Spotify got it wrong? ‘No… and yes’, says its CEO

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Hello everyone, I’m here today while Ariel is free for the week. I’ve really been enjoying the new Rian Johnson/Natasha Lyonne show. Poker face, with its bizarre characters and unusually extended murder-of-the-week introductions. The first four episodes are out now and two of them have a fun audio link. (Look, I made this relevant to the newsletter!) There’s a big plot point revolving around a radio broadcast in one episode, and another features a true crime show called killer girlwhose host is played by a former podcaster (Y Edge alum). I have to respect your commitment to Podcast Voice.

Today, I’m diving into Spotify’s earnings and where the company is headed in 2023. But first, a quick announcement…

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It could have made a lot of headlines here, but this quote from Spotify’s earnings call felt like the moment that best sums up where the company is today.

Spotify reported its fourth quarter 2022 earnings this morning and the results were strong in a few key areas. Spotify became the first music streaming service to surpass 200 million paid subscribers (not that the others regularly share), and it’s closing in on 500 million monthly users, a goal it’s likely to hit this coming quarter. Ad and subscription revenue also increased double digits year-over-year.

But, at the same time, those numbers weren’t enough to prevent last week’s layoffs, in which Spotify cut 6 percent of its staff. There was a big reorganization and the company’s operating loss jumped to 231 million euros (about 250 million dollars); was 7 million euros for the quarter of the previous year. This all follows several years of heavy investment in recruiting, content, and acquisitions. (The Chartable and Podsights purchases were announced nearly a year ago.) And it comes just a few months after we saw Spotify cut some of its original content plans through… even more layoffs at Gimlet and Parcast.

So the question on many investors’ minds, and evidently one that Spotify CEO Daniel Ek knew was coming, was: were Spotify’s substantial investments in 2022 a mistake? And to that, Ek replied: “No… and yes”.

His argument for no: User growth has increased, new features have helped differentiate the app from the competition, and long-term investments are already having a short-term impact.

His argument for: “In hindsight, I probably got a little carried away and overinvested relative to the uncertainty we saw in the market.”

All of this context is to explain Spotify’s priorities going forward. Ek reiterated time and again that the company would refocus around “speed and efficiency.” The shakeup? Speed ​​and efficiency. The goal for 2023? Speed ​​and efficiency. Biggest thing holding Spotify back? Speed ​​and efficiency. (I counted 12 “efficiency” drops between Ek and CFO Paul Vogel alone in my notes Of the call.)

Now I don’t know exactly how this restructuring will allow for some dramatic efficiency improvements for Spotify, but Ek said it needs more help on top. Moving Alex Norstrom, Spotify’s chief commercial officer, and Gustav Söderström, Spotify’s chief product officer, to more centralized roles “will materially mean that we have more brains thinking about these things…to make decisions faster because, honestly, that’s one of the biggest obstacles. ”

However, it’s not just about making decisions faster. Ek was also clear that 2023 is more about worthwhile investments than new ones. There will be “more efficient spending” on podcasting, making it less of a drag on gross margins. The same goes for spending on benefits for Premium subscribers. “You’ll see incremental investment slow down and earnings hit on the 23rd,” Vogel said.

The TL; DR for 2023: After years of big investments, Spotify is finally being asked to show what it all amounts to, or at least that it can limit the losses until it all pays off.

There are a handful of other moments that I wanted to highlight from the earnings call.

Ek knows that Spotify’s audiobook product needs work:

• “There are two kinds of companies: There’s the company that waits until they get it perfect the first time…and then the company that launches something that they know needs work and quickly improves from there. We are definitely the last.”
• He promised “a lot of new things” in the audiobooks that will be released this year.
• For what it’s worth, “audiobook” appears twice on Spotify’s shareholder slide deck; “podcast” appears 18.

What Dawn Ostroff’s departure means for Spotify Original Content:

• “I don’t think from a strategy standpoint it would be that different,” Ek said.
• One thing that could have an impact though: Marketing, advertising and content will all be in a combined P&L under Norstrom. That’s meant to help Spotify “get resources where they’re needed most.”

Some changes to podcast spend are in the works:

• Investors (and Ek) mentioned multiple times that podcast investments had been a “drag” on gross margins.
• It is expected to decline this year, partly because the investments have already been made, but also due to a change in spending strategy for 2023.
• “We have been making a lot of investments. Some have been working a lot and you have to expect us to duplicate them, and some have not worked.”
• My reading: more batman unburied, minus Gimlet and Parcast. I bet Joe Rogan, whose contract reportedly runs through the end of 2023, is also on that “double down” list.

Pushkin fired “a handful of employees” last week, Ashley Carman reported in Bloomberg. The cuts came in response to falling revenues and a difficult economic environment. Pushkin’s spokeswoman, Nicole Morano, confirmed the cuts to hot pod; Morano said no shows were canceled as a result.

The layoffs follow similar industry-wide cuts: Spotify with around 600 features last week, Vox Media with several audio features the week before, NPR with the cancellation of its internships and fellowships, in addition to earlier cuts at Gimlet and Parcast. It’s clear that the entire industry is feeling the tightest ad market right now.

Today was a really great Spotify show. I’ll be back with you Thursday and Friday with SiriusXM earnings, some hiring news and anything else between now and then. And if you are not yet a subscriber, you can sign up here.