Spotify CFO: Company could achieve profitability, 'If we wanted to'

Dive Brief:

Music-streaming company Spotify is breaking even and could achieve profitability, but prefers to focus on growth, the company's CFO, Paul Vogel, said on an episode of "Spotify: For the Record," a podcast aired last week.
"We're still in the early days of growth, and there's a huge opportunity to continue expanding," Vogel said. "We're in a market share game. If we wanted to, we could manage the business to show an income statement of profitability, but we wouldn't be investing as aggressively in marketing, research and development, AI, or machine learning."
Vogel said while usage decreased in March and April, it has since returned to pre-COVID levels, a statement consistent with the company's second-quarter earnings report last month, which showed strong liquidity and continued free cash flow.

Dive Insight:

In Spotify's approach to long-term planning, Vogel said, the brand is trying to balance not being overly promotional, while also building its business for the long-term. It hopes to convey to investors that, "if you believe in our strategy, just stick with us, because this company is going to be a lot bigger, and worth a lot more."

Most of Spotify's revenue is paid out to rights holders and music publishers, Morgan Stanley media analyst Ben Swinburne said on the podcast. The streaming company launched in 13 additional markets last month, including Russia.

"Like anything else, our go-to market strategy gets better the more we do it," Vogel said. "When we come to certain markets, people are excited. We tap into what we think is pent-up demand for our service. And, for each user, the more they use the platform, the more customized their experience."

For Spotfiy's user base, which tops 300 million, executives are less concerned about the user profile and more focused on the ability to serve the content they want, Vogel said.

"At the end of the day, there's billions of smartphones," he said. "There's no reason every smartphone out there shouldn't have a streaming audio service. Our view is, why shouldn't it be Spotify?"

Spotify filed its IPO as a direct listing in April 2018, at which point it was cash flow positive and valued at $29.5 billion. Today, the company is roughly breaking even, which Vogel attributes to its philosophy of prioritizing growth over profitability. Spotify is free cash flow positive, "which is a great place to be," Vogel said.

Vogel says Spotify leadership is moving the ball forward with its focus on growing users and subscribers while adding more content, a recipe they believe will set it up for long-term success.

The pandemic has not made a sizable dent in long-term business, Vogel said. Prior to pivoting to all-remote work on March 9, the streaming company's 6,000 employees were "exceptionally" well-prepared.

"We've been a distributed workforce forever," he said. "We have headquarters in Stockholm and offices in New York, Boston, Los Angeles and London. It's very rare you're in a meeting where there isn't someone dialing in remotely."

Music comprises 80% of Spotify's business; podcasts comprise the remaining 20%. In February, the streaming service acquired podcast companies The Ringer and Gimlet for $196 million and $230 million, respectively, and will enter a multiyear licensing deal with popular podcast, "The Joe Rogan Experience" starting September 1.

In its second quarter earnings call, Spotify announced a $20 million advertising partnership with Omnicom Media Group that it called "the largest global, strategic podcast advertising partnership to-date."

"From a finance perspective, we're modeling out both sides of the equation," Vogel said of the acquisitions. "How much does x piece of content affect revenue and costs? How will it impact churn? How will it improve retention? We're modeling all that out, and we weigh all those different dynamics in understanding value."