After taking down smash hits created using generative artificial intelligence to replicate the voices of Drake and The Weeknd, Spotify’s CEO Daniel Ek says the AI hitting the music industry is “both cool and scary.” Meanwhile, the Stockholm, Sweden-based audio streaming company is still growing its audience. spotify Inc.’s earnings report showed that its subscriber growth in the first quarter reached an all-time high in the same period, however. Weakness in advertising led to lower-than-expected earnings.
In the quarter that ended in March, the company made layoffs and reorganized at the top, saying it aims to improve operational efficiency this year after a period of intense spending. spotify also introduced new video feeds in its app to boost user engagement. The company overhauled the app’s landing page to recommend music, podcasts and audiobooks to users through video clips similar to TikTok and YouTube clips.
The streaming company reports it has 515 million monthly active users, up 22 percent from a year ago. That beat the company’s expectations by 15 million and represented its largest growth in a quarter. Spotify said the increase in users spanned nearly all age groups and was in both developed and developing countries. The company’s most profitable customer type was paid subscribers, which grew 15 percent to 210 million, which also exceeded the company’s guidance. In a conference call, Spotify CEO Daniel Ek talked to investors and analysts about the potential impact of artificial intelligence on streaming music. He said, “I don’t think I’ve ever seen a phenomenon like this in the tech world, where innovation and progress is happening so quickly in the both cool and scary things that people are doing with AI.”
In April, a song created using generative AI to replicate the voices of Drake and The Weeknd was taken down from various streaming platforms after Universal Music Group filed a copyright infringement complaint. Universal Music Group claimed that the use of music by the group’s artists to train the generative AI on streaming platforms violated its service agreements and copyright laws, and said the platforms bear “the legal and moral responsibility to prevent the use of their services in ways that harm artists.” The song, titled Heart on My Sleeve, has been played 600,000 times on Spotify, with different versions appearing on YouTube and TikTok.
Ek said that Spotify is doing its best to harmonize the balance between allowing innovation on the platform and protecting artists’ copyrighted works, adding that this will lead to more music being created, which will benefit Spotify. He also discussed the company’s role in supporting artists’ original works. He said, “We take our responsibility to protect artist creativity and provide support for artists and creators extremely seriously.”
Free cash flow measures how much cash a company generates from operations and is seen by many investors as a proxy for company performance. The company’s free cash flow was €57 million, equivalent to $63 million, compared to €22 million a year ago and -€73 million last quarter. Spotify lost €225 million or €1.16 per share in the first quarter compared to a profit of $131 million or €0.68 per share a year ago. For years, top executives have said the company would prioritize investment over profits while trying to attract users from around the world and expand into new forms of audio. Last fall, the company said profitability was expected to improve this year after a period of heavy investment.
In January, Spotify furloughed about 600 employees, or 6 percent of its workforce, as part of cost-cutting measures after high spending during the epidemic. The company said in April that severance-related costs from the layoffs increased operating costs in the quarter. Staffing costs rose in the quarter primarily due to staff expansion in 2022, the company said. The company expects operating costs to improve after 2023. Average revenue per subscriber in the subscription business declined 1 percent to €4.32 in the quarter, or 2 percent at constant exchange rates. This metric is under pressure as Spotify seeks to attract new subscribers through discount programs and lower prices in emerging markets. Prices for family packages have risen in mature markets, including the U.S., helping to boost subscriber revenue, but investors expect Spotify to reach price increases in line with Apple and Amazon’s individual packages, Mr. Ek said, adding that Spotify intends to raise prices in 2023, though the company is still negotiating with its brand partners on the matter.
Subscription revenue, Spotify’s main source of revenue, rose 14% to €2.71 billion. Advertising revenue rose 17 percent to €329 million. As Spotify expands its podcasting business, advertising revenue became a specific area of growth, accounting for 11% of total revenue in the quarter, down slightly from the previous period. Overall, revenues rose 14 percent to €3.04 billion in the quarter, slightly below the company’s expectations of €3.1 billion, which Spotify said was the result of macro-level uncertainty in the advertising business. At a company event in March, Spotify announced that it had struck a deal with NPR that would see the podcast publisher cash in on its shows using Spotify’s ad marketplace. spotify’s ambitions for podcasting include making money from its own shows and expanding its ad revenue by selling ads on other networks’ and publishers’ shows.
The company has also loosened its exclusivity arrangements for some of its podcasts and will begin distributing shows that used to be available only on Spotify to other platforms, a move aimed at increasing listenership and boosting the advertising potential of its shows. It’s a strategic shift for the company, which in the past has relied heavily on paying for exclusive distribution content to attract podcast listeners. Spotify is now the most listened-to podcast platform in the U.S., according to Edison Research. The company’s exclusive deals with celebrities like Joe Rogan and Emma Chamberlain are still in effect. The company’s goal for the current quarter is to grow to 530 million monthly active users and 217 million premium subscribers. The company said it expects revenues of €3.2 billion.