Q2 2020 Spotify Technology SA Earnings Call

On the method one with Crazy, Yes, we got to the rid of safaris, New hairline, we went into space with clean B and unpack the chemistry in our skincare routine plus we got to know our listeners we love hearing from you you make this show what it is and we can't wait to make more lab just for you.

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Hi, Dan I have an announcement the pod tap is moving to spot of five I signed a multi year licensing agreement with spotted by that will start on September onest, starting on September onest. The entire J.R.E. library will be available on spot of fight as well as all the other platforms than somewhere around the end of the year It will.

Become exclusive to spot about including the video version of the podcast. It will be the exact same show I'm not going to be an employee of Spotify. We're gonna be work on the same crew doing the exact same show the only difference will be it will now be available on the largest audio platform in the world. We're very excited to begin this.

New chapter of the J R E and I hope you there when we crossed over thanks, Hey, everyone. I just want to talk to you real quick about something I've been working on lately, it's called the Michelle Obama podcast I can't wait for you to list.

Ladies and gentlemen, thank you for standing by and welcome to the spot for Q2 2020 earnings call.

At this time, all participants are in listen only mode.

Or any further assistance. Please press star zero. Thank you I would now like and the conference over to your speaker for today, All Vogel Chief Financial Officer. Please go ahead.

Great. Thank you and welcome to Spotify second quarter 2020 earnings Conference call I Hope everyone is continuing to stay safe.

As is the case with just about everyone. Our team again, we'll be hosting this call entirely remotely our CEO Daniel is participating for Stockholm, and I might I am at my home office in New Jersey.

This morning, I'm pleased to introduce our new head of Investor Relations Bryan Goldberg, We just recently joined our team I'm sure. Many of you recognize his name from his time at Bank of America.

Also during the IR team as Lauren Katzin was previously on our licensing finance team within after today.

Excited to have both of them onboard.

Marker, Mike or Scioli, who had been both part of our IR team and escalate teams over the past few years is transitioning into an expanded role with an f. today, but we will be on hand to answer questions post this quarter and for the next few weeks and with that I'll turn it over to Brian.

Thanks, Paul turning out of the call, we'll start with opening comments from Daniel after their remarks, Daniel and Paul will be happy to answer your questions like last quarter, we'll be taking questions exclusively through slider questions can be submitted by going to slow dotcom SL I'd dot com and using the code hashtag spotlight earnings.

Analysts can ask questions directly into slide on all participants can then boat on the questions. They find the most relevant if for some reason you don't have access to slide all you can email investor relations that IR at spot if I dotcom and we'll add and your question before we begin let me quickly cover the safe Harbor during the call we'll be taking certain forward looking statements, including projections are estimates about that.

Future performance of the company. These statements are based upon current expectations and assumptions that are subject to risks and uncertainties actual results could materially differ because of factors discussed on todays call in our letter to shareholders and IND filings with the Securities and Exchange Commission. During this call will also refer to certain non IRS financial measures reconciliation.

Between our IRS, a non IRS financial measures can be found in my letter to shareholders in the financial section of our Investor Relations page and also furnished yesterday on form 6K, and with that I will turn it over to Daniel.

All right Hey, everyone and thank you so much for joining us like all of you Spotify continues to navigate issues related to cope with 19 and racial injustice, both of which are reshaping our industry and society and significant ways.

Given the role we play in culture, we believe spot if I had a responsibility to use our platform to help build a more equitable future.

For us that means focusing on what is core to our business amplifying the music and perspectives on block creators and taking every opportunity to connect them with current and future fans.

We're also taking a hard look at what we can do to build a more equitable workplace and we have committed to increasing representation of black employees at all levels within spotlight. When we do this right. It's good for employees good for creators and good for shareholders.

Now turning to the quarter, we're pleased with our results, which met or exceeded our guidance by almost every metric after making adjustments to help us whether the pandemic in Q1 consumption returned to normal levels this quarter.

Finally active users increased to 209 9 million and subscribers grew 238 million both exceeding our expectations.

Advertising revenue, which took a significant hit in Q1 improve notably throughout the quarter and we feel good about our momentum as we enter Q3.

We also continue to invest in our audio first strategy signing exclusive deals with some of the world's most well known creators and most powerful voices.

Earlier today, we lost the first episode of the Michelle Obama podcast added features a conversation with a very special guest President Barack Obama.

Our podcast catalog now has over 1.5 million shows 50% of which launched in 2020.

And while it's been gratifying to see so much enthusiasm for these announcements throughout the quarter. It's important to remember that with many of our newest shows we're still early in the progress in some cases like DC comics, we need to produce the content and in others like Joe Rogan. It has yet to launch on our platform, there's still work to do.

In much more to come.

On the music fronts, we enter a new multiyear global license agreement with unit Versum user group that reflects our shared commitment in growing the industry and supporting artist at all stages of their careers.

Universal Music group will leverage spot price marketplace tools for both frontline and catalog artist to connect them with fans grow their audiences and better monetize their fan base.

And we'll also work together to develop new product and tools to drive discovery and engagement at a scale that as never before existed.

Fortify has now surpassed 60 million tracks globally, giving artist even more opportunities to connect with their biggest fans and just last week Taylor Swift surprise release of our new album folklore broke the number one first day record for a female artist album and Spotify history.

She also became the most streamed artist on spot of fire on any day. This year with nearly 98 million streams on July 24th alone.

Finally, I would like to address our business overall investors often ask me what our secret sauce is expecting that theres, some sort of silver bullet to our growth. The reality is that at a platform of our scale. It's really about one thing instead, it's about setting up a culture of experimentation and being willing willing to.

Double down on opportunities if we believe they have the potential to enhance the user experience and change the slope of our growth curve.

And I want to share two recent examples that I think exemplifies this points.

Over the last two years, we've tripled the number of experiments from a few hundred two thousands of AB tests.

Some of these experiments yield nothing more than a few key learnings while others have shown great promise.

In one of our recent podcasts experiments, we increased listening among the test group by 33% and that's just one example of many and when we see results like this you should expect us to invest even more and we know that no. One experiment is going to materially impact us even in the next year, it's the thousands of low.

The things that we're doing which will gradually add up over time.

The second example, I want to point as new market launches just this month, we launched in Russia and 12 other European countries and our first week in Russia was huge even bigger than our first week in India. So.

If we do this rights you have the opportunity to reached 250 million more listeners in these markets over the long term.

And we're now operating in nearly every country across Europe, but theres still a lot of pent up demand for Spotify in markets around the world, which is why we have plans for further expansion globally.

And what these two recent examples underscore is the staying focused on the long term growth while managing for speed of reiteration near term is what will drive future growth and using that lens and with examples I gave I think it it's apparent that we still have many more improvements left to make and that's also why we.

Keep investing and with that I'll turn it back to Brian.

Thanks, Daniel again, if you have any questions. Please go to slide O'dowd Com hash tag Spotify earnings will read the questions in the order they come in with respect to help people vote up their preference for questions.

And the first question today is going to come from Eric Sheridan.

Can you frame the impacts you expect long term in your business from greater podcast content consumption lower churn greater gross adds share of streamed audio increased long term AD supported gross margins.

Well, it's really about taking a step back and I think what we're seeing heres the beginning of a flywheel.

As we talked about before Spotify is now going after all of audio and that's obviously a significantly larger markets than just the music industry and then on itself.

And so what we're seeing is that by every piece of content that we're adding on to service that were successful in serving to consumer we're creating more engagement that engagement in turn leads to obviously lower churn.

But more importantly, now that we have almost 300 million monthly active users on the platform. These users are also when they find great shows sharing that on social media and other forms to other consumers as well driving this virtuous cycle, where more and more people are learning about why.

What's going on on spot of Fireeye, and more and more creators and want to be on spot of five creating this purchase flywheel. So with the expansion of podcasts, we're definitely seeing more of that and it's happening at a faster clip than what we've seen before and we're very encouraged by it.

And then from a numbers perspective, I would say everything you mentioned is what we're looking at to devalue each piece of content. So it. It is the combination of what you're doing for our user growth was it doing to improve retention and lower churn and then also how can we grow advertising on top of the into when we look at pieces of content and we look at how much we need to add.

And where we're spending it's really about the LTV of the overall spend on content and how it impacts holistically the entire business for user growth to subscriber grossed advertising growth.

Okay. Great next question from Rich Greenfield what percentage of AD revenue is now directly tied to podcasting trying to understand what AD supported music revenues were down year over year relative to 21% overall AD declined in the quarter as podcasting growth and acquisition first time benefits, presumably benefited the 21% decline.

Yes, I would say a couple of things in this one is.

You are passing is still reasonably small relative to the overall amount of advertising that being said it did outperform in the quarter and we felt there was one of the stronger areas of growth which is great.

Hopefully everyone has seen the deal we struck with omnicom at the last couple of weeks, which is a $20 million deal to invest in podcast advertising moving forward, which we're really.

Excited about the other thing about podcasting, it's having a couple affects one is overall podcast.

Growth is there and so we finished this quarter at 21% of EMEA, you, which is up from 19%.

Podcast consumption is still up over 100% and we're seeing advertisers really wanting to invest in podcasting as a media. The other thing. It's that's benefiting us as we're starting to sell more media deals across all of our products and so we're seeing nice growth from deals that incorporate both music advertising and podcasting advertising in the deals.

And so in general podcasts was strong in the quarter, it's still reasonably small but growing very nicely.

Okay next question from Eric Sheridan can you update investors on your views on acquiring licensing podcasting content, what will drive either approach any update on the level of investments in podcasts and how critical is putting podcast content exclusively on your own platform against your long term goals for the business model.

Yeah, I mean, we are really pursuing sort of all strategies in tandem it's really all about creating the best overall user experience as I talked about before with this virtual cycle.

Now that said the exclusivity is a key component of that strategy, we want to create more and more original programming that only exist on Spotify and I think this quarter you started seeing.

Some of those announcements come in a big way and obviously, that's something we're pursuing with graders, but but it's important that we are in open platform and we're seeing more and more content as I mentioned in my opening statements over a million and a half.

Shows are now available on Spotify over and above 50% of them was created in 2020, it's impossible. Even if we wanted to have all of that content exclusively on our platform. So it's going to be a mix of all of those things going forward.

Okay next question from Richard Kramer with the UN GE deal has spot secured any from commercial commitment to pay for two sided marketplace services.

So as we talked about before were very very excited about marketplace and the momentum it's having we're seeing lots and lots of big artists come in we saw John Legend, we saw the 1975 Lady Gaga among many others adopted tools this quarter.

So we're very excited about it.

And with the Universal Music group announcement, there really now leading in because of that.

Really early excitement in the marketplace and I want to adopt more tools I want to go deeper because they're seeing the potential impact that it can have on their business.

Next question from Eric Sheridan.

Can you give us a sense of how the AD market evolved over the recent quarter in terms of AD budgets pricing and how you see those dynamics evolving against the current macro backdrop can you provide color on any variability by industry verticals geographies or type of ad budget.

Yes, so the advertising market. It definitely started the quarter started off slow we mentioned.

Coming out of Q1 that the last three weeks of Q1, we're we're pretty we can sell some some big declines in that continued into April and May we were actually running behind on the ads business for April and May probably down about 25%.

On those two months and then we really had a nice pickup in June June was only down about 10% on the advertising side.

In terms of geography is unlocking to get into specifics, but weve a much higher percentage of our revenue on the outside comes from North America, then on the premium side. So.

In North America goes tends to be how our overall business goes.

And then in terms of product the direct business was weak in the quarter actually underperformed our expectations and we were very strong or at studio, which is our self service tool, which outperformed and as I mentioned above podcasting outperformed as well.

Okay next question from Michael Morris is the level of podcasts engagement similar across both premium and AD supported users are you seeing a difference in churn for podcast users. If so can you quantify the relative impact.

Sort of high level I would say you know the good news is that part guest engagement in general overall is increasing so as I mentioned, we're now 20% 21% of our EMEA you engaged with podcast, which is up from 19%.

And consumption was up over 100% in the quarter. So we continue to see it going up in general.

Premium does have a higher engagement than.

The the AD supported business, but both of them have been moving up nicely in both and have been improving.

And with respect to any impacts winter and we don't break that out into the individually.

Okay next question from Doug Amis do you expect podcast have a bigger financial impact through advertising dollars or more through incremental premium subscribers to the platform.

Well it really say it depends on what the time horizon is that you're looking at it obviously, our subscription business. It's a much larger business. So even if we improve that by a small percentage space, that's likely going to be a larger impact that then even if we improved our advertising business with <unk> with UBS.

Double digit growth as well so think of the short term and improvement that we can make on improving retention is going to be materials.

With the subscription business and that's how you should look at at the long term when I look at the landscape. What excites me is that we're going after all of audio and all of audio is a multibillion gives or opportunity and it's a marketplace that.

The only in its existing form today as north of $50 billion and advertising revenue and it's the combination of subscription and advertising long term that I think is the future of media businesses and Spotify has really since its inception played and both of these businesses.

So I'm very excited about long term, both being a principal player in advertising as well in us and subscription.

And and so over long term it will become a bigger part of our business.

And I would just at which I think I mentioned earlier, when we look at some of the larger content deals we've done.

We are measuring or forecasting both sides of the equation in terms of how we.

How we value that content moving forward.

Okay. Another question here from Doug can you talk about how the recent universal deal made treat the two sided marketplace differently than other recently signed label deals or are they essentially the same.

But I think the big difference here, it's really a universal's willingness to experiment and.

Go all in on marketplace and that some of what I think should be that bigger take away here for all investors as well.

So what that means in essence is a universal seen the early success, it's very excited by it and they want to make sure that it can get behind an experiment a lot more with the paid tools of marketplace, but also the organic told us that allows artist to.

Create more fans engage with those fans and monetize those fans.

Better and so overall, we want to work with all labels, but we're very very encouraged to see a universal go all in on.

The tools and services that were building.

Okay next question from Mark Mahaney, where can AD supported gross margins go near term and long term can these gross margins match those of premium.

Yes, so in the very long term, we definitely think guide.

Gross margins could reach the premium gross margins, we haven't given a timeframe on that but we believe that's that's that's where we're headed.

And then more near term there's a couple of factors at play here. One obviously is the weaker overall AD environment, which is impacting gross margins.

Particularly on the AD side, there are some minimal that we pay in certain markets, where the advertising hasn't rich hasn't quite reached critical mass and so as we get to a tipping point in some of those markets on the music side. The gross margin will improve and then Additionally, I'm. Just a reminder, we now account for all of the cost of podcasting in our AD supported business. So the entire brands.

Of the investment we're making on the content side is hitting the AD supported line and so as we continue to invest in content.

As business will.

You know will feel more we do expect.

Gross margins to to improving Q3, and then be even better in Q4.

Our next question from Steven Cahall, what do you expect will be the impact to end may use premium subs in gross profit with the Joe Rogan experience comes exclusive to Spotify in September.

[noise] I think it's too early to talk about what the impact will be yes, we obviously know it's a big show and we are encouraged by the reception you've seen in the marketplace. So I do think a lot of his fans are very excited about the announcement, but it's going to take time.

And we'll we have to learn how to market and merchandise the Joe Rogan show both through its existing fans.

As well as to all of the other 300 million or so listeners on spot defy as well because this as we've talked about before even with the announcement of general again. This was the number one searched for show.

On a spot a fire that we're now including so I think it's going to be a very very positive one but again I think the best way to think about this is that Spotify is not about one single show. It it's really about the drumbeat now of new.

Exclusive content original programming and the one and half a million podcasts that exist on the platform that's growing at a very very rapid pace. So theres something for everyone Thats. The message I want you have to take away.

Next question from Rich Greenfield Howard Stern's multiyear agreement with serious expires at the end of this calendar year. If you were Howard Stern why would you want to be on spot of fibrosis serious.

I can't really speak to Howard Stern, specifically, what I can say, though less you've seen in the quarter. There are more and more great creators around the world that are turning to Spotify and I think part of that reason is because this is an interactive media. This allows them to better connect.

With their audience seeing the data seeing how they're engaging with the content seeing the feedback.

Directly it is an international platform to.

Not just the domestic so while we are very large in North America, where equally large in Europe, and left and Asia us well.

So this is a global audio platform on like anything else and now thirdly the size of this platform. It's just.

Huge compared to many of these platforms that may operate in just one market.

So I think the combination of that interactivity. They flexibility that allows you and the global nature and scale of this platform is what excites a lot of creators to be on our platform.

Next question from Richard Kramer, how are you get the local data to target podcast adds you intend to insert will each host have to record a large number of ads, which will be inserted depending on local interest customer segment et cetera.

I'll take this and maybe Paul you can chime in as well so I'm just a level set with everyone Theres a number of different tools that we have in our podcasting advertising sets and the.

The host Red adds as one of them and what we call Sai is something very different so specifically to address the question on our host Red ads. The host itself decides among a number of different brands that he wants to work with and then reads those ads and then Spotify serves that base.

To to the audience that best suits, the advertisers intense and then with Sci. It's more dynamically created ads that are set in some of them are recorded by the the advertisers themself and some of them our hosts read outs as well that are are baked into the.

Mix, but this is a very very nascent marketplace that exist today. So generally speaking when it comes to podcast a lot of this data that we're now talking about this become standard on the Internet has not existed so what what I think the general trend has been is that when you have it add internet.

Level data and.

Accessibility of those tools the performance of those ads goes up and when the performance of those goes at adds goes up the value of goes up as well both to the creator am to the platform as well so where were very very excited.

How about bringing internet level advertising technology to the podcast medium and this is something that I that I am very very encouraged by and that I think you should look out for for the next coming.

Quarters in years.

Next question from Michael claim can you elaborate on how you expect the addition of video will impact the growth of Spotify is advertising business is it realistic for investors to expect a positive impact in the next 12 months.

Yeah, Yeah. So I think the way you should look at video overall as its yet another capability. The we're adding four creators to to connect to fans as well and.

It it's just in this quarter as well with discovery of podcast, where the podcast charts are coming in.

And more and more tools and data that we're adding some broadcasters as well. This is another innovation as well to allow podcast us to creatively express themselves in a different way.

So you should expect us to integrate on that now that said we are in audio first platform and so we expect for the foreseeable future the majority of consumption to be.

Audio, meaning that consumers that watch video will go in and out of the video experience than them being able to put that experience in their pocket and continue with them when they hear something interesting pull it back up and then wants to show a gap. So this is it you should not look at this us some of the other platforms like you two of them snap where its pre.

Dominantly a lean in experience a video some added capability. It is priced very attractively for advertisers, but the share of video on Spotify is low right now and then well be growing but I don't think you should expect it to be another year chip.

Next question from Mount Thorton on podcast can you give some color on one what percent of ours are currently monetizable on how is that trending to how current AD loads and CPM stack up versus industry average and three the third party AD network opportunity.

Yes, so we don't really disclose AD loads, particularly but I'd say, they're pretty close to industry averages I would say in general what's really interesting and I think annual touched on this is as you get better at targeting when you have tools like Sai you're able to actually increase your monetization increase the relevancy of the AD and increase.

Overall monetization without actually having to increase the overall AD load. So we feel really optimistic that our technology and innovation, we're bringing to technology will allow for greater monetization.

[noise] overtime added due again to way, we don't necessarily have to increase AD loads in some cases, where to deal with a lower AD loads, if you're able to target the adds more specifically to to users with it with a horrible higher ROI.

In terms of a third party AD network opportunity.

It's definitely something potentially longer term, we could we could look into we know that when we launched Sai which is only on our owned and operated properties. The number of inbound calls we got from folks who had interest in using that technology as well I was pretty high so nothing to not to this point time, but obviously something we would we are potentially consider.

One thing I would add also I think part of this question was how where we are and just the rollout of this so we're very very early days. So the expectation I want everyone to have as the vast majority of advertising you here on Spotify today is the burnt in adds that the pot casters themselves have served us bonafide does not.

Participate in that but by building out tools like Sai and host Red ads, which are a lot more efficient and better for the advertisers better for the crater as well.

We expect.

That to me in a lot more adoption in the coming quarters as well. So just want to make everyone is aware of that.

Next question from Rich Greenfield you mentioned a change in the cadence in promotional offers impacting churn how should we think about the timing length of major promos going forward.

Yes, So I think if you take a step back historically, we've run promotional offerings seasonally so one in the summer and wanted to halt holiday period time every year, which we've done for the last couple of years.

Last year, we didnt, even more experimentation with offers at different times and different types of offers and so for instance in Fourq you have last year, we had an always on promotion that started earlier in Fourq you in normal and in Q1. This year, we actually extended the normal holiday campaign into Q1, which persisted for a through the early early parts of February.

The seasonal change there is that we had more folks in Q2 this year coming off of seasonal campaign than we normally do so as a result, you normally expect some uptick in churn when you have people rolling off of those promotional offerings I would say.

While the your quarter on quarter year on year churn was down quarter on quarter was up modestly, but that was totally expected and inline with our expectations.

Moving forward you can expect us to continue to experiment I would say the seasonal campaigns are likely to continue to happen with with the same regularity and then we'll experiment with other offerings other promotions other regional plans overtime.

Next question from Lloyd Walmsley can you tell us how much premium gross margins benefited in two key relative to year ago from the extended use of the free trial. This year versus last year's 99 for three months, what about the total impact the first half premium growth, yes. So in Q2 that impact with small it was probably about 15 kind of bigger impact.

In Q1.

Around 80 basis points, so together, it's probably about a 40 basis points or so.

For the first half of the year.

Next question from Rich Greenfield the core Apple podcast experience has evolved in years, but there are a wide array of dedicated podcast apps such as pocket cast overcast Castro et cetera, how would you rank the experience of Spotify is a podcast player versus the dedicated apps can you become the best place for podcast.

[music].

Well, that's certainly our ambition you know again, what I've said prior is that we want to be the de facto audio platform of the world and there's a lot more innovation.

We have started doing about two years ago and that we keep shipping quarter by quarter I think my personal favorite at the moment, which I'm Super excited about is the ability to do group listening remotely.

So just as an example, this is something we announced yesterday, where consumers can now share what they're currently and listen to and people can tune in to that experience whether that be podcast or whether that be music.

But because we have this large music platform and because we have this audio platform all of the benefits that we are developing for the music ecosystem are coming.

Two of the podcasts ecosystem Aswell and that's true of advertising as well as us the discovery tools.

And other usability benefits too and I think overtime, that's going to compound into an amazing user experience that.

We believe will be attractive too.

Most if not all consumers around the world who are interested in listening to audio content.

Next question comes from Ben Swinburn.

Why do you believe cobot 19 pressures seem to persist and be more substantial in Latin America and rest of world relative to North America and separately do you think there has been a reduction in artists releases due to co bid and if thats impacted engagement.

[noise] some very good question and generally I would say, we see some of this seasonality on the market by market basis.

As well not related to covert, but just due to seasonality due to holidays that kind of thing my best thesis at the moment.

We've talked about this last quarter that theres been a.

Paul a forward the effect of smart devices, and smart home devices, So smart speaker smart TV screens et cetera exploding in consumption. This has been a very very nice tailwind overall my my best thesis at the moment as we don't have the same extent of smart device.

Yes in Latam as we do.

In say more mature markets like North America in Europe, and that can have some of the impact that where were seeing as well on that but that's a that's my own thesis and not something that I can sort of.

Just confirm on a broader basis.

Your next question from Sumant Wahid.

Talking about the margin profile of the podcast business in the shape of the ROI what are your expectations there.

Yes. So I think has we've talked about in the short term short to intermediate term, we're still investment mode, and we're going to continue to invest in the business and.

You will see the content.

Drag on gross margins get near continue for some period of time as advertising growth.

Over the long term, we think it should be margin accretive how long that takes we'll we'll have to see and I think we said on a couple of occasions that if you continue to see the goodness in that business from podcasting, whether it's on user growth or subscriber growth. If we see it impacting the retention numbers in churn numbers at a positive way, we're going to continue to invest in that business and so.

I think you'll see it holistically and our LTV in or LTV to CAC in how we how we think about that.

But it could be.

A drag.

For a period of time before it starts to the benefit which we think will will be significant overtime.

The one added thing I would probably add to what Paul said, just overall is that.

That the best measure that we use internally for judging the business success is the LTV to socket metric.

And in baked into the LTV metric of course, it's the retention of our are a basis, it's about getting exclusive content.

And that exclusive content may mean that we are the only place that have that show, which enables pricing power as well. So long term that's the flywheel. That's the metric that we're focusing on.

So.

We are investing in that business to build a differentiated business.

Impaired to all other businesses that exist here and we think this will be the audio platform on the internet and that that's a large opportunity and a very valuable opportunity both with subscription on advertising.

Okay. Next question comes from Brian Russo on your recent renewal with you on GE can you confirm this partner has agreed to treat podcasting on your premium tier in the same manner that the other majors have with regard to a carve out of listening time.

Well I think what we have said is that from a podcasting perspective, the advertising related to podcasting will be a 100% Spotify and not shared beyond that I'm not sure. We've commented much on any other terms of the of the deals.

Okay next question from Richard Kramer.

What ROI do you think you could provide advertisers are labels for their promoted songs how do you balance that with the legal limitations on payola and consumer expectations around recommendations.

Yeah. So so we have been and investing in a marketplace for quite some time and in particular, we have had marquee being out there. We are always of course monitoring consumer satisfaction and making sure that that is high at that stage gauging factor that we're looking into it.

Everything, but I do want to talk a little bit about the the honest as a behind us that the I talked about the economics of a label before but the single largest cost of a label today. Unlike the for used to be that distribution, what's the single largest costs of a label today the single largest cost of.

<unk> label is promotion and marketing.

And what's so exciting to me is that Spotify is the platform, where most people are consuming and discovering content.

So if labels instead reinvest some of the portion of the marketing spend that they use to promote a market artist on this platform natively.

The results should be a lot better you should see better results for consumers because they're getting more of what they actually like you should be see better results for artist and let labels as well because they're able to grow their fans a lot better at more efficiently price prices than say other advertising.

Marketplaces or billboards that they've traditionally spent them on.

And of course for spot of five means a higher gross margin business as well. So I really do look at this is a win win win where it's better for the consumer a better for artist and labels and better for spot of fine.

Okay. Next question comes from Steven Cahall, when users combine into a premium dual account or family plan. How is factored into gross adds net adds in churn.

Well, if you're already a subscriber and you just moving and plan to continue to be a subscriber. So there's no change there and for gross adds it just it would be new users to the platform. So.

And with respect to churn if you're moving for implants, the other but you're seeing a subscriber it shouldn't impact churn either so the home, yes, that's that's pretty much done.

Okay. We've got time for about two or three more questions. We'll go to Mark Mahaney can you talk to the piano impact so far from the two sided marketplace and comment on its potential future financial impact.

Yes, So I think we mentioned last year that it was about 30 million benefit to gross profit and then to start the year. We said that we expected market place to be up about 50% over contribution to gross profit in 2020, and so there's no change at all to our expectations for.

For the year in terms of how marketplaces rolling out.

And sorry, just just sorry, just to just to add I know, there's some questions on a good majority of that.

This is contra costs. So it's a benefit to gross margin without revenue. There is some revenue attached to the the benefits of marketplace, but it's reasonably small the majority of the benefit. We get is is is directly related to benefits, we see directly in the gross margin.

In the next question comes from deep Pocketed Barclays.

With Joe Rogan coming on the platform exclusively in September and other podcast potentially launching how are you thinking about the potential benefit to premium subs and I may use and your third and fourth quarter guidance.

Yes, so it's a great question and to piggyback on with Daniel said earlier.

We've been reasonably conservative with the expectations for how much it benefits are.

Our platform and so when you look at the guidance range again, if you go back to the started the year. We had mentioned a certain level of conservative with first with respect to how much potential benefit we're going to see this year from podcasts and podcast launches and and new content launches and so.

We definitely have seen continued growth in EMEA you as I mentioned earlier it was up this year more than it was up at the same time first half of 2019, and we've seen really nice growth there.

But I would say the exact impact modeled in for the benefits of any of the content is still fairly.

Fairly minor and so there is some conservatism baked into the I know you side with respect to.

The benefit of podcasts and new content.

So now I would just make their to stats.

They are they the interesting factor isn't just about one show it as when you're adding more and more things that only exist on spot of five.

Talked about before so to the extent that we're looking at this assay.

Big events, that's fantastic and Thats, great and I'm sure we'll have a big.

Impact with both existing Fabs and new fans alike, but for me. This is really about adding more and more and more reasons for you to come to Spotify and.

The on the Spotify ecosystem, as well and with that I'm very excited about both the launches we've already had but also the coming.

Announcements in the coming quarters about all the other shows that we're making that.

There should be something for every single person.

On the Spotify platform and more and more of those shows will only exist on Spotify.

Okay, Great question from Richard Kramer, what precisely are you hoping to gain from the Apple antitrust case, what's your ideal outcome and given that 70% plus of U.S. subs are on iOS, how would it affect earnings.

[noise] polymer us, but that just overall the most important thing for us is to create a platform principles of where it's more fair and equitable.

Marketplace for us and other startups to engage and compete for consumers a pension time and wallets.

We ultimately think this is important not just for Spotify, but actually for the broader ecosystem as well.

You know the best service is the one that should be when not the one who had an existing platforms that were able to lock in consumers with as well. So that's certainly what we're hoping for us an outcome and maybe Paul have something more specific on the impact for US yeah, nothing other than within what we said in the past, which as we've grown really really nicely.

And really well in the face of some.

I'd say a competitive dynamics that are ideal for us in terms of how we can market and talk to our consumers within the the iOS ecosystem. So we feel really good about the growth. We've had in spite of the fact, there are limitations that apple puts on us and our ability to market promote and convert our users into into subscribers.

She will come from Ben Swinburn product mix shift largely due to just kind of.

And family plans continues to be.

For year over year premium revenue growth view this trend positively for the long term earnings power of the business and not a sign of a maturing market.

I guess I'll start off if there's any comments on this one but I.

I think from US we've really been in a mode of growing market share and it's all a bit about growing users and growing subscribers and as we've talked about on a number of calls we really focused on LTV to sac and making sure that we're adding subscribers that we believe will be profitable and profitable over the long term.

And so we continue to add we've had success. The affinity plans have helped us grow our of our subscribers gainshare, but we have seen ARPU decline I was down 9% fit in the quarter as I mentioned, 7%, excluding FX and there wasn't other walk preset impact of the revenue reversal, so down about 6% I think over long term architectures that ARPU will.

[music].

Declines and start to move higher but for now it's really been about market share gains over the near term profitability.

Yes.

I think the only thing I would add to that as we keep looking at all of those changes and product mix from the lens of just the overall LTV. So there are many variables that go into LTV. One of them of course is retention and overall acquisition monitor for that and as Paul said wait.

For growth and I think rightfully, so because with the scale of the platform.

More of the benefits that we've been there for us to market to existing consumers when we're doing something like podcast.

Most of those consumers starting to turn marketing to other new consumers to join the platform too. So we're seeing this purchase.

Michael of more and more people joining the platform on the basis of that long term, though just to elevate this discussion.

You know where are very very bullish stills and we're still in the early days on this journey of going after.

The audio platform of the world and that is still measured in billions of consumers. This was still relatively early in that cycle and just from a Tam perspective, you know even today.

You know the radio industry is north of $50 billion. Most of that is advertising advertising today, a small portion of the spot suffice business, but it will be a much bigger them on overall, so thats an added potential benefits.

Then on the subscriber side as Japan, and the U.S. have shown before.

There are existing audio products that are monetize that much higher ARPU stem Spotify.

Those marketplaces, and I think you know the Spotify product and content mix, it's getting better by the day and overtime that gives us confidence that we should have ability to be a significant player in subscription and.

Have a pricing power as well going forward. So I think the combination of those two growth will still be the priority given that we're talking about India billions of but I'm very very bullish on our ability both on advertising and subscription on term.

Okay that concludes our question and answer session.

Daniel do you have any final closing remarks.

Yes, sure I'm. So in closing we had a very strong quarter.

And as I mentioned, just before I'm really never been more bullish about where we are today and our future opportunity.

And they're still billions of people have yet to discover our on demand music streaming or listen to our podcasts and of course, many more we have yet to reach end markets around the world, where Spotify doesn't get exist.

Speaking of podcast the last thing I wanted to do is just encourage you to shake out Spotify new for the record podcast, that's coming out this Friday, Paul and I will be sharing additional thoughts about the quarter and we will be discussing my philosophy on growth innovation and the importance of risk taking us.

So feel free to check that out shameless plug.

Thanks again for joining us. This morning, a this is an exciting time to be focused on audio and were only just getting started.

Thanks again, everyone for joining the replay of the call will be available on our website and new for the first time also on the Spotify App under Spotify earnings call replace thanks again.

This concludes Spotify Q2, 2020 earnings call. We thank you for your participation you may now disconnect.