The “Harvard Business Review” recently reported that Spotify developed a framework for exploring the relationship between data and uncertainty they call DIBB (Data, Insights, Beliefs, and Bets). They use it to explicitly identify success metrics for new ideas and opportunities and create a common language around judging performance. You could say it worked. Spotify, the Swiss audio streaming service, reported its Q3 – 22 results and announced that it has 456 million total users worldwide, up 20% year-over-year, surpassing expectations.
Spotify also announced it has 195 million paid subscribers, up seven million, which is one million more than prior guidance or 13% year-over-year.
Total revenue followed suit up 21% to €3.04 billion. Premium revenue was up 19%, and ad revenue grew to €385 million. Each beat Spotify’s earlier guidance. That seems to be a healthy quarterly report card.
If seeing the Euro sign (€) confuses you, the Dollar ($) and Euro are now worth equal amounts for the first time since 2002.
Wall Street usually rewards such good news with jubilation, but Spotify’s stock plunged 13% after releasing its earnings on a day when the Dow Jones Industrial Average was up over 337 points (1.1%). No longer a Wall Street darling, Spotify stock has slipped over 60% in 2022. At around $80 per share, it has lost about 45% of its value since opening at $148 in 2018.
So, what gives?
It turns out that more subscribers and revenue don’t equate to more profit.
Spotify reported a third-quarter net loss of €194 million or €0.99 per share. According to Bloomberg Business, the loss per share exceeded expectations of €0.82 per share.
Spotify exemplifies the old saying, “the harder I work, the behinder I get.”
Spotify’s answer? On its earnings call, CEO Daniel Ek told analysts that the company is considering raising subscription rates in the U.S. because Apple Music and YouTube’s Premium service did. In these challenging economic times, it’s hard to predict how effective that will prove.
The company’s Q3 – 22 earnings report also reminded me of a lengthy conversation with Emmis Communications CEO Jeff Smulyan and Rick Cummings, President of Radio Programming Emmis Communications.
We spoke during the middle of Summer when Spotify was trading over $100 a share. Smulyan said: “One of our statements at Emmis is we ought to take $20 million and short Spotify.” Jokingly, he qualified the statement, “We said with our luck, the minute we shorted Spotify, Alibaba or Tencent would buy it for $100 billion, and we’d be wiped out.”
Smulyan understands the economics of broadcasting, streaming, and podcasting, probably, as well as anybody on the planet.
Remembering formatics 101, here’s a pre-sell for what’s coming up.
#1: Jeff Smulyan’s book, “Never Ride a Rollercoaster Upside Down: The Ups, Downs, and Reinvention of an Entrepreneur,” is out December 6th.
The book includes a breakdown of the businesses Emmis has managed over the years. “I hope, I think, it provides an easily distillable analysis of the economics of sports, radio, TV, streaming, and podcasting that somebody could say, I never knew that,” Smulyan told me.
As I listened to Spotify’s earnings call, what Jeff Smulyan told me last summer rang in my head. “The reality is if you are iHeart or you are Spotify, and you rely on the economics of streaming, the math is impossible. And Apple being Apple has made it more impossible because they basically went to the music business and said, we’ll pay you $0.73 on the dollar. So, Spotify at $0.65 on the dollar isn’t going to get much lower rates. The problem with that is you show me a business where 73% goes to music licensing besides all the other costs, and you make no money.”
Spotify lost €194 million in Q3 – 22. Spotify is projecting a loss of €300 million for Q4 – 22.
Smulyan knew.
In the previous quote, did you notice iHeart is in the same sentence as Spotify? Do you think that was random? Think again about Emmis’ decision to exit radio. “It Was Hard To Be Gone, But Harder To Stay For Emmis Communications.”
# 2: I promise that the interview with Smulyan (and Cummings) is one of the most fascinating with a CEO ever. Barrett Media will post the transcript of the entire conversation the week before and after Thanksgiving.
Here’s why it’s so terrific:
- It’s a two-hour conversation. Getting a big-time CEO to stay in one place for that long would usually be impossible. However, although he said he felt fine (and sounded his usual upbeat, optimistic self), Smulyan was isolating with Covid. I think the interview kept him occupied over a holiday weekend when he couldn’t do much else. Rick Cummings was dragged into it, which may have ruined his weekend, but he never complained. Apologies to him.
- Rick Cummings – He interjects and plays a foil to Smulyan. Having Cummings there adds comfort and depth. If you need a morning show, I can recommend the team of Smulyan and Cummings – or is it Cummings and Smulyan? The only issue is you’re not sure who the straight man is much of the time.
- A little Indy knowledge: Betcha didn’t know I lived in Indianapolis when Smulyan started his legendary broadcast career. Therefore, I have Jeff Smulyan trivia information. Included are topics I’m sure he has never been asked about, at least outside of Indy. For example, this interview has a remarkable story about him winning a radio contest on another station, not to mention his (and Cummings) favorite David Letterman tales.
There is a ton more in this interview about Spotify, including why the company went into podcasting and audiobooks – and he nails it.
#3 The Barrett Sports Media Summit includes the Jeff Smulyan Award presented to the top Sports Radio Executive. Smulyan will be at the Summit.
Remember, Jeff imagined the Sports Radio format and was the principal owner of the Seattle Mariners. He talks about the experience at length in our conversation. Which do you think are smarter: MLB owners or the heads of major radio broadcast groups? Smulyan’s answer surprised me. His combination of experiences running a media empire and owning an MLB team gives him a unique perspective.
I hope I’m not giving away his topic at the Summit, but when he talks about ESPN’s challenges…you don’t want to miss it.
Spotify also has challenges. As Smulyan discusses in our conversation, music royalty fees may doom the music streaming service.
As Jacobs Media President, Fred Jacobs, tweeted not long ago, this is the company that hired and then couldn’t figure out how to utilize Kevin Weatherly and Tom Calderone for successful music programming. There aren’t smarter, better, more imaginative programmers in the world. What does that suggest about Spotify?
Competition from Apple, Alphabet’s YouTube, Amazon’s Audible, and music service, among others, are only the beginning of the challenges. Exchange rates favor U.S. companies. The economy is souring worldwide. Losing just €300 million in Q4 – 22 isn’t looking any easier.
If only I’d invested that spare 20-mil shorting Spotify.