Spotify Car Thing 220

Spotify is killing off its Car Thing listening device targeting drivers. Spotify also says it had 433 million total monthly active users during the second quarter and at the end of Q2 it had 4.4 million podcasts on the platform. Spotify reported second quarter revenue of $2.9 billion but it remained in the red. Here are seven takeaways from Spotify’s latest update to investors –

Car Thing Killed Off

Spotify’s foray into tech hardware has come to an end. The company has decided to end production and sales of its Car Thing device which plugs into a car’s sound system offering a digital listening option for cars that do not have an infotainment system. 

Car Thing was released on a limited basis in April 2021 after nearly two years of development. It beta-launched last October before becoming widely available in February. Spotify has not released any sales figures for Car Thing, which retailed for $89.99. 

“We tested a number of price points, and we frankly haven’t seen the value at the higher prices that would make the current product financially viable,” said CFO Paul Vogel. He said the decision to stop manufacturing Car Thing was also tied to inflation of component costs coupled with the now-required lead time needed to order parts. Vogel said the result was it “significantly altered” the risk-reward of investing into further product development. The move resulted in a one-time write-down of $31 million tied to closing down the Car Thing business.

Record Q2 Growth In User Numbers

Spotify says its monthly active users grew 19% year over year during the second quarter to 433 million. “We had another very strong quarter in Q2, building on the momentum and success we’ve now seen for four consecutive quarters,” said CEO Daniel Ek. The gain of 19 million – about five million more than forecast -- was its largest ever Q2 growth rate which it says came largely outside the U.S. market. India, Indonesia and the Philippines are where its best growth numbers came from as North America continues to make up a smaller share of the Spotify listener base. The region now made up 22% of Spotify’s users during second quarter compared to a 31% share four years ago. 

Premium subscribers increased 14% from a year ago to 188 million aided by promotional pricing which lasted five weeks rather than the typical four, and sales of household plans. That was a million more than what Spotify executives had previously told investors to expect during the quarter.

Podcast User Numbers Rising

Despite Spotify releasing a 36-page report about Q2, podcast numbers were scarce. Spotify did say it had 4.4 million podcasts on the platform at the end of second quarter and that the number of monthly active users who listened to a podcast grew double-digits from a year ago. It did not say what that number is, however. Spotify also said its per user podcast consumption rates continued to rise, but it also did not release that number.

“We’ve seen strong growth on the podcasting side,” said Vogel. “We’re seeing increased numbers of advertisers and increased demand. We think it’s becoming a core buy for people – it’s always tough to know – but we’re really encouraged with the growth trajectory.”

Beyond just podcasting, Ek said that audio advertising stands to gain share as marketers tap into it to reach consumers on the go. “It’s quite obvious that audio ads are going to be a very dominant driver for reaching people while they’re in the car,” he said. Ek also thinks the trend of always having earbuds in will help the audio medium. “There’s a huge opportunity in local advertising too,” he said. “I believe audio is the primary beneficiary of that.”

Ad Dollars Grow Faster Than Subscriber Revenue

Spotify’s second quarter revenue was $2.9 billion, which was a 23% increase from a year ago. Subscriber revenue still makes up the vast majority of its revenue – it increased 22% to $2.5 billion during the quarter – but advertising sales grew at a faster rate. Spotify’s ad revenue totaled $366 million during second quarter, a 31% increase from last year. Advertising also reached an all-time high as percent of revenue, making up 13% of the company’s total revenue during Q2.

Losses for the quarter totaled $196 million.

Spotify says its music business had double-digit growth year over year, led by double-digit growth in CPMs. Podcast revenue grew in the double-digit range, led by the Spotify

Audience Network where sold impressions grew triple-digits and CPMs grew by double-digits.

Vogel said they hope to grow their ad business by increasing user engagement. “We’re constantly improving and testing products in the free offering and you’ll continue to see more innovation and more usage,” he said. “We think the best way to increase impressions is to have people come back more often.”

Advertising loads may also grow. “We think there’s probably some room to expand it over time,” Vogel told analysts. He said it may also vary person-to-person with more ads served to some users at different times.

‘Substantial Uncertainty’ About Global Economy

Facing continued questions about the global economy, Spotify says it is taking a closer look at marketing activity facing what it calls “substantial uncertainty” about the coming months. It confirmed plans first announced last month that it will cut its planned hiring during the second half of the year by 25% as it monitors macroeconomic conditions. At the end of Q2, its workforce consisted of 9,058 full-time employees worldwide. Spotify also notes its operating expenses jumped 38% during second quarter, in part from the recent acquisitions such as Podsights, Chartable and Whooshkaa, as well as its decision to expand its global sales team to tap into the international ads monetization potential.

Ek told analysts that he believes “only the paranoid survive” and said Spotify is preparing as though the economy will get worse before it gets better. 

Users Growing; Ad Market Softening 

The revenue outlook may be cloudy, by Spotify executives said the picture is clear on users. It expects to add 17 million new monthly active users during the third quarter, which would bring its tally to 450 million worldwide. 

“To date, we have seen no real impact on our user or subscriber outlook,” said Vogel. Spotify does not release user churn figures, but he said they continue to move lower. “For advertising, we did see some softening in trends over the last few weeks of June,” Vogel said. “But we still expect solid growth in Q3 albeit slower than we might have forecast earlier in the year.”

Spotify forecasts revenue will top $3 billion while forecasting a $221 million operating loss for the quarter as profit margins continue to be weighed down by its investment in non-music programming.

“While the macroenvironment continues to present uncertainty, we’re currently not seeing any material impact for users or subscriber growth,” Ek said. “My confidence in our business and the unique Spotify machine that we’re building is really unwavering. Audio is growing, and Spotify with it.” He still thinks Spotify will be able to get to one billion worldwide users by 2030.

Audiobooks Rollout Begins Shortly 

Following Spotify’s acquisition of Findaway in November the streaming expects to expand its audiobook business in the coming months. “You should see us quite imminently get something to market,” said Ek, who told analysts the first result of that integration could be released in the coming weeks. It will then expand on that during the next year. “You’ll probably see more of the full extent of the audiobook efforts in the first half of 2023 and in the second half you’ll start to see some of our work in some of the other categories,” he said.