Jun 8, 2022 - Economy

Spotify CEO teases major push into audiobooks

Photo illustration of Spotify CEO Daniel Ek

Photo illustration: Natalie Peeples/Axios. Photo: Sebastian Reuter/Getty Images for Spotify

Spotify CEO Daniel Ek on Wednesday laid out plans to reach $100 billion in revenue in the next decade and to push into audiobooks to take on rival Amazon.

Why it matters: Ek told Axios in an interview that the company's continued forays into audio businesses outside of music, like podcasts and audiobooks, will boost its long-term profits.

Details: “It’s all part of a new strategy that we’re calling 'the Spotify machine',” Ek told Axios. 

  • The “Spotify machine” focuses less on short-term engagement growth metrics than on increasing the lifetime value of customers — the amount of revenue consumers drive with Spotify over the long term.
  • To maximize lifetime value, Ek said, the company will add new audio verticals every few years, directing enough resources and attention at each to develop a leading market position.

After audiobooks, Spotify plans to explore other audio-related businesses, executives told investors in an annual presentation Wednesday.

  • While it didn't name those businesses, Spotify's experiments in areas like live audio suggest the company is already planning further expansion.

Be smart: Spotify planted a similar flag around podcasting six years ago before spending well over $1 billion acquiring podcast companies and content.

  • Those moves eventually led to Spotify displacing Apple as the top global podcasting company,
  • By its own estimates. its audiobook ambitions should be viewed the same way, Ek said.
  • "There's one dominate player in audiobooks and that's similar to what the podcast space looked in 2018," Ek told Axios. "We think that by entering the market, there's a great chance to win but also expand that market, and if that takes more acquisitions, we're flexible to do that."

Yes, but: Venturing into new verticals can be expensive. In the past, Wall Street has punished Spotify for slower gross margin growth caused by its heavy podcast investments.

  • Ek defended the company's strategy, arguing investments beyond music would deliver a much wider gross margin over time.
  • He also argued that Spotify's investment in revenue streams outside of subscriptions — particularly its marketplace tools that offer creators ways to connect with and earn income from fans — would help grow profits.

By the numbers: Today, for example, Ek said the company's gross margin in music is roughly 28.5% (up from roughly 21% in 2017), largely due to investments in creator tools.

  • While the podcast vertical isn't profitable yet, "we believe it has a 40-50% gross margin potential," he said.

Audiobooks promise similar margins, Ek said, if Spotify can build a marketplace of creator tools around them.

  • It has already started to acquire audiobook companies to help build out those capabilities.
  • Today, audiobooks represent a roughly $10 billion global market. Ek sees that growing to $70 billion, with Spotify owning a big chunk.

Catch up quick: When Spotify went public in 2018, it was mostly a music subscription business, but today it's seeing growing revenue from advertising and marketplace creator tools.

  • The introduction of a free listening tier dramatically expanded the ad business.
  • In the years since going public, Spotify has also built out a marketplace business for music, including services like ticketing and e-commerce.

What's next: In addition to reaching $100 billion in revenue in the next decade, Spotify has also outlined ambitious goals to reach 1 billion users. To do so, the company will continue to focus on making its app more accessible across a greater array of devices, especially in cars and wearable devices.

  • Today, the company says 28% new user registrations come from over 2,000+ distribution partners, up from 14% across roughly 250 partners in 2018.
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