how does Spotify make money
Stock Market Analysis

Is Spotify About To Open A Brand New Revenue Stream?

Industry leader Spotify recently reached 144 million paid subscribers, and its disappointing revenue might now be resolved.

Spotify (NYSE: SPOT) is an industry leader, and according to its Q3 earnings report last week, it boasts up to 144 million paying users across the globe, a jump of 27% year-over-year (YoY), while total monthly active users (MAUs) hit a record 320 million in Q3, 2020. That was where the smiles stopped for investors though:

Spotify lost the equivalent of $0.68 cents a share on sales of $2.31 billion in Q3. Analysts had expected it to lose $0.61 a share on sales of $2.36 billion. In the same quarter last year, its earnings were $0.40 cents a share on sales of $1.93 billion.

Spotify’s revenue

The streaming giant generates revenue in two main ways;

Firstly, if users want to listen to tunes on the platform for free, then they have to listen to advertisements while using the service. Advertisers pay Spotify to use the platform to showcase their product, which in turn funds the royalties the company pays artists. However, Spotify’s advertising revenue was just 7.8% of its total revenue in Q3 2020, or $218 million.

Secondly, and much more importantly, Spotify makes money from paid subscriptions, which allows users to access unlimited music across the platform and devices. Monthly subscriptions range from $4.99 for students, $9.99 for standard accounts, and $14.99 for family accounts. The company’s premium revenue was up 14.6% YoY at around $2.11 billion.

It may have missed recent revenue targets, but this could be about to change, for 2 reasons.

1. Spotify acquires Megaphone

One area in which Spotify has seen massive growth is in podcasts, which saw audience usage up 20% YoY, helped by the millions it has spent on acquiring exclusive rights to content from Joe Rogan, the Obamas, and more. However, the once ad-free safe-space for non-paying users may soon be no more…

The company announced yesterday that it has entered into an agreement to acquire ad tech company Megaphone for $235 million, stating:

“With this acquisition, Spotify continues to deliver against its goal to become the world’s leading audio platform and focus on growing audio monetization across the industry. The acquisition follows Spotify’s launch of Streaming Ad Insertion, an innovative podcast ad technology that delivers the intimacy and quality of traditional podcast ads with the precision and transparency of modern-day digital marketing.”

Megaphone creates tech for podcast publishers and advertisers seeking targeted slots on podcasts, including podcast hosting, distribution, and ad-insertion tools, and does work for the likes of ESPN and the Wall Street Journal. Advertisers can use the company’s technology to find audiences across the podcast content of those publishers.

The deal should give advertisers more scale in terms of who they can reach on Spotify and let podcast publishers opt-in to have their shows monetized, and allowing Spotify to open up a wave of new revenue in the ever-growing podcast space.

2. Is Spotify’s subscription price going up?

At last month’s Q3 earnings call, CEO and co-founder Daniel Ek hinted at a possible price increase but cited the ongoing global pandemic as a reason why that might not happen in the immediate future:

“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,” 

Though users may be annoyed to hear such talk, investors will likely be delighted, as a similar strategy of boosting subscription costs has worked out very well for fellow over-the-top (OTT) service leader, Netflix, in the past.

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Jamie Adams
Jamie Adams
Jamie is the Content Editor here at MyWallSt. His favorite stock is Apple, which is also the first stock he ever bought. Jamie is not only a big fan of its products, but he believes that the tech giant has a whole lot more to give the world, and hasn't even scraped the surface of its potential.