Spotify beats paid user estimates as AI personalization strategy ramps up
Add Axios as your preferred source to
see more of our stories on Google.
Photo: Gary Hershorn/Getty Images
Spotify on Thursday beat investor estimates on paid user growth for the third quarter, thanks in part to new AI-driven personalization features and other benefits designed to bolster the value of a subscription.
Why it matters: Paid user growth is contributing to a more financially stable and profitable company that can reward shareholders while allowing Spotify to invest more in its business.
State of play: Co-CEO Alex Norström told Axios on Thursday that the company's growing cash flow allows it to pursue more organic investment opportunities while returning excess capital to shareholders.
- Spotify returned excess cash to shareholders through stock buybacks in the third quarter, a commitment it made during its investor day May.
- Previously, the company used most of its cash flow for share buybacks to offset dilution from employee stock compensation, CFO Christian Luiga said.
By the numbers: Spotify added 6 million premium subscribers last quarter, about 1 million ahead of guidance and Wall Street expectations. The paid user base of 306 million was up 9% from a year ago.
- Premium subscriber revenue rose 17% year over year, thanks to subscriber growth and price increases.
- Free, ad-supported monthly active users grew 12% year over year to 499 million globally.
- Q3 revenue of €4.97 billion was roughly in line with guidance of €5 billion, while Spotify's 33% gross margin slightly beat guidance.
The big picture: Spotify believes it can increase profitability by leveraging AI to build a "large taste model" that supports interactive sharing over passive listening.
- In an interview Thursday, co-CEO Gustav Söderström said the company made "a pretty big investment earlier this year" in building that model and other AI-based features that are paying off now in better engagement.
- "We're seeing double-digit increase in discovery specifically," he noted, which is helpful to artists as the music catalog grows.
- The model is on track "to add billions of hours already per year," he said. Söderström believes the company is still in its early stages of using the taste model to bolster growth.
Yes, but: While AI investments are contributing to free user growth, Spotify's ad business still faces pressure.
- Spotify delivered on an earlier promise of stronger ad revenue growth in the second half of 2026, posting a 10% year-over-year increase in Q3. Still, that's a slower pace than premium revenue growth.
- Norström credited investments in technology that make it easier to buy ads on its platform.
Zoom out: To grow its taste model, Spotify needs to increase both time spent on the platform and creators engagement.
- Earlier this week, the company launched a paid memberships program for podcast creators.
- It also recently expanded audiobook access from 22 markets to more than 180.
What to watch: In May, Spotify announced a landmark deal with Universal Music Group to build a new tool that allows fans to create covers and remixes of songs by participating artists and songwriters. It subsequently announced deals with other music licensing groups and publishers.
- Söderström believes the tools, available as premium add-ons, could boost engagement and create revenue opportunities for artists on Spotify.
The bottom line: "We think this game is going to be decided based on who compensates the most," Söderström said.
- "And we are by far the best positioned to compensate the most artists as they start to participate in this and using these new tools."
