Spotify Is Still Struggling to Monetize The Music Streaming Business Despite Playing The Right Notes

On Tuesday, Spotify Technology S.A. SPOT reported a record first-quarter user growth but a soft ad business resulted in lower-than-expected revenue.

Record User Growth

According to CEO Daniel EK, this was Spotify’s second largest quarter of user growth since inception, with the result exceeding its own expectation by 15 million. As of March 31st, Spotify’s userbase soared to 515 million as it rose 22 percent since last year, and 5 percent since last quarter, leaving behind Apple Inc AAPL whose Apple Music is expected to reach 110 million subscribers by mid-decade. However, Apple does not announce its user numbers regularly, so this is an estimate from JP Morgan’s report and Apple does not comment on estimates. Apple officially issued numbers for its music business back in 2019 when Apple Music exceeded 60 million subscribers. Among those 515 million monthly users, Spotify has 210 million paid subscribers as they increased 15% YoY, leaving its competitors far behind. Although Google's YouTube had 32 billion monthly users at the end of last year, there’s no direct comparison as Google-owned platform hosts much more than music being primarily a user video streaming service. It’s been years since competitors launched their music streaming services, including Amazon.com AMZN and Tencent Holdings Limited TCEHY, but Spotify remains at the top when it comes to most paid subscribers in its field. Even the e-commerce titan remained in the shadows with its Amazon Music that is included in Amazon’s main subscription. With its massive library that counts more than 100 million songs and podcasts, along with giving users the ability to add their own music, Amazon serves as an example that Spotify’s magic remains unparallel in the streaming music field. 

First Quarter Figures Show That User Growth Comes At a Cost

Unfortunately, despite the above success, Spotify still posted net loss of €225 million for the first three months of the year, which translates to about $248 million. Last year, it made a net income of €131 million which translates to about $145 million during the comparable quarter. But still, this is an improvement from the previous quarter, fourth quarter of 2022, when it posted a net loss of €270 million which translates to about $298 million. Margins came in at 25.2%, topping estimates of 24.9%.

A Cautious, But Optimistic Outlook

Spotify’s management aims to become more efficient this year and therefore, stricter with spending which is to be reflected sequential margin improvements. Ek reiterated that gross margins are expected in the range 30% to 35% over the long term. As AI comes into the picture to disrupt the music industry as well, Ek’s sentiment is both cool and scary as the company cautiously but optimistically, continues further scaling its ads and podcasting business. Unlike Apple Music and Google’s YouTube premium, Spotify decided not to join price hikes until the timing is right- which will be at some point later in the year. 

Spotify Seems To Be Playing The Right Tones, But Business-Wise, It Still Has A Long Way To Go

This is the music streaming service’s strongest quarter since going public five years ago. The boost in subscriber growth and the fact subscriber’s base passed the half billion mark came at a good time after fourth quarter losses and layoffs at the beginning of the year that trimmed its workforce by 6%. Prioritizing user growth comes at a cost that Spotify is clearly willing to pay. Unfortunately, execution of monetization of its business remains murky in this weakening macroeconomic climate as ad softness has hurt revenue. But, shares went up 5% upon the report so the market and investors seem to be sharing Ek’s positive sentiment of Spotify’s prospects.