Spotify Technology Stock

Spotify Technology S.A., together with its subsidiaries (Spotify), provides audio streaming subscription service worldwide.

The company had a community of 602 million monthly active users (MAUs), including 236 million Premium Subscribers, across 184 countries and territories as of December 31, 2023.

In September 2022, the company made available a catalog of audiobooks in the United States that its users may purchase on the web and listen to on its platform alongside its catalog of music and podcasts. In November 2022, the company extended audiobooks availability to the United Kingdom, Ireland, Australia, and New Zealand. Over 350,000 audiobooks are available à la carte to listen to on Spotify in these markets. During 2023, the company launched a new audiobooks experience on its Premium Service, offering 15 hours of access a month to more than 200,000 audiobooks as part of a subscription to the Premium Service. Audiobooks are available for eligible Premium Subscribers in the U.S., U.K., and Australia.

The company has transformed the music industry by allowing users to move from a transaction-based experience of buying and owning music to an access-based model, which allows users to stream music on demand. In contrast, traditional radio relies on a linear distribution model in which stations and channels are programmed to deliver a limited song selection with little freedom of choice.

The company is actively investing in podcasts, audiobooks, and other forms of alternative and spoken word content to complement the music library available through its platform. The company offers a more diverse selection of content will lead to a more enriching experience and higher user engagement. Spotify is more than an audio streaming service. The company is in the discovery business.

Building a Two-Sided Marketplace

The company continues to build a two-sided marketplace for users and creators, which leverages its relationships, data analytics, and software. The company has been instrumental in reshaping the way in which its users enjoy, discover, and share audio content. With its marketplace strategy, the company is empowering creators by offering unique insights and developing new tools designed to give creators more power and control and by unlocking new monetization opportunities for creators. Spotify is uniquely positioned to offer creators and fans access to one another, and to provide creators with analytics and tools to help them better understand their fans, to support themselves, and to effectively monetize their creative work.

Business Model

The company offers both Premium and Ad-Supported Services. The company’s Premium and Ad-Supported Services live independently, but thrive together. The company’s Ad-Supported Service serves as a funnel, driving a significant portion of its total gross added Premium Subscribers.

The company is in 184 countries and territories. On a geographic basis, all four of the company’s major regions are growing. Europe is the company’s largest region with 169 million MAUs, accounting for 28% of its total MAUs as of December 31, 2023.

Premium Service

The company’s Premium Service provides Premium Subscribers with unlimited online and offline high-quality streaming access to its catalog of music and podcasts. Premium Subscribers in select markets have 15 hours of access a month to audiobooks as part of a subscription to the Premium Service, available to eligible Premium Subscribers in the U.S., U.K. and Australia. Premium Subscribers can also purchase audiobooks on an à la carte basis in select markets. In addition to accessing its catalog on computers, tablets, and mobile devices, users can connect through speakers, receivers, televisions, cars, game consoles, and smart devices. The Premium Service offers a music listening experience without commercial breaks.

The company generates revenue for its Premium segment through the sale of subscriptions to the Premium Service. The Premium Service is primarily sold directly to end users. The Premium Service is also sold through partners who are generally telecommunications companies that bundle the subscription with their own services or collect payment for the stand-alone subscriptions from their end customers. Premium partner subscription revenue is based on a per-subscriber rate in a negotiated partner agreement. The company also bundles the Premium Service with other services and products.

The company offers a variety of subscription pricing plans for its Premium Service, including its Standard Plan, Family Plan, Duo Plan, and Student Plan, among others, to appeal to users with different lifestyles and across various demographics and age groups. The company’s Duo Plan consists of one primary subscriber and one additional sub-account, allowing up to two Premium Subscribers per Duo Plan subscription.

In addition, as it has entered into new markets where recurring subscription services are less common, the company has expanded its subscription products to include prepaid options and durations other than monthly (both longer and shorter durations), as well as expanded payment options.

Revenue from the company’s Premium segment is a function of the number of Premium Subscribers who subscribe to its Premium Service. New Premium Subscribers are primarily sourced from the conversion of the company’s Ad-Supported Users. Through both its online platform and external marketing efforts, the company engages its Ad-Supported Users by highlighting key features that encourage conversion to its subscription offerings. These efforts include product links, campaigns targeting existing users, and performance marketing across leading social media platforms. Additionally, new subscriber growth is also driven by the success of converting users from the company’s trial programs to full-time Premium Subscribers. These trial campaigns typically offer certain features of its Premium Service for free or at a discounted price for a period of time.

Ad-Supported Service

The company’s Ad-Supported Service has no subscription fees and generally provides Ad-Supported Users with limited on-demand online access to its catalog of music and unlimited online access to its catalog of podcasts on their computers, tablets, and compatible mobile devices. Ad-Supported Users can also purchase audiobooks on an à la carte basis in select markets. The company’s Ad-Supported Service serves as both a Premium Subscriber acquisition channel and a robust option for users who are unable or unwilling to pay a monthly subscription fee but still want to enjoy access to a wide variety of high-quality audio content.

The company generates revenue for its Ad-Supported segment primarily from the sale of display, audio, and video advertising delivered through advertising impressions across its music and podcast content. The company generally enters into arrangements with advertising agencies that purchase advertising on behalf of their clients and it also enters into arrangements directly with some large advertisers. These advertising arrangements are typically sold on a cost-per-thousand basis and are evidenced by an insertion order that specifies the terms of the arrangement such as the type of advertising product, pricing, insertion dates, and number of impressions or downloads in a stated period (Insertion Order). Additionally, the company generates revenue through arrangements with certain advertising automated exchanges, internal self-serve, and advertising marketplace platforms to distribute advertising inventory for purchase on a cost-per-thousand basis. These advertising arrangements typically specify the type of advertising product, pricing, insertion dates, and number of impressions in a stated period.

Revenue from the company’s Ad-Supported segment is dependent primarily on the number and hours of engagement of its Ad-Supported Users and podcast listeners and its ability to provide innovative advertising products that are relevant to those users and enhance returns for its advertising partners. Revenue is recognized based on the number of impressions delivered.

The company’s advertising strategy centers on the belief that advertising products that are based in music and podcasts and are relevant to Ad-Supported Users and podcast listeners can enhance user experiences and provide even greater returns for advertisers. The company has historically introduced, and continues to introduce, new advertising products across both music and podcast content. Offering advertisers additional ways to purchase advertising on an automated basis is a key way that it continues to expand its portfolio of advertising products and enhance advertising revenue. Furthermore, the company continues to focus on analytics and measurement tools to evaluate, demonstrate, and improve the effectiveness of advertising campaigns on its platform.

In February 2021, the company announced the Spotify Audience Network (SPAN), an audio advertising marketplace that connects advertisers to listeners across its owned and exclusive podcasts, podcasts from enterprise publishers via Megaphone, and podcasts from emerging creators via Spotify for Podcasters. Through SPAN, the company provides hosting and ad-insertion capabilities for audio publishers that allow it to sell targeted advertising to brand partners that enables them to reach listeners both on and off its platform. Some of these agreements require the company to share associated revenues and can include minimum guarantees.

Licensing Agreements

Sound Recording License Agreements with Major and Independent Record Labels

The company has license agreements with record label affiliates of the three largest music companies—Universal Music Group, Sony Music Entertainment, and Warner Music Group—as well as Merlin, which represents the digital rights on behalf of hundreds of independent record labels.

The company also has direct license agreements with hundreds of independent labels, as well as companies known as aggregators (for example, CDBaby, Distrokid, and TuneCore).

Musical Composition License Agreements with Music Publishers

The company generally obtains licenses for two types of rights with respect to musical compositions: mechanical rights and public performance rights.

With respect to mechanical rights, in the United States, the rates that the Copyright Royalty Board set apply to compositions that the company licenses under the compulsory license in Section 115 of the Copyright Act. In January 2021, the company obtained a new blanket compulsory license available under U.S. law, administered by an entity called the Mechanical Licensing Collective. The Copyright Royalty Board set the rates for the Section 115 compulsory license for calendar years 2018 to 2022 in proceedings known as the Phonorecords III Proceedings. On August 10, 2023, the Copyright Royalty Board issued final regulations for the Phonorecords III period.

Podcast License Agreements with Podcasters and Podcast Networks

With respect to podcasts for which it obtains distribution rights directly from rights holders, the company either negotiates licenses directly with individuals or entities or obtain rights through its owned and operated services, such as Spotify for Podcasters, that enable creators to distribute content to its Service after agreeing to comply with the applicable terms and conditions.

Audiobook License Agreements with Audiobook Publishers and Authors

With respect to audiobooks for which it obtains distribution rights directly from rights holders, the company either negotiates licenses with audiobook publishers or authors or obtain rights through its owned and operated service, Findaway Voices by Spotify, that enables creators to distribute content to its Service after agreeing to comply with the applicable terms and conditions.

Competition

Specifically, the company competes with:

free and/or subscription-based digital music streaming providers, such as Apple Music, YouTube Music, Amazon Music, Deezer, Joox, Pandora, SoundCloud, and TikTok Music, for high-quality music content and the time and attention of its users;

online or offline providers of on-demand music, which may be purchased, downloaded, owned, or available for free, such as iTunes audio files, MP3s, or CDs;

providers of internet radio, some of which, such as Pandora, may leverage their advantage in content library, territorial coverage, existing infrastructure, and brand recognition to introduce additional streaming or on-demand music features to enhance user experience;

providers of satellite radio, such as SiriusXM, which may offer extensive and exclusive news, comedy, sports and talk content, and national signal coverage;

podcast streaming providers, such as Apple Podcasts, YouTube, Audible, Facebook, Pandora, Deezer, and TuneIn, for high-quality podcasts and time and attention of its users; a growing variety of these podcast providers seek to differentiate their service through content offering, product features, and monetization ability;

podcast creation and hosting platforms, including Acast, Buzzsprout, Podbean, and Libsyn;

live talk audio content providers, such as X (formerly known as Twitter), Discord, Meta (including Facebook and Instagram), and ByteDance (including TikTok and Resso), for the rights to distribute content and time and attention of its users;

audiobook content providers, such as Amazon’s Audible, Apple Books, Google Audiobooks, Librivox, Kobo Audiobooks, Downpour, Storytel, and BookBeat, for the rights to distribute content and time and attention of its users;

companies that offer advertising inventory and opportunities, including large online advertising platforms and networks such as Google, Apple, Amazon, AppNexus, Criteo, and Meta (including Facebook and Instagram).

Seasonality

The company’s results reflect the effects of its trial programs, both discounted and free trials, in addition to seasonal trends in user behavior and, with respect to its Ad-Supported segment, advertising behavior. Historically, Premium Subscriber growth accelerates when the company runs such trial programs. Historically, the company has run two programs per year during the second and fourth quarters. During both 2022 and 2023, the company launched a total of three programs in each year which were run during the second, third, and fourth quarters (year ended December 31, 2023).

For its Ad-Supported segment, typically the company experiences higher advertising revenue in the fourth quarter of each calendar year due to greater advertising demand during the holiday season. However, in the first quarter of each calendar year, the company typically experiences a seasonal decline in advertising revenue due to reduced advertiser demand.

History

Spotify Technology S.A. was incorporated in 2006.