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Spotify Reports Surprising Quarterly Profit and Ventures into Audiobooks

Spotify Technology S.A. (NYSE: SPOT), the Swedish music streaming giant often dubbed the “Netflix of music,” stunned the market with its first quarterly profit in 18 months. After the robust earnings report, shares of the company rose by 10%, boosting its market value to $33.22 billion. For the quarter ending on September 30th:

  • Earnings per share came in at 33 euro cents, defying LSEG’s forecast of a 22 euro cents loss.
  • The company reported a revenue of 3.36 billion euros, slightly outpacing LSEG’s expectation of 3.33 billion euros.
  • Premium subscribers reached 226 million, surpassing the StreetAccount’s estimate of 224 million.

These figures were bolstered by strategic decisions, including price hikes in its subscription plans and stringent cost-cutting measures. CFO Paul Vogel commented on the positive impact of the pricing changes, noting negligible subscriber churn.

“We had a similar forecast for this quarter. We saw basically no real change on the churn side and we saw an acceleration of gross additions” of subscribers,” Vogel told CNBC’s “Squawk on the Street”.

Branching Out: Challenging Amazon’s Audiobook Dominance

After making a significant splash in the podcasting arena in 2015, Spotify has now ventured into audiobooks. In a move set to challenge Amazon’s Audible:

  • Spotify announced that it would offer subscribers access to over 150,000 audiobooks.
  • While UK and Australian subscribers already enjoy this feature, the US launch is slated for this winter.

The latest earnings figures suggest promising profitability for Spotify’s podcasting arm. Paul Vogel anticipates the podcasting segment to reach breakeven by the upcoming year.

Cost-Cutting Measures Contribute to Profit

Several strategic initiatives have been at the forefront of Spotify’s recent profitability:

  • Reduced marketing expenditures.
  • Lower personnel costs due to a 2% workforce cut, translating to around 200 layoffs. This downsizing was part of a structural overhaul in its podcasting division.
  • Advertising revenue witnessed a growth of 16% YoY and 11% QoQ, amounting to €447 million (approximately $473.4 million).

Shifting Focus in Podcasting

While Spotify previously championed content as king, it’s clear the company’s priorities are evolving. CEO Daniel Ek’s emphasis on “efficiency” highlighted the company’s focus on scalability rather than content.

One innovation underscoring this shift is Spotify’s AI-driven translation product. Ek sees AI as a revolutionary tool, not just for translations but also for podcast advertising. He illustrated the potential of generative AI in substantially reducing the creative costs involved in crafting audio ads.

Future of Licensing Deals: Big Names in Question

Given the company’s changing focus, questions arise about the fate of major licensing deals, especially as contracts with prominent names like Joe Rogan, Alex Cooper, and Dax Shepard near renewal. It remains to be seen how much Spotify and its investors are willing to invest in the podcasting industry’s biggest names.

Embracing an All-Purpose Audio Strategy

Spotify’s shift from being solely a music streaming service to embracing a comprehensive audio platform identity is evident. Its aggressive push into podcasts and now audiobooks showcases the company’s ambition to cater to a broader spectrum of audio enthusiasts. Not to mention, its foray into these domains also hints at Spotify’s intent to become a one-stop destination for all things audio.

Adapting to Market Dynamics

The music industry has witnessed profound changes over the past decade. In 2022, the Recording Industry Association of America disclosed that streaming services constituted a whopping 84% of recorded music revenues. Physical media trailed far behind at 11%, and falling digital downloads comprised a mere 3%. Spotify’s current strategies are clearly in alignment with these market trends. By focusing on streamlining costs, innovating with AI, and expanding its content base, the company is positioning itself to capitalize on these market shifts.

Conclusion: Spotify’s Evolving Landscape

Having solidified its position as the default platform in the music industry with partnerships with giants like Sony Group Corporation (NYSE: SONY) and Tencent Holdings Limited (OTC: TCEHY), Spotify is on a path of evolution. From its conquest of the global streaming market to its new pursuits in audiobooks and AI-driven tools, the company is not only diversifying its offerings but also redefining its identity in the digital audio realm.