Spotify announced today that it beat expectations for third-quarter revenue and posted an operating profit of €54 million (about $60 million). This marks the third time in its history that the company has turned a profit, but one of those profits was the result of a tax windfall in 2018 that pushed it into the black.
Spotify’s shareholder letter outlines a variety of reasons for this turn to profitability — a faster new subscriber rate that has boosted the company to 248 million monthly active users (113 million of which are paying, Premium users), less money spent on promoting original content and artist marketing, and new tools for artists like sponsored recommendations that will expand Spotify’s “two-sided marketplace.”
All of this (along with a bunch of other decisions mentioned in the document like share repurchasing) means the company is tightening up its business while expanding in a variety of ways. It continues to bet heavy on podcasts, bought music production marketplace SoundBetter, and has marched forward into new territories like India.
In addition, this year Spotify introduced a new bundle plan in a handful of Latin American and European countries called Duo, which is a discounted subscription for two people. Like the family plan, Duo members must reside at the same address in order to take advantage of the deal. Basically, all these moves put Spotify on a trajectory that could attract more subscribers and cost less for consumers and the company.
But, while Spotify looks to be on a good track with keeping pace in registering sheer numbers of subscribers, it remains to be seen how this will all shake out for the songwriters whose music is on the platform. Discounts and cheaper Premium plans affect how much songwriters are paid because Spotify doesn’t pay royalties on a fixed rate per stream. Instead, it takes into account several factors like the country the song is streamed in, the number of active paying users as a percent of its total active users, and the relative Premium pricing in different countries. Here in the US, how much streaming platforms pay songwriters in mechanical royalties has been a contentious, ongoing battle that currently has no resolution.
To that end, the shareholder letter notes that “royalty costs were more favorable than expected due to product and revenue mix,” which likely points to the diversification of discounted plans, and expansions into emerging markets that don’t pay as much for Premium accounts. As a result, Spotify’s average revenue per user keeps going down. At the end of 2015, the company’s average revenue per user was €6.84 (~$7.59). Today, it now says that number is €4.67 (~$5.18). That’s great for consumers getting cheaper deals, but might not be great for songwriters’ royalty paychecks. The flip side is a potential makeup in consumption. Spotify’s ever-increasing global reach could grant artists increased exposure and more streams for songs that would not otherwise get listened to.