Fourteen percent of Spotify users also listened to a podcast during the third quarter, while the number of podcast hours streamed on the platform grew 39% during the quarter, compared to a year ago. The numbers are giving executives increasing confidence in their decision to spend hundreds of millions of dollars to marry podcasting with streaming music.
“We made the strategic bet that music and podcasts are additive and users would enjoy having podcasts as part of their Spotify experience. We’re seeing evidence that this bet is paying off with signs of increased engagement and higher conversion rates from free to paid,” said CEO Daniel Ek. “We’re encouraged and we intend to continue to invest against this early success,” he told analysts on a conference call Monday.
Spotify said that of the 34.7 million podcast listeners it had during July, August and September, the U.S. market accounted for the largest number of podcast streams. But it also noted that Spotify had a larger share of listening in several European countries, and its share is higher and growing faster there than in the U.S. “Podcast engagement is clearly a growing global phenomenon,” the company said in a letter to shareholders.
The company did not release any specific numbers on how many podcast listeners are making the leap from ad-supported to Spotify subscribers, but it called the numbers “extraordinary” and “almost too good to be true.” The company signaled it isn’t entirely confident in the data it has, telling investors that it is working to “clean up” the numbers in order to better show causality between podcast listening and subscribing to the service, not just a correlation. “Still, our intuition is the data is more right than wrong, and that we're onto something special,” it said in the shareholder letter. The company expects to release more detailed information about the link between the podcast and music businesses when it reports fourth quarter figures early next year.
Spotify has said it would spend as much as $500 million to build a podcasting business and, after a series of deals, it potentially is still willing to invest another $100 million in the space. Asked whether the streamer is more focused on organic growth from what it has already acquired or whether more deal-making may be on horizon, Ek sidestepped the question.
“We’ve really just begun the overall integration between the companies. But you can see already from this quarter that we have announced a number of different originals, both from Parcast and Gimlet. We’re really pleased with the early results from those,” he said. “Obviously, over time, you should expect us to increase the number of original productions.”
Users And Revenue Rise
Spotify reported Monday that its total monthly active users grew 30% during the third quarter, compared to a year ago, totaling 248 million worldwide. It said listeners in North America made up 27% of that total with Southeast Asia remaining its fastest growing region. In August, Spotify launched a test of a new 90-day free trial offering and that helped push subscribers to its advertising-free tier up 31% to 113 million worldwide. The company said 30% of its subscribers are in North America. It forecasts it will have between 255 and 270 million monthly active users by year-end, including as many as 125 million subscribers.
“We continue to feel very good about our competitive position in the market,” Spotify said in the shareholder letter. The company estimates it is adding “roughly twice” as many subscribers per month as Apple and that it is also adding more users on an absolute basis than Amazon. “Our data also suggests that Amazon’s user base skews significantly more to ‘Ad-Supported’ than ‘Premium’, and that average engagement on our platform is approximately 3x,” it told shareholders.
Spotify reported third quarter revenue grew 28% to $1.9 billion. The majority of revenue came from its premium subscription sales, while ad-support revenue increased 20% to $188 million. The increase in ad revenue was less than had been expected, but Ek said that was largely from implementation and integration issues as Spotify moved off of Google’s Doubleclick Sales Manager in July to its own order management software. That led to about $10 million in “lost” orders. “There was demand for that product, but we were just simply unable to run it on the site. The ad business today is performing strongly,” said Ek.
No Podcast Ad Focus Yet
Spotify doesn’t break out podcast revenue but it said the segment outperformed expectations with “strong” year-over-year growth. But the company also noted podcast ad dollars are still a “relatively small” slice of its ad business, making up less than 10% of Spotify’s total ad revenues.
“We’re not yet focusing on monetization of podcasts,” said Ek. “The primary thing for us has been to drive up engagement.” He pointed out the company continues to see podcast listeners spending more time with the platform, including listening to more music on Spotify than non-podcast listeners. They’re also more likely to become subscribers. “We think those benefits in and of themselves is very valuable and that’s where we are focused,” said Ek. “Over time though, obviously we believed monetization of podcast remains a huge opportunity. That is something we will start looking at in 2020.”
CFO Change In January
With the transition to a public company now completed, Spotify also announced Monday that CFO Barry McCarthy, 66, plans to retire Jan. 15, 2020. He will be succeeded by Paul Vogel, 46, who is currently Spotify’s Vice President of Investor Relations. The two men have worked closely during the past three years and the company told analysts on a conference call that it expected no significant change in the company’s financial strategy under Vogel. “I’m confidentthat we will have a smooth CFO transition,” said Ek. Pending shareholder approval, it is expected that McCarthy will be re-appointed to the Spotify board, a role he held prior to joining the company as CFO in 2015.