It closed yesterday on the NYSE at $112.14. That’s down 54% on where it was on the opening trading day of 2022 (January 3); it’s also less than a third of the size it was ($364.59) at its all-time peak in February last year.
The result: Over the past 14 months, Spotify has lost no less than $47.8 billion in market cap value (from $69.35 billion to $21.51 billion, according to YCharts).
And these numbers might be about to get worse.
Tomorrow (April 27), Spotify will announce its latest quarterly fiscal numbers, for Q1 a.k.a the first three months of 2022.
You don’t need MBW to tell you that – for any consumer-facing subscription business – this was a quarter rocked by macro events: from household inflation / cost of living prices shooting upwards, to Vladimir Putin’s widely condemned invasion of Ukraine.
Netflix knows exactly how damaging such factors can be to a company’s performance: Last week, the movie streamer announced that it had lost 200,000 net paid subscribers in Q1 around the globe.
The market’s reaction was unforgiving: Since it announced its Q1 results on April 20, Netflix has lost $65.4 billion – yup – in market cap value.
Now, it’s Spotify’s turn in the harsh glare of Quarterly Investor Land.
We don’t yet know the numbers Spotify is due to announce in less than 24 hours’ time. But we do know the pressure is on.
MBW is sadly not an investment bank (one day, friends, one day), and therefore we won’t have the ear of Spotify’s leading executives on the firm’s earnings call tomorrow morning.
But if we did, here are three tricky questions we’d definitely ask them:
1) What’s going to happen to Spotify’s subscriber base by the end of 2022?
Perhaps the most troubling element of Netflix’s Q1 results last week wasn’t the 200,000 net loss in global paid subscribers (although that’s primarily what sent its share price into a tailspin).
It was that Netflix is now projecting it will also lose a further 2.0 million paid subscribers in Q2.
That’s quite a collapse from the equivalent quarter in 2021, when Netflix added 1.5 million subscribers.
The section of Netflix’s shareholder letter in Q1 that admits the firm is now projecting a loss of 2 million subscribers in the second quarter
Back in early February, Spotify irked some influential figures on Wall Street by announcing that it would no longer be offering guidance beyond the next quarter in its fiscal calendar.
As a result, Spotify is now refusing to publish any projection for where its global subscriber number will end up at the close of 2022.
Instead, we just have this: Spotify’s latest guidance, issued in February (within its FY ’21 results), suggested that the firm’s subscriber base would close Q1 2022 at 183 million, up by 3 million on the 180 million subscribers it counted at the end of 2021.
Subsequent to Spotify issuing this number on February 2, however, Russia invaded Ukraine (February 24), while the news about cost of living rises for households just got scarier and scarier. (US inflation climbed to 8.5% in March, its highest point for over 40 years, according to the Consumer Price Index.)
Both of these factors were named by Netflix last week as contributing reasons for its disappointing Q1 2022 subscriber figure. (Other factors cited by Netflix included user password sharing, plus slow consumer adoption of connected TVs.)
Netflix’s decision to shutter its operation in Russia – and end all Russia-based subscriptions – proved decisive in its decline in Q1: Netflix’s told shareholders last week that it lost 700,000 net subscribers as a direct result of its actions in Russia; had this not happened, NFLX would have ended Q1 with quarter-on-quarter global growth of 500,000 subscribers.
For Spotify, events in Russia are likely to have an even more severe effect on subscriber reach.
In March, SPOT’s CFO, Paul Vogel, announced that the company expected around 1.5 million of its subscribers to “churn out” of Spotify’s numbers as a consequence of its decision to stop billing users in Russia.
Spotify, remember, said in early February that it expected to add 3 million net subscribers in Q1. So with those 1.5 million subs in Russia subsequently phased out, that figure has already been cut in half.
The big question now: with consumer prices escalating in various key global markets – not least in terms of energy prices – will Spotify see any further decline in its existing subscriber base, as people look to cut household costs?
And could this additional decline see Spotify ‘do a Netflix’ and end up with negative subscriber figures in Q1… or, indeed, in Q2?
A related question: When Spotify struck its “stock-swap” deal with Tencent Music in 2017, the agreement essentially cemented an agreement Spotify would not expand its service into China.
(This fact was confirmed by Spotify’s then-CFO, Barry McCarthy, in 2018, when he said: “Our mainland China strategy is our investment in Tencent Music… We have no plans to compete with them in China.”)
With global music subscribers now looking increasingly hard to attract for Spotify, was this really such a good idea?
2) why didn’t you raise prices properly when you had the chance? And What’s your upsell plan now your old one has been destroyed by Apple and Amazon?
As MBW covered last week, the savior for Spotify’s subscription churn rate (versus Netflix’s) might be price.
Spotify has been heavily criticized by some in the music industry for (by-and-large) refusing to budge up its $9.99 / £9.99 / €9.99 monthly charge for a standard individual subscription account in key markets, including the US, Germany and the UK.
That’s in contrast to Netflix, which has raised its prices a number of times in recent years: In the US, for example, a Standard HD subscription to the ‘flix will now cost you $15.99 per month.
As a result – combined with the fact that Spotify has such a vast catalog of music versus Netflix’s selectively-licensed TV/film offering – cash-strapped Spotify subscribers may be less likely to cancel their music service, than Netflix subs might be to cancel their TV/film service.
There is, though, another lens through which to view this narrative.
Back before the pandemic, in 2019, consumer conditions were considerably more favorable for a Spotify price rise. The inflation rate in the US that year, for example, was a very manageable 1.8%.
In Covid-hit 2020, that annual US inflation rate fell to just 1.2%. And in each of the first two months of 2021, it was less than 2%.
Spotify telling its customers that it was pushing up their monthly bill in any of these time periods would likely have been met with far less price sensitivity (a.k.a subscription cancellations) than it would today, when tightening-of-belts and “do we really need Spotify when YouTube is free?” conversations abound.
Does it now look like mis-management for Spotify to have resisted raising prices (beyond a handful of smaller markets) over the past five years? And if so, how much has it cost the company long-term?
There is one obvious reason why Spotify might have resisted raising its prices, of course: The potential stranglehold of Apple, Amazon, and YouTube on music streaming – and their never-ending cash piles.
Spotify knows that these giants’ subscription music services offer (pretty much) the exact same music catalog as its own platform.
At any point, if these other platforms held firm at $9.99-per-month (or less) as Spotify moved up its price – even a bit – then Daniel Ek and co. could risk pushing price-sensitive customers away to the competition.
“Since there’s hardly any exclusive music content anymore, [people] would just switch services if anyone (okay: Spotify) increased prices more than just a few cents…or they’d just go back to the good old piracy days.”
Writing on a LinkedIn thread the other day, Spotify’s Global Director of Growth, Sven Ahrens, summed up this argument thusly: “Since there’s hardly any exclusive music content anymore, [people] would just switch services if anyone (okay: Spotify) increased prices more than just a few cents…or they’d just go back to the good old piracy days.
“In any case, Apple and Amazon would watch from the sidelines and keep laughing at the minimal cost that the music business is in their overall ecosystem P&L.”
Spotify did have one elegant option to encourage its consumers to pay more, of course: an up-sell to a better quality of audio.
So it would surely have been pleasing to SPOT investors to hear the company announce last February at its Stream On event that Spotify HiFi – an HD audio launch – was on the way before the end of 2021.
Billie Eilish and Finneas were even roped in to explain why HD audio matters so much to artists.
On the topic of “Apple and Amazon watching from the sidelines and laughing”… lest we forget what happened next.
Within three months of Spotify’s announcement that Spotify HiFi was incoming, Apple and Amazon jointly crushed any hope SPOT investors might have had of the company launching a $12.99/$15.99 HiFi tier.
Amazon did so by folding its HD-quality music offering – previously only offered at a premium price – into its standard price ($9.99 per month) Music Unlimited service.
Surprise, surprise: In the end, Spotify HiFi never materialized, as promised, in 2021.
If Spotify had any plans to launch a premium-price HiFi tier, it now knew doing so would look miserly to its customers… when Apple and Amazon were giving away equivalent improved-audio features to their subscribers for nadda.
So the question for Spotify management tomorrow: If you’re too scared of competition from Apple and Amazon to raise your prices… and if Apple and Amazon have also destroyed your ability to launch an HD audio up-sell… then what is your plan to improve per-subscriber revenue in the months and years ahead?
3) Artists leaving Spotify is starting to become a real thing. Should investors be worried?
Remember back in January when Neil Young and Joni Mitchell yanked their music catalogs off Spotify in protest at what they perceived to be Covid vaccine misinformation on Joe Rogan’s podcast?
Yes, we agree, it does feel rather a long time ago. But it happened – and their music still ain’t on Spotify.
At the time, MBW suggested in a similar column to this one: “I suspect that Neil Young may be about to prove that a swathe of established artists – namely prestige catalog artists – really don’t need Spotify to survive anymore.”
And then it seemed like this would-be trend just… went away. It never snowballed. It was a failed prediction.
However, those who believe that it completely vanished haven’t quite been paying attention.
This live medley, which took place in mid-February, seemed almost universally applauded and enjoyed, and has to date racked up over 83 million (official) plays on YouTube alone.
It featured fantastic performances from each of Snoop Dogg, Dr. Dre, Mary J Blige, 50 Cent, Eminem, and Kendrick Lamar.
How did these artists capitalize on the rush of acclaim, attention, and nostalgia that this performance generated?
In the case of Snoop… he bought the rights to the Death Row brand, plus the rights to a bunch of the label’s most celebrated albums – including his own Doggystyle and Tha Doggfather, plus Dr Dre’s The Chronic. And then he unceremoniously yanked them off Spotify and various other streaming services.
Why?
As Snoop told the Drink Champs podcast earlier this month: “First thing I did [after acquiring the Death Row rights] was snatch all the music off those platforms traditionally known to people, because those platforms don’t pay.
“Those platforms get millions of millions of streams, and nobody gets paid other than the record labels.
“So what I wanted to do is snatch my music off, create a platform, something similar to Amazon, Netflix, Hulu. It’ll be a Death Row app. And the music, in the meantime, will live in the metaverse.”
“I want to create an avenue where I can show people how [they] don’t always have to go through the slave trade, but can create our own trade, where we’re engaging with our own fans that’s buying our music.”
Snoop Dogg on pulling his classic Death Row albums off Spotify and other services
Snoop then challenged the podcast’s host: “Go to Spotify right now and look up Death Row music, see how much you can find.”
The artist continued: “We don’t play. It’s called power; it’s called control.
“I did it on purpose… ‘cos no one in here can tell you what a stream adds up to. It’s a fraction of a penny… so you get a hundred million streams and you don’t make a million dollars. So what the f*ck is that?
“You want me to keep giving you my music, but somebody’s making the money, and it ain’t me. I can’t afford to keep doing that.
“I want to create an avenue where I can show people how [they] don’t always have to go through the slave trade, but can create our own trade, where we’re engaging with our own fans that’s buying our music… [and] making us money off the music that’s being traded and sold.”
“You want me to keep giving you my music, but somebody’s making the money, and it ain’t me. I can’t afford to keep doing that.”
Snoop Dogg
As MBW wrote in that Neil Young op/ed back in January: “In an open letter, Young [has] called on his fellow stars to move off the Spotify platform.
“If they do – whatever their motivations – it could have repercussions far beyond polemical disputes over Covid-19, and whether or not Spotify cares more about podcasting or music.
“It could, crack by crack, cause an earthquake at the center of Spotify’s business.”
Dr Dre currently has 20 million monthly listeners on Spotify. Snoop Dogg has 23 million.
