Spotify continued to grow subscribers and content in the third quarter of 2020 but came up short on sales and earnings, driving its stock down in early trading on Thursday.
CEO and cofounder Daniel Ek also hinted at a price increase during the call, but cited the ongoing global pandemic as a reason why that might not happen in the immediate future.
The streaming giant lost the equivalent of 68 cents a share on sales of $2.31 billion in the most recent quarter. Analysts expected it to lose 61 cents a share on sales of $2.36 billion; in the same quarter last year, its Spotify earnings were 40 cents a share on sales of $1.93 billion.
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However, it reported a gain of 6 million subscribers, from 138 million in the second quarter and 130 million in the first, and 320 million total monthly active users, up 29% year over year. Ek pointed out that its advertising revenue came in better than expected, returning to growth after a significant dip in the second quarter. The company also launched in Russia and 12 surrounding territories.
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According to its guidance, Spotify expects to lose $84 million on sales of $2.46 billion in the fourth quarter.
Ek mentioned the possible price increase while discussing growth potential. “If engagement and/or our listener value per hour is high, it gives us the ability to selectively increase our price. Here’s how I think about it. While our primary focus remains user growth, based on our maturity in certain markets and the increasing value we provide to our subscribers — including enhanced content — we’ve seen engagement and more specifically value per hour grow substantially over the past few years,” he said.
“initial results indicate that in markets where we’ve tested increased prices, our users believe that Spotify remains an exceptional value and they have shown a willingness to pay more for our service. So as a result, you will see us further expand price increases, especially in places where we’re well-positioned against the competition and our value per hour is high.”
He noted, “I would, however, throw in one big caveat, we will continue to tread carefully in these COVID times to ensure we don’t get ahead of the market.
Ek pointed to the company’s areas of growth during the report, saying that it has paid out more than €1 billion to rights holders in every quarter in 2020, “and I’m proud to say that we’re on track to pay out another €1 billion-plus in Q4.”
He also said that podcasts increased over 20% and music releases are up 13% over the prior quarter. “We saw a strong positive reaction when Michelle Obama’s and Joe Rogan’s podcasts launched during the quarter, and we’re seeing great success with our Originals and Exclusives, which now account for 19% of all podcast listening on the platform.
“The size of our total catalog increased significantly, and our advertising business returned to growth,” he continued. “We also beat expectations in our newest markets where we are seeing growth continue to accelerate. This affirms our belief that there is significant pent up demand for Spotify around the world — even in places where our service has yet to launch. These results illustrate the power of our business despite COVID and other related challenges across the globe.”
He repeatedly used a flywheel (a heavy wheel for opposing and moderating by its inertia any fluctuation of speed in the machinery with which it revolves, per Merriam Webster) as a metaphor. “We know that when we reach more listeners, we’re able to attract more creators to our platform. So with more reach, comes more content and with more content, especially content unique to Spotify, there comes more opportunities to monetize. That interplay is super important because it is the foundation of our flywheel. And that flywheel is continuing to accelerate faster with every new user and creator that comes on our platform.
“Bottom line,” he concluded, “as I look at the increase specifically in reach that we are seeing this quarter, it gives me confidence in our ability to monetize that growth. So to fuel the flywheel, you will see us continue to invest in enhancing our user experience, furthering market expansion, and developing and acquiring unique content from both new and established creators.”