Mr Ek said those investments and the company’s financials, taken together, have clouded some of the business’s growth. Gross margins for music have been steadily climbing in large part due to Spotify’s two-sided marketplace strategy, where it charges artists and labels for marketing, tools and services. The gross margin for music is roughly 28.5 per cent, which Mr Ek said represents significant progress in reaching a long-term goal of 30 per cent to 35 per cent.

“Marquee,” Spotify’s flagship tool that recommends new music releases to likely fans, in the first quarter doubled its new customers from the fourth quarter and saw revenue increase 225% from a year earlier, Charlie Hellman, Spotify’s vice president head of music product, said during the investor the presentation.

Podcasts, meanwhile, are expected to become profitable in the next one to two years, with the potential for a 40% to 50% gross margin, the company said. One-third of Spotify listeners tune into podcasts, the company said, and podcasts account for 7% of all listening hours on the platform.

The company indicated that it would go after audiobooks as aggressively as it has pursued podcasts.

“We’re absolutely dead serious about this space,” Mr Ek said in the interview. “We think it’s bigger than most investors realise.” Nir Zicherman, Spotify’s head of audiobooks, said the category is growing 20 per cent a year, and that by introducing its 422 million music and podcast listeners to audiobooks, the company can dramatically expand the market.

Today, the global size of the book market is estimated at around $US140bn, according to market-research firm Grand View Research. That includes printed books, ebooks and audiobooks, with audiobooks having only a 6 per cent to 7 per cent market share. But Mr Ek said he believes audiobooks could drive $US70bn in annual revenue and margins over 40 per cent for the Spotify unit.

Consumer demand for audiobooks continues to be strong, according to the Audio Publishers Association, which said that audiobooks sales have shown double-digit gains for 10 years in a row. The trade group said nearly 74,000 audiobooks were published in 2021, up 6% from 2020.

Spotify last fall announced a deal to acquire audiobook platform Findaway. The deal, valued at around $US125m, is under review by the Justice Department ‘s antitrust division, according to people familiar with the matter. The Justice Department has been taking a more aggressive approach in scrutinising deal activity, particularly when there are potential concerns about industry consolidation. The Justice Department declined comment.

One publishing executive who asked not to be identified said Wednesday that he has spoken with Spotify in recent months but that the company appeared to be waiting for its acquisition of Findaway to close before disclosing specific plans.

Ohio-based Findaway is a global digital audiobook distributor. Its offerings include Findaway Voices, which caters to self-published authors by helping them create professional quality audiobooks that can be sold by all audiobook retailers.

During Wednesday’s presentation, Mr Zicherman called out that there is one major player in audiobooks, Amazon.com’s Audible.

“We know that doesn’t fuel innovation,” he said. “Spotify will be pushing the industry forward.” Audible didn’t immediately respond to a request for comment. Findaway likewise didn’t respond.

R&D chief Gustav Söderström said the company is building its capabilities to serve a better audiobook listening and recommendation experience. Audiobooks, with chapters, are consumed differently from episodes of a podcast or songs from an album.

Amazon’s Audible offers more than 700,000 audiobooks, podcasts, and other audio entertainment. The service sells audiobooks a la carte, but its primary revenue driver is its subscription offering, which includes a $US14.95 a month plan that allows users to select a single audiobook and a separate, less expensive subscription plan priced at $US7.95 a month.

Audible currently controls about 48 per cent of US audiobook unit sales, according to book-audience researcher Codex Group.

Audible has also emerged as a leading publisher of original audiobooks, where it competes with the country’s largest book publishers. Later this month, it will release comedian Sarah Cooper’s audiobook about returning to the post- Covid world titled “Let’s Catch Up Soon: How I Won Friends and Influenced People Against My Will.”

Mr Ek said the best companies in the world are vastly different from when they started after making their mark in one category.

“We’ve moved from a music discovery and playback service to a fully-fledged platform where artists and creators can create, engage and earn,” he said.

The Wall Street Journal