Underlying Take Aways From Spotify Q3 Net Profits

New of Spotify final making net profits in Q3 have just come into news as of a week ago. Even tho the net profit wasn't much, roughly €43m The firm’s operating performance – a better indication of a business’s true health – showed a small, if drastically improved, loss €6m. The company didn't turn it into a big deal but truth is, the industry did not see this happening anytime soon. Profits don't make the job easy considering it isn't easy to maintain the, specially for Spotify when Apple Music is just at it's tail. Daniel Ek and CEO Barry McCarthy answered some tough questions from the amalysts and investors last week. Here are some takeaways found by Music Business Worldwide.

1. Spotify will charge artists and labels for the tools they provide them to optimise their presence on the application.

Our strategy [with] our marketplace side of the business is the same as the rest of Spotify… it’s a freemium business, meaning there will be a certain amount of products which artists and labels can get for free, and there are others which we will charge money for - Daniel Ek

Ever since Spotify started talking about a ‘two-sided marketplace’ at its New York Investor Day in March, the labels have known this was coming. It has been made known to the industry officially. Ek also carified that data is not going to be one of the paid for services which is music to the ears of A&R companies that are based on AI to find new talent. He said that Spotify expected to move from a handful of licensing deals with large players to

Lots and lots of deals that will happen [with] individuals as artists and labels are purchasing more services. - Daniel Ek

2. Spotify doesn't feel the product is getting better as fast as it is required to.

Spotify wasn’t too excited it's net profit or its operating losses significantly narrowed – in the three months to end of September. The main reason is - Ek and co wanted to hire a bunch of gifted R&D staff in the past six months, but wasn’t able to land the talent required.

The pace of product innovation is slower than we anticipated - Barry McCarthy

Ek said:

Overall, it’s not a big surprise to know that when you look at engineering, machine learning, big-scale engineering, those are all skills that are widely demanded in the marketplace. For us, it’s not really about volume [of hiring], it’s about finding the right quality, and that’s not something that [differentiates] Spotify [from] any other technology company in the world.

3. Podcasts are a major focus area

Ek said that Spotify was experimenting with both fixed and variable deals when it came to podcasters 1) paying people based on their popularity on the platform each month, like Spotify does with music 2) paying one-off fees for the perpetual right to host major league ‘casts.

When you think about something like radio, the truth is that the vast majority of the minutes that are being spent on radio today haven’t yet moved online,” said Ek. “Our opportunity really is gigantic when you look at that, and there aren’t too many companies in the world that are focused on that opportunity of bringing audio online. - Daniel Ek

If Spotify increase the presence of podcasts on its platform, the amount of royalties paid out to record companies would reduce.

4. ARPU remains an area of concern

In Q3, the firm’s premium ARPU fell to an all-time low of €4.73 a month. This was down 6% year-on-year – but that in itself was a less severe drop than the 12% year in year decline seen in Q2.

Family and Student plan growth has caused a reduction in ARPU. The marginal downward pressure on ARPU has moderated as the installed base of Family and Student plan subscribers has grown. However, subscriber growth in low ARPU regions like Latin America, Southeast Asia, and other newly launched markets could add incremental downward pressure on ARPU.

5. Consideration on bidding for UMG?

Back in July UMG announced to be selling 50% of the company. When an analyst asked Ek about the Spotify rumous, he simply responded:

I really can’t make any comments on any deal negotiations at this point