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The Most Important Metric From Spotify's Latest Earnings Report

By Brett Schafer - Feb 7, 2021 at 9:16AM

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Hint: it was not subscriber growth or gross margin.

Audio streaming service Spotify (SPOT 0.02%) reported fourth quarter 2020 earnings before the market opened on Feb. 3. The company missed analysts' earnings expectations, sending the stock down 8% for the day.

While investors mostly focused on subscriber growth, current gross margin, and fiscal year 2021 guidance when reading the report, the most important metric for Spotify's future was hidden at the bottom of the earnings letter. Here's what the metric is, and why it's so important for Spotify's future.

Spotify app on laptop, tablet, and phone.

Image source: Getty Images.

Engagement with podcast content

The metric I alluded to above is what Spotify calls "engagement with podcast content." It is not a requirement for them to report it, but management has been kind enough to release the percentage of users that listened to podcasts each of the last few quarters. This quarter, that number grew to 25% of total monthly active users (MAUs), up from 22% of MAUs in the third quarter of 2020. That equates to over 86 million users engaging with podcast content on Spotify, a tremendous feat for a service that didn't even have podcasts on its platform until 2015.

One reason for this increased engagement could be that The Joe Rogan Experience went exclusive on Spotify during the quarter. The podcast gets tens of millions of downloads each month and will hopefully convince many of those listeners to switch to Spotify for their podcast needs. If the Spotify podcast charts are any indication (the show is consistently the top-ranked show on the platform), the exclusivity period is going well so far.

Why/when it will matter

Podcast engagement is vital to Spotify's success with original content and advertising technology. With original content, Spotify has bought and built out a podcast content team with CEO Daniel Ek saying there are now close to 1,000 people working on producing content for the company. Since Spotify owns this content, it can choose to put it behind its premium paywall, theoretically increasing the value of that subscription and the company's ability to raise the cost of premium subscriptions. Podcast engagement connects to this goal, because in order to increase the value proposition of the original content, Spotify needs as many users as possible listening to shows on its platform.

With advertising, Spotify is working to grow its streaming ad insertions (SAI) technology to help monetize its 199 million ad-supported users.  Right now, the technology is only being used for shows it owns, but management says it will eventually roll out to third-party content played on Spotify and even other podcast platforms if they integrate the technology from the Anchor and Megaphone hosting platforms that the company now owns. As with original content, the more users that listen to podcasts on Spotify, the more it will be able to monetize them with its SAI technology.

But when should investors expect these efforts to boost the financials? Well, without access to a crystal ball, my best guess would be not to expect anything material for a year or two, if not longer. SAI is currently limited to original content and only available in four countries. It also just acquired Megaphone late in 2020, and it will likely take more time to integrate its capabilities. Investors need to have patience here. Podcasts can help Spotify grow its business and increase gross margin, but it will not happen overnight.

The podcast industry is similar to where streaming TV was a decade ago. On-demand audio continues to take listening hours from linear radio, a trend that should continue over the next decade.

Whether it puts this content behind a paywall, supports it with advertising, or both, Spotify can be the leader in monetizing the podcasting industry. But first, it has to capture the most listeners. That's why investors should closely follow the percentage of users that engage with podcast content on Spotify. 

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