Q4 2020 Spotify Technology SA Earnings Call
Different perspectives on voices.
Perhaps you haven't heard before and find on common ground.
On that happened this change really is possible.
Of the amendment to celebrate kindness and compassion.
We saw in so many places this year kind of underlying everything you hear from Archrock audio we're talking to some amazing people, if they're going to share their memories that have really helped shape. This past year, which has been as we know of difficult one for everyone.
So many people have been through so much pain this year experiencing loss of huge amount of uncertainty.
But it feels worth acknowledging that 2000 twenty's connected us in ways, we could have never imagined true.
Endless acts of compassion and kindness.
And what really matters is clear now more than ever.
So Hugo you needed the cash flow right now go ahead.
Couple of them that way you wouldn't itself, you'll be able to hit new shows for much of our audio as soon as day drop we're so excited to follow and listen for free only on Spotify.
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Welcome to ultra low he hasn't podcast voice Uganda to anybody that has not been to Africa, I'll say, Uganda, Israel, Canada, and the beautiful glass with beautiful people.
That's where I was world I'd like to add.
On the battery.
The voice of hearing belonged to a man named Bobby Why did you go on to the biggest pop star one of the most famous men on the African continent.
He is also comparable to Asia.
It was supposed to be a day month, because I mean, they are bullied by Jacqueline.
People are on running for level of care.
Analyst day.
Yeah.
Okay.
No.
Great.
Yes.
This is the message of a new documentary podcast about one day and struggle to bring freedom to the country.
Struggled on may cause some of life.
For the last decade for Ibs C and debt.
Of the many day of dictatorship laid by the end of the related.
Again, we have plenty of weakening corruption hit on.
My dad and decided to debt using my music too.
Condemn the injustice, however that was only the beginning.
On January 14.
Orders in Uganda ahead sort of post the likes of new President.
On one side predictor.
Dictated and on.
On the other side.
Sales of musicians from the salons.
Fifth our premium always current guidance guidance Steve.
Hi, Kate.
Okay people, who call half of it and get them Chris.
President of your Excellency, considering the amount of people from the very beginning it was powerful forces United against them.
Bobby when it's going to view of but if we only into the streets day kind of keep all.
But it's a battle between the cash on the future of between negative on freedom.
Iranian president.
Our net you're going to be free.
Moving from awfully Nice and Universal Studios. My name is Bonnie. This is the messenger of Spotify original podcast coming January 15th.
Ladies and gentlemen, thank you for standing by and welcome to Spotify as Q4 2020 earnings call. At this time all participants are in I'll listen only mode. If you require further assistance. Please press star Zero I would now like to hand, the call over to your speaker today, Brian Goldberg head of Investor.
Relations. Thank you. Please go ahead.
Great. Thank you and welcome to Spotify in fourth quarter of 2020 earnings conference call joining us today will be Daniel Burke, our CEO and Paul Vogel, our CFO, we will start with opening comments from Daniel and after the remarks, Daniel and Paul will be happy to answer your questions. We will again be taking questions exclusively through slide on questions can be submitted by going to slide on dot com and using.
The code hashtag Spotify earnings Q4, 'twenty analysts can ask questions directly on to slide on all participants can then vote on the questions. They find the most relevant.
Don't have access to the slide you can email investor relations at IR on Spotify Dot Com and we will add in your question before we begin let me quickly cover the safe Harbor. During this call, we'll be making certain forward looking statements, including projections or estimates about the future performance of the company.
So based on current expectations and assumptions that are subject to risks and uncertainties actual results could materially differ because of factors discussed on today's call in our letter to shareholders and filings with the Securities and Exchange Commission. During this call. We'll also refer to certain non <unk> financial measures reconciliations between our <unk> of non <unk> for exponential measures can be found in.
Our letter to shareholders in the financial section of our Investor Relations website, and also furnished today on form 6K, and with that I'll turn it over to Daniel.
Alright, Thanks, Brian and hi, everyone and thank you so much for joining us.
Despite the global uncertainty of 2020, it was a remarkable year for Spotify.
Our strong Q2, and Q3 Q4 met or exceeded our guidance by nearly every metric.
Mostly active users reached $345 million coming in at the very top of the range and we now have 155 million subscribers, which surpassed all expectations.
Over the last year, we have demonstrated our ability to pivot quickly anticipate user trends and adapt to their new behaviors.
It's easy to forget about 2020 had plenty of uncertainty and puts and calls.
Our success really is a testament of the strength of the teams and I am confident this experience will serve us well in the future.
Going into 2021, Covid still has the potential to be of headwind as it's difficult to sort of gauge its impact.
Spotify more time at home resulted in more people discovering streaming and turning to our platform, but it also created disruption in listening habits consumption hours and the release of new music on podcasts. We believe it's cost of the pull forward of subscribers across the back half of 2020, which makes it really hard to predict it.
It will drive the same subscriber growth in the year ahead. However, the trend lines are unhealthy and long term the ships from linear to on demand that COVID-19 accelerated will continue and remains of massive multibillion user opportunity.
Knowing youre focus is likely on our outlook for the upcoming year I wanted to spend a few minutes addressing how I'm thinking about 2021, and some of the uncertainty and some opportunity is great.
And as a reminder, our approach to forecasting is the only forecast will be of a very high degree of certainty, but we will achieve.
Given the uncertainty we face today I suspect that our full year of 2021 plant will have a higher variance than prior years. Therefore, what you see reflected in the forecast is what I believe we will absolutely do this does not mean debt that's what I hope, we will achieve as evidenced by our outperformance in 2020.
So I thought it might be worthwhile to outline some of the day biggest drivers that may contribute to this variance.
For example, while we have seen some pull forward effects that may slowdown in subscriber growth in some markets. We are shifting to drive more aggressive revenue growth, where we know our pricing power will enable us to increase our code.
We've long believed that Spotify provides exceptional value and a positive early data we're seeing from this price increase that we announced in October makes us very optimistic that our users.
This week, we implemented price increases across a number of markets and we will continue to evaluate future increases carefully based on the broader global economic impact of Covid.
A number of important Kols, we will pursue is the continued expansion into new markets. We launched in South Korea on Tuesday morning, tapping into one of the fastest growing use of markets in the world and there are still of millions of creators and billions of listeners who don't yet have access to Spotify and work is underway to change that and I will share more.
In the near future.
The impact from expansion into new markets also creates some uncertainty as we forecast use of growth.
And it's been really challenging to predict.
Russia is a Prime example, we quickly and significantly surpassed all expectations. There. The result of this outperformance that we saw some additional pull forward of user demand again, leading to growth in 2020, but we expect it to occur in 2021.
Another area of the business, where we're seeing extremely strong results, but where the true payoff of Spotify is still in front of us is podcasting.
In the last year alone, we tripled the number of podcast on our platform moving from about 700000 in Q4 2019 to $2 2 million podcast today.
And we've also significantly grown the number of podcast usage on Spotify going forward I think our investment in the original and exclusive are creating more and more reasons for listeners tissue of Spotify.
And our exclusive programming is already proving to be an essential part of our differentiation.
That said with a small number of these shows on our platform today, but many more on the pipeline. It is very difficult to know exactly when we'll see the compounding effect of these investments, but all early indications are very positive.
Another example is our advertising business on the platforms have experienced ecosystem AD growth in the early years and we're no exception to that and we're putting more resources into developing this business and in Q4, our AD business accelerated finishing above forecast.
In our mature markets, our largest issue of what the dealer inventory constrained.
While this sounds like a good problem to have and I guess it is it is difficult for us to predict how quickly we can open up your inventory.
And I expect that as the category of audio ads matures and more radio dollars move to streaming this area will become much more predictable, but for the next year or two it will be a bit more uncertainty.
To conclude 2021 brings more uncertainty than any normal year.
That said, we have a high degree of confidence in our ability to deliver against the guidance. We provided and we were able to overcome unprecedented uncertainty in 2020 and exceed almost all expectations.
And I believe that we can do the same in 2021.
I'm also focused on identifying where we can see new opportunities and drive sustained growth in the long term just look at what happened to video in 2020.
Linear video fell apart as viewers of smart to on demand and the companies who were not prepared to take advantage of this disruption faced huge challenges as their business models were up and it.
A similar shift hasnt happened yet to linear radio.
<unk> heard me say that it's coming and I'm more confident today that that's inevitable, but unlike video there are only a handful of companies who will be able to take advantage of this disruption in audio and no. Other company has the capabilities or is as well positioned as Spotify for this massive opportunity and that is our eye on the price.
And with that I'll turn it back to Brian.
Great. Thanks, Daniel again, if you've got questions. Please go to slide on Dot Com hash Tag Spotify earnings Q4, 'twenty. Once Youre question is entered you can editor of withdraw your question by selecting the option in the bottom right will be reading the questions in the order they come in with respect to help people both of their preferences for questions.
And our first question today is going to come from John <unk> of Stifel. The high end of your 2021 subscriber guidance suggests you'll add fewer net new sales. This year versus 2020, you know the churn should decline in 2021 that you expect the newly announced price increases to represent a material headwind of sub growth in 2021, what other factors should we consider here.
<unk>.
Yes. This is Daniel.
Long term again this is a multibillion user opportunity and im confident about that.
<unk> bin.
As I mentioned in my opening remarks, all of that said we are facing.
A global pandemic and that pandemic has shifted all user behavior in 2020 and as I mentioned also.
Did create some pull forward effect.
Throughout the year.
That means that there are more uncertainties.
Throughout the year on on what will happen to the subscriber growth. So.
Again, our forecasting means that we do the things that were only very very certain that we will deliver upon spa.
Specific to the price increases.
All can probably address that.
To a greater extent, but but we've seen very very positive response from the price increases in October and we believe that will be the same for the price increases that we just.
Paul do you want to add anything.
A couple of things I think to Echo what Daniel said I think in 2020, we obviously had a very very strong year Daniel mentioned in his opening comments, we pull forward the Russia launch so Russia was there a meaningful impact in 2020, we had originally thought that we wouldn't really see meaningful impact until 2021, so that helped 2020 and in hindsight, we didn't really call.
And any specific quarter, where we thought.
The benefits of people being at home of the tailwind of streaming we're necessarily in any one quarter, but in hindsight when you look at it.
A little bit tough to disaggregate, how much was just better execution on our part how much was some pull forward from.
Kind of the tailwind of extremely had in general in 2020, but we do believe that each quarter, probably saw a little bit of pull forward as well when you go back and look at where we started 2020 on there. We ended the finish of a $4 million plus or minus above where we thought we were when we started the year. So definitely some better execution there are probably some pull forward.
Just on the tailwind of extreme you had as well as the pull forward in Russia and then when you look at 2021 I would say as Daniel mentioned I think there is.
Higher degree of uncertainty than we normally have theres lots of initiatives I would say uncertainty isn't always a bad thing.
Lots of things that could break positively and theres, some things that could be more challenging but there is just probably more of them in 2021 than we've experienced in years past and that's all baked into the forecast.
And then as Daniel mentioned with respect to the forecast we are on.
He said you guys will give you guidance based on what we actually think we're going to do and that is what we've done this year as well, but that being the case. It really is of a base case model of what we have a high degree of confidence that we will achieve.
And it doesn't necessarily assume that we're going to have the upside in some of the initiatives uncertainties, where if they break positively.
It'd be better so.
Again, we've given you our best case forecast and why do we feel of with a high degree of confidence we'll be able to achieve.
Yeah.
Alright. Our next question comes from Eric Sheridan of UBS, how should we think about the progress made against previously discussed investments in the podcast opportunity is there an update about the puts and takes in terms of upsides of the business compared to global investments needed to scale of it's coming years.
Yes.
Overall, we're very pleased with what we're seeing but just as a reminder, the primary opportunity as we think about the long term here.
On the radio linear radio experience that of moving online.
And into on demand.
Got it.
I on the price, but one that we are changing and that's still what we're kind of looking at as we look at that universe. So the primary thing that we've been focusing on as we got into this audio first strategy with growth we already have a massive user base on Spotify today, how can we turn them into podcast listeners.
And extending.
On our platform into becoming the de facto brought GAAP player where a lot of these users MAU and as evidenced I think from from this quarter compared to even last week keep on extending the number of users on our platform that are using.
Hum.
Podcasts on the platform team now on a quarter of them that are pockets users.
As we start getting.
On the upper end of those ranges you will see.
<unk> outside in terms of the convert more and more of the outside users who are not yet spotify listeners to come onto the platform.
And I think exclusives will be a material part of that strategy.
And even there I would say very encouraging to see the early results of the exclusivity strategy that we have.
But we're in the early days in the sense that there are many many more exclusives that we have on the pipeline for 2021, and we're excited about the hard thing to forecast what the compounding effect of all of those when they happen and when do you think Spotify, but will be more and more reasons to come to quantify that's one thing for share.
On sort of near term uncertainty in terms of the effect of that.
The one thing I would add as well I think if you go back.
But over a year ago I think we mentioned in one of our show of letters that we believed.
The podcast and podcast usage was highly car.
Correlated with improvements in retention and user growth, but we at that point and couldn't really prove out the causality I think of those new shareholder letter that we did mentioned that we now feel reasonably confident that we can prove out the causality of having podcasts and the benefit of is having on.
Unusual growth and retention and then having podcast is a positive contributor LTV per subscribers. So.
We're still going to continue to obviously work and monitor that and test that but we do feel good about sort of the.
The incremental knowledge, we have in terms of the positive impact of podcasts is having on our platform.
Okay. Our next question is from Alan how of how <unk> company.
When will Spotify AD social the social element of the overall experience like Tencent music apps like clubhouse could have an interesting entry to audio and Tencent music could be a good way to follow up in some regard.
Yeah, we're very interested in obviously paid close attention to everything that's happening in markets around the world and new developments and audio.
With many times before but I think we are in the early innings of innovation of the audio formats.
And creator to fan interactivity.
It's definitely one of those things that we're paying attention to and looking at.
And we are conducting experiments on it already.
But I don't have any sort of specific here to announce but there are plenty more things to come on in the coming months of this year as well when it comes piece of it of creators of fan engagement.
Well.
Okay next question from Richard Kramer of Arete.
And entering markets like South Korea on what is your strategy for building of subscriber base given that the market has six very well established players.
Yes, we always take.
A large amount of time to try to analyze the markets and South Korea circling on an exception to that rule.
Some would even say that we're late to the party in some markets, Russia with kind of the same dialogue, but we have been studying the market for many many years and we're well aware of the South Korea is a mature market and that it will take time for us.
Established ourselves I think the key is the same thing that.
What we do in pretty much every single market. The deeply on we've tried to understand the content that we have.
And many of the domestic markets, we try to bring in international flair to it and bringing the creative talent that we have from all of our creators around the world to that platform I think we can definitely do.
Good job there I think our strength and personalization will certainly play incredibly well in South Korea.
And specific to the South Korean market.
Obviously have a lot of partnerships for instance, with Samsung, which is a major player.
In South Korea, So that end of 2000 other devices. That's part of price on is a major contributing factor I think too wide to user experience and better on why.
I think south Korean consumers are very excited about Spotify.
Okay. Our next question comes from Brian Russo of Credit Suisse. Do you think customers would be willing to pay specifically for podcasts and if so would the margin profile of that podcast revenue look different than your existing premium service.
I think we are in the early days of.
<unk>.
On the long term involvement of how we can monetize audio.
On the Internet I've said this before but I don't believe that it's on one size fits all I believe in fact that we will have all business models and that's the future for all of media companies that have.
AD supported subscription and Ala carte sort of.
In the same space.
Of all media companies in the future and you should definitely expect Spotify to fall followed that strategy on that pattern.
So I think it's I think.
It's early days, though to specifically kind of look at.
How that could play out, but obviously if that were to be the case.
That revenue profile will be different.
And how we do music.
Okay next question from Mike Morris of Guggenheim did the meaningful audience uptick for the Joe Rogan experience come from new or existing Spotify users. How does the premium to free mix of heavier podcast users compared to the overall base and can you share the churn difference between podcast users and non.
Non or light users.
Paul do you want to take this one.
Yes, im not going to overly specific but obviously, we do believe that.
Although there has contributed positively to user growth on the platform, we haven't broken out how much of his usage has come from existing users are new users.
But if you sort of take of giant step back part of the <unk>.
Strategy when you bring someone like that on the platform is it's going to have a couple of different effects wanted to bringing people onto the platform and another is to create a better experience for those already on the platform whereby their retention increases or their churn goes down and so all of that is.
What we believe to be the case and it will happen.
We haven't really given the split between true pay probably cash uses but as I said earlier in my commentary we are increasingly comfortable that podcasts are having a positive effect on on LTV for subscribers.
So.
That's where the continued investment function.
Okay. Another question in the queue from Eric Sheridan at UBS, how does the team think about strategies around carrying the product by format or content over the long term.
I'd just love that question.
No.
Can you sort of take away.
Yes, I can try to answer any of.
Great.
Again.
I think we're currently in the evolution stage, then I think you can see this in the other media formats as well aware of its pretty much been.
In the early stages of adoption you try to go for simplicity gets you out of a one size fits all in order to have it easy.
<unk> proposition that consumers understand in our case, we have a free tier on our paid for tier we've evolve that model to adding of free and paid and family and students.
I think as you get to the next level of growth and even more of local.
Markets as we expand youre going to see many more configurations on the ones that are currently there and it's going to be of mixed between subscription and advertising and Ala Carte.
It will play a role in terms of Spotify future.
Okay next question from that sort of net choice securities as it relates to price increases could we see of family plan price increase in 2021 in the U S. Further does guidance assume any impact to retention conversion gross adds.
From the planned price increases.
Think of that.
So so on the price increases.
As we've talked about we launched seven markets.
A little while ago into 25 more markets most recently.
We're not going to specifically talk about what markets may or may not come in the future. So.
So we'll just have to see I mean, there's obviously a number of factors that will go into price increases and where we launch them in the magnitude.
The number of factors some of them are the maturity of the market both contributing in general our penetration rate there how do we feel about each individual market.
And so from true pricing, that's kind of how do we think about it even with the impact on the model as I've said we have.
Assumes price increases in the model, where we know we're going to launch them and we're going to launch and so.
Just to reiterate how we think.
Planned throughout the year is baked into our guidance.
That being said is it flow back to my earlier comments, we sort of give you the base case of what's going to happen. So we have some assumed.
Positives or negatives to churn of retention based on price increases and we'll see how the year rolls out and I think as Daniel mentioned earlier, there is still a turn of sort of uncertainty throughout the year, you know COVID-19 being one of the impact that has on the global economies.
I will say none of our past 2020, we had expected to experiment with more price increases in 2020 than we did we pulled back on that because of the pandemic and because of the uncertainty and because of.
Not wanting to.
To raise debt with with consumers given all of that is going on and so when we talk about the unknowns into 2021 Thats. Another unknown, which is how confident do we feel in certain markets and of timing and a lot of that is still TBD.
Okay next question from another one from Richard Kramer artist lots of their main source of income during the pandemic line performance is Spotify in a position to support live streaming performances, whereby artists would get directly.
Sure.
With me.
Directly paid on the platform.
Yes.
This is Ben.
Very very rocky year of course for a lot of artists around the world.
<unk> seen sort of of their lives up end of based on Covid and their livelihoods. We have responded to a number of ways, including artist fix.
Covid relief fund et cetera, and one of those happens also traditionally on this Spotify artist pages, we have hot concert listings.
Now.
Kim if all of those to include also flagged performances as well as their day.
What happened through Spotify of directly but it's facilitated so thats artist can point consumers to that and I know that theres been a number of artists that have been experimenting with those types of performance of some some have been quite successful in doing. So so we are absolutely offered the opportunity, but it's not something that.
We are of principle of today, but we of course look very carefully about.
How it's going.
What works better than what doesn't.
Evolve and again long term our strategy as I said it.
It is to allow those creators to fan engagements to happen on the platform.
And an even greater extent than what is currently.
Does today.
Okay next question from rich Greenfield of light chain partners.
We've seen Amazon by wondering to integrate podcast into Amazon music and Apple appears to be gearing up to launch some form of subscription podcast product. While this is clear strategy validation curious how you expect it to impact Spotify and the ability to make acquisitions in the category.
Yeah I mean.
One of what I would say.
I definitely do believe that and we're not surprised that something like audio debt interest of billions of consumers around the world also will catch the attention of the big companies because there are very few spaces.
Have hours of.
Most consumers time of day.
Billions of people at the same time, so we're not surprised that this is happening and.
We also do look at this as a validation that we're heading the right direction.
Again, we did expect this hence why we've also been very aggressive previously with the acquisitions.
Most of our strategy going forward, while we don't exclude any further acquisitions, it's about ramping.
The ability of our own production capabilities that we now have through all of the studios that we have acquired.
And just to put that.
And in a finer point on because I think this is kind of one of the internal points to our team most of the time I believe about three years ago, there were fewer of them 30 people ad.
Spotify that we're actively producing content.
That ended up on our service in one way or the other.
That number now.
I would say certainly during 'twenty one of them will be closer to 1000 people.
It's really.
A tremendous kind of shift of the company and even our skill sets that we have and.
We're looking to use some of those muscles that we have.
Added to our roster.
Throughout the last few years and create even more amazing content for our users experience.
Got another question from Richard Kramer is there any reason to believe you can change the terms of deals with of labels to carve out time for podcasts and reduce the value of payout the labels for the pool of listening.
While I can't comment specifically on how our label deal terms looks like we have said this before but.
Cash is a separate category and does not involve how we pay out for music royalties on.
Don't know Paul if you want to add something to that no. As we said we carve out the advertising on on podcasting. So as that growth will continue to get the.
The benefit of the advertising revenue on top of podcasts and then with <unk>.
Daniel's point, how the relationships evolve over time, we don't really get into the specifics they always change.
Okay next question from Steven behalf.
The implied 2021 incremental operating margin looks like it's approximately 3% in 2021 indicative of the operating leverage.
Of the business on.
Or are there other factors ahead that should be that should drive more meaningful margin expansion.
Yes, I don't want necessarily a full modeling of the cash on this call, but I guess I'll give some high level thoughts on kind of operating margins over time.
I'd say one is.
Do you have to take into consideration year over year on the impact of social charges have on reported numbers.
But we could sort of take that aside and we're happy to have those conversations offline.
When you look at sort of the big components on the operating day.
The impact of the operating margin after after the gross profit when you think about R&D, we've been pretty consistent and steady about talking about.
They were to continue to invest heavily in the business.
That's an area of.
All of our financial model that you probably won't see lot of leveraging that if we could probably even spend more there in order to continue to grow the business and then when you look at sort of sales and marketing.
I think there are areas over time that we could be more efficient there.
Firstly on the marketing side, you will see and then also on the sales side as we add more automation into the ecosystem of more self serve products and those types of things and.
And then of G&A side as well on units.
It's a heavy lift first to go in and be prepared to be of public company and then as you continue to launch more and more markets.
You need to do from an infrastructure standpoint, obviously theres some build up there.
As you can imagine over time once were.
In more markets, where we wanted to be on where it has sufficient scale, you'll start to see leverage on the on the G&A G&A side as well.
And maybe one on one more perspective too we are very much still in the investment case.
On Spotify and it's not just the investment phase and music.
Doing because clearly there are we could show a lot more operating margin.
Improvements as well by for instance of lowering the sales and marketing costs on some of those things of Paul mentioned, but were going after billions of consumers around the world and we're going broadly after the category called audio.
And even more so I think the future of that audio platform is one where you will have millions of creators.
Debt are interacting with consumers in a social fashion.
To allow us to be that platform where.
They can grow their audience, they can engage with their audience and we can monetize in a number of different ways. Those are all of the.
The capabilities that we're investing behind these are multiyear investments.
On plus of course, adding to the fact that we're.
Producing our own content growth pursuing of exclusives, we're going into categories, we're going into new markets moving.
Those are all of the things that you are seeing in the P&L.
Coming through that we are giving them in many cases on a company our size on.
Many of the investments, we're even making now are are years in the making them on many of the things you see flow through from the goodness on also things we did years ago. So we're very very bullish on the long term and we're still investing behind that bullishness and thats, what we should be expecting and I think.
At a mature state business will look very different than the growth states that we're investing time now.
Okay next question from Mario Lu with Barclays. Currently in Korea, It launched only with the premium individual and dual plans with no option of either of the family plan or freemium model, which should help drive our accrual of that being said can you speak a bit as to why you came to that decision and if we will eventually see both plans in Korea.
Yeah just.
Critically this is not very on common practice for us we typically launch as I mentioned with the very simple proposition.
In the end markets.
And then over time to build on.
And Thats something thats been incredibly successful for us to do and if you go back to almost all of market launches kind of followed the same pattern go in with a very clear proposition through very clear audience brought on that proposition over time, both of us more local content with more local nuances and as you mentioned more.
Planned from pricing just mentioned one example, like prepaid planning is something that we've been experiencing in southeast Asia. That's just one example of of innovating to local nuances.
Okay next question from with Greenfield.
There was a recent article about podcast just being disappointed in the ink and the anchors ability to deliver sponsors.
Sponsorship with AD often for anchor.
Spotify.
What happened and does it tie into why you bought megaphone.
Well.
What I would generally say if we're early on in our.
Podcast platform monetization efforts.
So on.
Most of the focus so far has been how do we get more great content on the service on the vast majority of podcasts on the service today, our self monetized, we havent been experiment with.
With various forms of monetization including of course.
The ability of 144.
Our test is to monetize themselves, but but then on the anchor modification efforts of you mentioned and now also with Mega phone as part of that we're very bullish on the opportunity to provide it.
A meaningful way for podcast is to monetize through the platform efforts and I hope to be able to talk a little bit more about what our plans are.
In the near future on that but.
Again lots of experimentation, but you should feel comfortable of that.
There is a lot in our capabilities.
The portfolio of that I think we can bring to the amazing creators that are doing pocket on the platform today.
Okay. Another question in the queue from Mario Lu can you remind us how price increases flow through to costs. In other words do labels received the same share of the price increase or is there a min Max threshold for pass throughs.
Yes, as we said in the past, we never going to give you specifics of how any of our type of deals work.
That being said.
Anytime we're raising prices I think the labels are happy with that but in terms of how it flow through.
Don't get into specifics.
Okay. Another question from Richard Kramer.
What's the total investment you've made in acquisitions and commitments to content owners in the podcast space and how do you measure the payback on that investment will it be an AD sales conversion of premium or separate subscriptions.
All of you on a tech talent.
So look I think from a from a payback theirs.
It is a holistic approach and I think you mentioned a number of them in the question itself and so when we look about when you look at the investment of podcast, whether it's something to develop on our own or licenses license or buy.
The model that we build out has all of those factors into it. So there is an expectation of.
Potential new users that may come to the platform based on having this content. There is increasing we are starting to be able to measure of what we think the retention benefits would be.
Through having that on the platform.
As well and then over time, it's how much can we grow AD advertising AD all through.
Through it.
There's a lot of nuance in there obviously there are certain there are certain points of inflection points, where you have enough content on on certain type of content or a certain genre or certain demo where you could have been a slight inflection point on the advertising side of our once you get that threshold you can even have a faster growth because you have that critical mass and so that will weigh into as well. So we look at all of those factors to measure.
And I would say additionally, as I said earlier for us it's really <unk>.
Spending the time to understand how much value different pieces of content have on our platform.
Understanding what we should be paying for different pieces of content on the platform.
And then understanding sort of the causality between having it and then how much it benefits LTV. So were looking at all of that we're modeling all of it out.
And I think when you look at.
As Daniel mentioned, we continue to invest in being in investment mode.
We had said.
<unk>.
Okay.
Okay.
I think they lost Paul there is technical issues.
While they get back on.
Background, sorry about that.
I was saying that if you.
If you go back.
In the past we've said if we continue to do.
Do you continue to see us invest in podcasts and podcast content on <unk>.
We are seeing the benefits within our ecosystem.
And the more we invest the more you can have some confidence that the good news with the sales rep Spotify and the benefits we're seeing.
I'm wondering if you can do invest against.
Sorry, I apologize, if I kind of too much I'm happy to.
We are staying with interest.
Debt related question in the queue from Josh Ley Covenant capital you expect 2021 gross margin to be lower than the current level, while seeing premium on <unk>.
Improvement can you elaborate on content cost in podcast investments in 2021.
Yeah, Let me address a couple of that so with respect to Arthur.
I think what we said is improvements in our true.
Non slightly up year on year, when you look at it on a on an FX neutral basis I think for the full year ARPA will probably roughly flattish.
Currency is still a pretty big impact on our business, it's pretty materially in Q1 as I think we will in the shareholder letter.
So it will still be down a little bit in the first half of the year, we do expect.
<unk> to increase sequentially throughout the year.
But again because of the of currency it probably will still be slightly negative from a reported basis.
The second part of the question was.
Just on gross margin in general, Yes, I mean, I think there's always lots of puts and takes on gross margin. If you look over the last.
A couple of years, we've sort of hovered between $25 25, 5% gross margin.
We do have some control on our investment and how much we want to spend and what we feel comfortable with with respect to where we are on the growth car curve, where we want to continue to double down on spending and so on there is a continued increase in <unk>.
Cash spending in 2021.
The revenue against that testing is growing very very nicely as well. So we are seeing that we're not quite at the point, yet where the revenue is outpacing need continued investment.
We are very optimistic that over time, we will get there, but as Daniel mentioned, we're going to continue to invest in.
Net investing has a compounding effect on the compounding benefit.
On the business and so.
That's where we're headed.
Another question from rich Greenfield of <unk>. It appears Apple is going to enable direct monetization for podcast or is it kinda patria on compared to an aggregated subscription of waste Spotify does can you explain why your model of superior for broadcasters.
Yes sure.
First and foremost while I can't speak to what anyone potentially made there.
Think of alluded to this in some of my prior remarks, I don't view of the future of Spotify to be a one size fits all.
And even today if you are.
A podcast or.
There are plenty of ways to monetize.
Through Spotify or so.
You can come in as of consumers of free user you can come in as of paid subscribers and long term I believe that we will allow for all three models, which is both advertising and subscription and Ala Carte.
The future of graders.
Okay. Another question from Richard Kramer, given at your podcast engagement definition is now seeing content for more than Euro milliseconds can you provide us with a more useful metric on podcasting for example of time spent relative to music.
Yeah, it's not on it's not of mentioned we've given out in the past we've talked about that 25% of our Mou of engage with podcast.
That's where we are now which is up.
22% in Q3.
You are clearly music is still the dominant.
On load on Spotify, but the podcast listening has continued to move up materially every quarter and it was up again in <unk>.
In Q4 so.
Alright, great. We've got time for one more question and that is going to come from Ben Swinburne at Morgan Stanley.
Daniel is the growth strategy shifting from focused on users to a balance of price and users. If so why does that makes sense to do now does it suggest user growth has peaked and then a follow up from Paul does the premium user guide for.
First quarter 'twenty, one of seeing any additional churn from the price increases.
Why don't I start and then you can take.
The second part of the question Paul Yes. So from my side I think we've talked about this a number of different times, including wound barrier.
Three legs to the stool of how we can grow.
We can improve our product proposition two we can launch of new markets and three we can raise prices upwards of MAU, you haven't really seen us flex the third on muscle because.
We've been focused on improving our product proposition and.
Launching new markets.
That is still the majority of what we're doing but I'll take my home country, Sweden is a great example.
That is a clear case, where we are tapping out of it.
And of addressable population, hence raising prices in Sweden, probably makes sense in order to grow.
Which then obviously not only compensate spotify, but compensate all of these amazing creators can have on on our platform and our losses to strengthen the proposition to them.
As well so we're trying to optimize for growth and there are three ways to grow and we're now adding the third.
Part of the story here as well, but I don't think you should read into that that the growth has peaked.
It is more of that we're now sort of flexing our muscles on adding a third.
Part two and we have experimented with it for quite some time I should say as well like we started two years ago. So it's not something that we've done.
In a rush.
We did in Norway, two years ago, we've done it same thing.
Argentina, Australia.
And in many many other markets.
Throughout the time, but this is the time, maybe where youre seeing it's actually becoming a real part of the strategy MAU.
In fact, because of all of the positive response.
But we have been seeing of just the value of that we're providing already to consumers.
So we feel that we have this opportunity and that it will benefit both Spotify and.
All of the amazing creators on the platform.
And then with respect to Q1 in particular I would call. It a couple of things one is.
Last year in Q1, we had an exceptionally strong Q1, we had as.
As we often do experiment with different.
Marketing plans and different plans and so we had some of our promotional activity, which normally ends at the end of the year continue on through into February of Q1 2020.
We think obviously benefited Q1 of last year, we don't have a similar promotion running in Q1 of this year so the comp between.
A promotion last year no promotion this year will definitely impact growth in Q1, and I would say secondarily, we obviously at a very very strong Q4, we think theres potentially we pulled forward some of what we would normally get in Q1 into Q4, given the upside there. So again, we feel really good about kind of where we're headed in 2021.
Q1 does have some pretty challenging comps relative to the the promotional activity, we had last year and the lack thereof and in Q1 of this year.
Yeah.
Okay. We're at a time for the question and answer session I will turn it back over to Daniel for some closing remarks.
Alright, Thanks, Brian.
I am very encouraged by the progress we made on our path to becoming the world number one audio platform and I want to thank all of the Spotify employees, who stayed focused on our creators fans and partners around the world This year and for executing that such a high level. While it's still early days, it's clear to us that our strategies working looking ahead.
And we will continue to enhance the user experience expand into new markets and develop and acquire unique content for both new and established creators we're planning to share more details about these innovations as well on what's next for Spotify during our stream on event later this month I hope you'll join us for this.
Event as it will shed more light on what the coming months and years will bring.
I'll be talking more about it and our earnings report on our podcasts Spotify for the record, which will go live on our platform tomorrow. Thanks again for joining us.
Okay and that concludes today's call a replay will be available on our website and also on the Spotify App under Spotify earnings call replace thanks again, everyone for joining.
Thank you everyone. On this will conclude today's conference call you may now disconnect.