Good morning and welcome everyone to Spotify’s 2022 Investor Day. I am Daniel Ek. And thank you all for joining in person and for those of you joining through our webcast.
We are excited to be here with you. And today, you will hear from me and a few members of our team about their own observations on the big bets we are making. And we will cover our progress, our investments and dig into how we evaluate success and how I believe that you should think about our business as investors.
I also want to talk about why I believe our future is a lot bigger, and even a lot more interesting than what you might have heard of previously.
Spotify went public in 2018 and four years into that journey, we have netted some notable accomplishments and 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. And frankly, we probably haven’t done a very good job of explaining it.
So as you assess our progress, let me start with what I am sure some of you are thinking. You think that Spotify is a great product with a great experience.
But some may also think that we’re a bad business or at least a business with bad margins for the foreseeable future. And others may even think that the audio market is limited and perhaps not that significant. So today we are going to say the quiet part out loud and directly address these assumptions.
To start, I believe we have a great product and importantly, our business is doing really well. But what’s even more, we’re really investing in building a fantastic, multi-sided platform that has all the ingredients to become one of the truly unique creative platforms in the world. And based on what we see, we are accelerating our moves to seize that opportunity in the near term. And the value creation opportunity is very high.
But nothing inspires confidence like a proven record of success—and success that can be effectively replicated over and over again with better and better results over time. So let’s take a quick look back at what we said we would do, and what we achieved.
So at our last investor meeting, we spoke about three core foundations that we believed would differentiate Spotify in the market—Ubiquity, Personalization and Freemium.
These are still the same foundations that drive our business today.
So let’s start with Ubiquity:
We shared this concept of ubiquity back in 2018—making Spotify available to anyone on any device. And back then, it was something that no one else was really embracing. At that time, we had about 250 partners.
But today, Spotify has more than 2,000 partners—with integrations spanning from wearables like watches to all facets of the connected life—including cars and even kitchen appliances. And this idea of creating a truly frictionless experience for users was really as much about engagement as it was about convenience.
Today, what’s also different is that listeners not only have access to all the world’s music, but also have access to more than more than 4 million podcasts and an increasing number of audiobooks. And just like in music, thanks to our early investments in ubiquity, users can listen anywhere and everywhere.
This is something our competitors haven’t prioritized because they don’t have the same approach. This is a key point of differentiation for Spotify.
Ubiquity has also proven to be a significant driver of new users to the platform, with 28% of all of our new registrations coming from these 2,000 partners. And that’s up from 14% in 2018.
People who use Spotify on more than one device represent some of our most engaged users, with lower churn and higher lifetime value, and that’s a metric we’ll spend more time on a bit later. Today, 89% of Spotify Premium subscribers use Spotify on multiple devices, up from 75% when we last spoke to you.
And further, this experience of innovating across different types of hardware with just about every player in the market makes us really well positioned for whatever comes next. And the more deeply that Spotify aligns with multiple devices, the more we also understand the listener, which leads us to our next foundation. Personalization.
So when you ask our listeners what they most admire about Spotify, more than 81% cite our personalization, and this is what we call discoverability.
Spotify listeners view this as the reason not only to sign up for the service, but also the reason to stay. And they repeatedly tell us that we are a service that “just gets them.”
And over time, our ability to find the right content for the right listener has improved significantly – and we are driving more discovery than ever before.
For further proof of the power of discoverability, just look at the success of our annual campaign – “Spotify Wrapped.” So for the last seven years, we’ve created a stop-sign cultural moment when we celebrate how our hundreds of millions of users listened to Spotify by giving them a completely personalized experience to share with the world.
And while the strength of our brand has been a key point of differentiation for the company, even we have been surprised by the longevity and virality of this campaign. In 2021 was our most successful Wrapped to date, with unprecedented engagement. It was the #1 worldwide trending topic on both Twitter and Tiktok, proving it’s really more of a cultural phenomenon than ever.
Our expertise in audio personalization is truly unmatched and we have already begun to apply it to podcasts.
And the final foundation that I want to outline for you in 2018 was Freemium—the combination of our free ad-supported tier and our premium subscription tier. And our strategy was to be available to all consumers on all platforms. So if you wanted to reach the most number of users in a very competitive world, what is the most aggressive strategy you could have? Well, how about lowering the price point to zero?
And this dual revenue stream approach, which now, by the way, is inspiring a lot of imitation across streaming, gave listeners a chance to try Spotify risk free. And at the same time, it enabled Spotify to build a successful flywheel with our free tier serving as a direct funnel to help us establish a large and growing subscriber base.
And there’s no question that this model has performed exceptionally well.
The low price of entry also helped propel our expansion into new markets and it also provides a critical safeguard to enable users to continue to have access to our platform—even in uncertain economic times. And it’s really this funnel that has propelled our revenue growth.
So as a reminder, when Spotify debuted publicly, we were available in 65 markets around the world. And thanks in large part to our unique approach, in just four years, we’ve almost tripled that number to 183 markets and territories. And this includes some of the biggest and most exciting audio markets in the world like India and South Korea and the entire continent of Africa. I am really excited for you to hear more about the impact of this expansion later today.
And at the same time, we’ve also invested in fighting for platform fairness, including more payment choices for users. And I think there’s no question that a fair and open platform enables better consumer experiences and it allows developers to innovate, grow and thrive.
And just last quarter, we struck a first-of-its-kind payment deal with Google. And while we can’t talk about the terms, I can say they are beneficial to Spotify and overall, there’s no question that that will lead to new subscriber growth opportunities on Android devices around the world.
And all of these efforts to enhance our experience have made Spotify more essential than ever. Our monthly subscriber churn rate has declined by nearly 30% over the last four years.
So it’s clear that investing in building the best product also leads to the strongest growth and healthiest business.
But we are at a financial event. So let’s get to it and talk about how this has translated into our financial goals that we set out.
So first, let’s go back four years. Looking at what the consensus estimates from analysts were, we’ve met or exceeded them. We’ve delivered compounded annual growth rates of 26% for monthly active users, 26% for subscribers and 26% for revenue on a currency adjusted basis.
From 2018 to today, our investments, really coupled with our clear focus on a core set of fundamentals, have paid off nicely for Spotify.
The lone outlier—that’s gross margin.
So there’s two possible explanations for this lower gross margin result. One might be that Spotify simply isn’t that good a business. And the other is that we are investing behind the strength of our business to make the business bigger, stronger and more resilient.
And I will share with you today that the music business is doing much better than you think. But we’re also investing in expanding what Spotify is.
Today, we want to share what we are building, what we call internally the Spotify Machine. And compared to 2018, I believe Spotify is in a much stronger position. We are larger and we have a much more differentiated proposition.
So let’s dive right into it.
In 2018, Spotify had three revenue generating models: we had subscriptions, we had ads and we had the beginnings of Marketplace. And at the time, these three were only being applied to our music vertical. But with a revenue split of 90/10, we were really just a music service.
Ads was more of an afterthought and Marketplace was really in its infancy with only €20 million in gross profit contribution.
But over the last four years, each of these three business models has evolved and grown. And today, they are much more robust in their ability to scale and drive revenue and gross profit.
So what happened then to our long term goals of 25-35% revenue growth and a gross margin target of 30-35%?
It really comes down to this. We saw the potential to be much more than just a music company. By leveraging what we learned—and all of the technology we built—in music—and across other verticals, our ambitions became much bigger.
And here’s where those investments have taken us: We are now the world’s largest audio streaming platform. But the prize we are going after is actually much greater and as a consequence, the total addressable market is gigantic.
And this is the Spotify we have been investing behind for the past few years. And this is the unrecognized narrative I referred to earlier.
And it’s a future that’s much more exciting for listeners, and artists, and songwriters, creators, shareholders, and advertisers. And it has more financial upside because of our ability to successfully combine and bundle multiple business models with multiple verticals into one user experience.
And it’s really under this one single experience where our model comes to life. It’s a model with multiple verticals that have very different characteristics and gross margins. And I can confidently say that this model, in its totality, is doing way better than you think.
So let’s talk through this evolution.
So as you all know, our company in 2018 was all about music. And when you isolate music, thanks to our Marketplace products, its gross margin has been steadily climbing. And we are performing much better than you probably suspect—roughly 28 and a half percent—which is significant progress in reaching our 30-35% long term goal.
What’s been dragging it down is our move into podcasting.
We saw such a significant opportunity to expand our platform and our audience, so we decided to go aggressively after podcasting. And this meant making a significant investment, which clearly has brought more listeners to Spotify and deepened the engagement, but it also has impacted our overall gross margin.
And while the podcast vertical is still largely in investment mode and not yet profitable, we believe it has a 40-50% gross margin potential.
So looking back, when we jumped into podcasting, there were really huge obstacles to overcome. We were a distant third behind the largest players in the industry and everyone said we wouldn’t be successful incorporating podcasts into what had traditionally been a music app.
But where others saw challenges, we saw an opportunity to turn a nascent business into one of the most attractive verticals in the media landscape. And we applied the same winning formula as we did to music.
We were able to build on the large and highly engaged global user base we established in music, giving creators scale from day one, and as a result, we dramatically expanded the entire podcast industry.
In addition to this, we made big acquisitions starting with Anchor and Gimlet, but then followed by others including The Ringer and Parcast. We’ve invested to bring some of the world’s most popular talent and most iconic franchises exclusively to our platform and we have continued to differentiate ourselves through our owned programming.
And we’re also enhancing the podcast discovery experience, which you will hear more about later in this program. And I think this ability to leverage state of the art machine learning technology to improve the discoverability of podcasts is really in its early innings of doing, for talk listening, what our personalization did for music listening.
And it works. We are now the number one platform that podcast listeners use the most in numerous markets around the world, including here the US. In just three years, we’ve not only become a leading platform for creators and listeners, but we’ve expanded the very format of podcasting itself.
And what’s even more, all of these investments have resulted in user growth, retention and increased engagement, with overall consumption hours reaching all time highs, quarter after quarter. And despite all of this, we still think there is incredible potential in this space.
So while we may have traded some near term gross margin at the expense of these investments, we really believe the impact they will continue to have on the Life Time Value of users is significant. And you will hear more about this concept of Life Time Value throughout the day.
This is the primary tool that I use to judge whether our strategy and investments are paying off. So we will talk a lot more about how we think about that and how we know that that drives our business.
So to sum this point up: What our successes in music and podcasting has clearly demonstrated is that we have built a powerful machine and solid infrastructure that enables us to go after new verticals.
And we are not waiting around.
So, several months ago, we announced the agreement to acquire Findaway, a global leader in audiobook distribution. And while we are still waiting for this deal to close, we believe that audiobooks, in their many different forms, will be a massive opportunity.
Today, the global size of the book market is estimated to be around $140 billion dollars. That’s inclusive of printed books, e-books and audiobooks, with audiobooks having only about a 6-7% market share.
But when you look at the most penetrated audiobook markets, it’s actually closer to 50% of the market. So call that an annual opportunity of $70 billion dollars for us to expand and eventually compete for. And just as we’ve done in podcasting, expect us to play to win. And, with one major player dominating the space, we believe we will expand the market, and create value for users and creators alike.
And this third vertical of audiobooks further builds on our ambitions to be the destination for creators. While it’s still early, we expect audiobooks to also have healthy margins, above 40% and be highly accretive to the business. And here again, we will apply the same differentiating foundations of ubiquity, personalization, and Freemium to attract both creators and users, and drive engagement.
But importantly, we aren’t planning to stop there. We see the opportunity to continue to imagine and explore new verticals across our platform—within audio, but also beyond. And for each vertical, we will develop a unique set of software, services, and products and business models that’s going to be tailored for that specific ecosystem. But again, all of these will live in one consumer experience.
And while we aren’t ready yet to share the verticals that will come next, I don’t think it’s hard to imagine how we will deploy this proven playbook against them, ultimately winning market share and innovating to expand the categories we go after.
So to put a fine point on it – this machine we are building really enables us to continue to bundle these verticals and business models into a single consumer experience, and that benefits users, creators, ad partners, developers and Spotify itself. And each vertical we add enriches the consumer and creator proposition and it allows us to increase our margin over time with our fourth foundation: Marketplace products. And this makes our model more and more accretive.
And this allows us to increase the LTV per user because we are upselling on our existing base. As long as the LTV per user is positive and our Gross Profit grows, we will have more ability to invest to further strengthen our market position. So our team will share more today on how we think about optimizing LTV and our plans to reach long-term profitability.
I’m not aware of any other company who has been successful in taking a multi-business model and multi-vertical approach within one user experience.
We’re much further along on this journey than you might think, and I have a tremendous amount of confidence in our ability to succeed!
So what does that success look like?
We will firmly cement Spotify as the home for some of the greatest artists, creators and educators in the world. And that gets us to that coveted position of being the world’s Creator platform. A place where artists, and writers, and labels, and publishers, studios and creators can come to manage their businesses.
And with these creators, comes more listeners. And this then allows us the chance to also become the preferred content platform for users. The place that they choose to listen, to learn and be inspired, educated and informed—all while establishing deeper connections with the artists and the creators they love.
Lastly, with the world’s top talent and hundreds of millions of engaged listeners, this gives Spotify the ability to attract the best brands and product partners.
And we will keep on evolving and keep on adding more verticals over time and expanding our business models to allow for more types of content and let artists and creators monetize them.
This is the Spotify Machine.
And this is the new definition of Spotify that I hope you will reorient yourselves around when you think about our business and build out your models.
To summarize, looking back at the best companies—think names you are all very familiar with—they are vastly different companies today than when they started. And they might have made their initial mark in one specific category, think books, search, desktop computers and they then redefined the way we think about those categories by expanding their potential through innovation.
And these companies didn’t stop there. They’ve continued to expand and build on these strong foundations, applying their learnings and leveraging their customer bases to move into new categories, ultimately broadening their value proposition. And as a result, they built more resilient businesses.
And this is the exact same journey we’re on.
We’ve moved from being a music discovery and playback service, to a fully-fledged platform where artists and creators can create, engage, and earn. A platform fueled by subscription, advertising and creator service models, applied to music, podcasts, audiobooks and more.
So today, it’s really all about giving you all a much deeper understanding of where we’ve been, where we are, and where we’re headed—and why.
And in the next couple of hours you will hear more details from our team about what this Spotify machine is capable of.
Next, Gustav Söderström, our Chief R&D Officer, will share more about our consumer experience and why we think we are uniquely positioned. He’s then going to hand it over to a few others who will take you through the verticals in much more detail so you can get a better understanding of each one—how they work and what they mean from a gross margin and revenue perspective.
And you’ll then hear from Alex Norström, our Chief Freemium Business Officer, who will walk you through how we plan to get to a billion users and he’ll also share additional details about the potential of our revenue generating model.
And lastly, Paul Vogel, our CFO, will talk you through how all of this translates into our long term financials.
And then I’ll be back with a few closing remarks and then we’ll be happy to take some of your questions.
So with that, please welcome Gustav to the stage.
So we’ve laid it all out for you. And it probably comes down to just one fundamental question for any investor—why should you bet on Spotify?
Well, we are running faster and we are more focused than anyone else in audio. And as you could hear, audio and long form content is a much bigger business than what many would have thought.
As a consequence, we are building a model that no other platform has dared to attempt. And this strategy to ensure our success, isn’t just based on just one thing, but literally hundreds if not thousands of things.
We think by embracing complexity and using machine learning and technology, that we are making a new type of company possible. A bigger and better company.
And we are shooting for the stars. Literally and figuratively. And the opportunity out there is massive. And I continue to believe it’s ours to win, and we will do so with the machine we are building.
So from everything I see, I believe that over the next decade, we will be a company that can generate $100 billion in revenue annually, and that we can achieve a 40% gross margin and a 20% operating margin.
And I know it seems challenging to put all this into a financial model, because frankly this type of company has never existed before, that is exactly my point. The businesses that never existed before are always the most valuable to have invested in over the long term.
And this is the Spotify machine: a unique, highly scalable machine that enables a unique platform.
And we are accelerating our move from a one-size-fits all, to a much more dynamic and open platform. A platform that will entertain, and inspire and educate more than one billion users around the world. And as the world’s creator platform, we will provide the infrastructure and resources that will enable more than 50 million artists and creators to grow and manage their own businesses, to monetize their work and effectively promote it.
And doing this well will make us more attractive as a home for top and emerging talent. And in turn, these services will also improve the gross margin across our portfolio.
So with every innovation and enhancement, we will turn more listeners into super fans, giving a voice to more types of creators and offering our users multiple ways to interact and engage with the talent that they love.
Thank you so much for taking the time to join us today. And now I will invite Paul back up to the stage again and we will take some questions from the audience.
We would like to caution you that certain of the above statements represent “forward-looking statements” as defined in Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended. The words “will,” “expect,” “believe”, and similar words are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, those relating to projections or estimates about the future performance of our company. Such forward-looking statements involve significant risks, uncertainties and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections, including our ability to attract prospective users, retain existing users, and monetize our products and services, competition for users, user listening time, and advertisers, risks associated with our international operations and our ability to manage our growth, and other risks as set forth in our filings with the United States Securities and Exchange Commission. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date hereof.
Non-IFRS Financial Measures
The discussion above includes a non-IFRS financial measure that should not be construed as alternatives to financial measures determined in accordance with International Financial Reporting Standards, or IFRS. See the appendix to our CFO’s Investor Day presentation available on our website for a reconciliation of this non-IFRS financial measure to the most closely comparable IFRS measure.