Spotify Saw Podcasting as a Panacea. Instead, It Produced Lots of Costs.

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Spotify is far from achieving its goals, and getting there looks increasingly rocky.

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Gabby Jones/Bloomberg

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Streaming-media companies have gone to great lengths to distance themselves from Netflix,
after its stock fell more than 35% on disappointing earnings on April 20. Executives at music-streaming leader Spotify Technology made it clear after reporting earnings this week that it’s not like Netflix—it has more content and a different business model.

Nevertheless, Spotify (ticker: SPOT) shares dropped to new all-time lows after reporting disappointing results on Wednesday, and they’re down more than 50% for the year. It may not be Netflix (NFLX), but Spotify is falling short in ways that bode poorly for the stock.

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Barron’s pointed out some of the holes in the bullish case for Spotify in a 2019 cover story (“Spotify Stock Is Risky Because the Music Industry Isn’t Changing Fast Enough,” April 19). At the time, Spotify was trying to be more Netflix-like. Management realized that it wouldn’t be able to grow profits enough if it kept paying the music labels 70 cents on every dollar it made from streaming. So, it began spending heavily on podcasts, in hopes that owning the content would allow it to keep more revenue and boost subscriber numbers, too.

Today, Spotify is far from achieving its goals, and getting there looks increasingly rocky. In 2018, the company said that its objective was to expand gross margins to 30%-35%. But margins have been stuck around 25% since then. Weak margins mean weak profits—or none at all. When it started trading in 2018, Spotify was expected to turn an annual profit by 2020. Investors are still waiting. Analysts don’t foresee positive earnings per share until 2023.

As Barron’s predicted, podcasting has been no panacea. The medium has gained in popularity, but it’s still dwarfed by radio and TV advertising.

What’s more, the economics of podcasting are considerably different from those of music streaming.

Spotify’s music-streaming service is an easy-to-navigate user interface that connects artists with listeners, and quietly takes a cut of every transaction. Like other modern tech platforms, its software sorts content and services offered by other people. Its podcasting business has its own algorithms, too, but it also involves lots of talent management and content moderation. Buying exclusive access to podcasters is expensive, and investors always need to know when the company will next have to write a check to a popular podcaster. For instance, the status of Howard Stern’s contract has always hung over Sirius XM Holdings (SIRI).

Spotify has spent hundreds of millions of dollars on podcasts and podcast software, including a reported $200 million for exclusive rights to the Joe Rogan Experience, Spotify’s ad-supported business, where it accounts for podcast costs, actually reported a negative gross margin in the latest quarter. Spotify said it doesn’t expect the podcasting unit to be profitable this year, though it’s “not super far off.”

All of that spending on podcasting hasn’t yielded a surge of new listeners. Spotify was regularly adding 5% to 10% more monthly active users a quarter before podcasts were a significant part of the company. These days, its user-growth rate has fallen below 5% in four of the past five quarters.

In Spotify’s early years, investors were willing to overlook its lack of profits because of torrid user growth. Without that growth, its valuation is compressing fast. Spotify once traded for more than five times its projected sales. Today, with the stock at about $104, it goes for less than two.

Spotify may not be Netflix, but one analyst thinks that it could follow in the footsteps of another tech company: Twitter (TWTR). “Given the lack of investor support,” wrote Brian White of Monness Crespi Hardt, “we believe Spotify should entertain the notion of going private or operating under the umbrella of a larger company.”

Write to Avi Salzman at [email protected]


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